Digital Pound Could Be a Fiscal Game-Changer for the UK

• The digital pound could earn the Treasury around £15bn a year by 2029 if 20 per cent of bank deposits were switched.
• Seigniorage is the profit made by a government for issuing currency.
• The digital pound is a form of central bank digital currency (CBDC) created by the central bank.

Introducing a digital pound could earn the Treasury tens of billions through increased seigniorage revenue, a new report has argued.

Research from Positive Money estimates that, by 2029, the government could gain around £15bn a year if 20 per cent of bank deposits were switched to a digital pound.

If 30 per cent of deposits were switched into a digital pound, the Treasury could earn an additional £30bn a year through seigniorage revenue, the report argued.

Seigniorage is the profit made by a government for issuing currency. It captures the difference between the value of money and the costs to produce it.

Revenue from seigniorage has fallen in recent years as interest-bearing commercial bank deposits have replaced cash as the most commonly used form of payment.

Physical cash now makes up around just four per cent of the UK’s money supply with the remaining 96 per cent made up by commercial bank deposits, on which the Bank of England pays interest.

In 1991, the Bank of England’s profit from issuing bank notes was worth around £5.5bn in today’s money. Over the past five years, however, seigniorage revenue has averaged just £250m.

“The government looks set to receive a significant windfall from the introduction of a digital pound in the coming years, which doesn’t seem to have yet factored into debates over ‘fiscal headroom’,” Simon Youel, author of the research, said.

Youel argued that the Treasury and the Office for Budget Responsibility (OBR) should undertake work to estimate the potential fiscal benefits of the digital pound.

The digital pound is a form of central bank digital currency (CBDC). Unlike existing digital payments, a CBDC is created by the central bank.

The Bank has previously suggested it is “likely to be needed in future” as digital payments become ever more important in the economy.  The Bank said it was still too early to decide whether to introduce a digital pound, but said further preparatory work is justified.

By City AM

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