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Guest Contributor: Professor Darren Duxbury, behavioural finance expert, Newcastle University

As Bank of England and Treasury officials assess the merits of a new digital pound, Professor Darren Duxbury, a behavioural finance expert at Newcastle University and member of an academic advisory group helping the institutions on potential change, examines the proposed currency and its meaning in today’s world of convenience.

The digital pound would be issued by the Bank of England and represent a new type of money, which would be denominated in sterling and come with a stable value, just like physical cash.

It would be accessible through digital wallets and used for day-to-day, in-store and online transactions.

The intention is not to replace cash, but to supplement it, acting as a riskless and universally accepted electronic alternative.

The Bank of England and the Treasury have identified a number of motivations underpinning interest in the potential introduction of the digital pound, with the reduction in cash use being a central point.

Since 2017, cash use in the UK has declined by around 15 per cent each year.

Nevertheless, cash remains the second most frequently used payment method in the UK, accounting for 15 per cent of all payments in 2021.

And while there are societal and economic benefits to the digital pound, potential risks have been voiced.

The House of Commons Treasury Committee, for example, says it could risk financial stability if consumers – en masse – were to switch bank deposits into digital pounds during periods of market stress.

There are also concerns about financial inclusion, which could suffer if the digital pound were to accelerate the decline of cash, causing potential difficulties for those reliant on physical money.

Ultimately, its success will depend on its widescale adoption.

To provide insight into the likely speed and scale of adoption of the digital pound, we will need to understand more about the behavioural drivers of individuals’ payment method intentions and choices.

And with more than 30 years’ experience of researching economic and financial behaviour, this lands squarely in my domain of expertise.

As research I recently led with NatWest shows, there is compelling evidence that behavioural factors, including an individual’s propensity for habitual behaviour and their level of financial literacy, influence intentions to choose physical cash over electronic forms of payment.

We also found a person’s response to exogenous shocks, such as a change in economic circumstances or security breaches, demonstrate such intentions are not immune to change.

As an academic advisory group member, such insight will likely play a key role in the design phase of the digital pound, and prove essential in accurately forecasting its take up.

Words by Professor Darren Duxbury

March 20, 2024

  • Ideas & Observations

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