As the UK gears up for the possible launch of the digital pound this decade, payments will be impacted more than most other sectors and activities. But will that be for good or ill?
The exact timescale for UK launch is uncertain, but Central Bank Digital Currencies (CBDCs) are just one element of a new financial environment. Stablecoins, cryptocurrencies, commodities tokens, digital wallets, finance apps, and money-transfer platforms are all proliferating worldwide. So, the extent of this transformation means that payments risk becoming an ever more complex area, despite fintech’s promise of simplicity, transparency, lower costs, and greater speed via the use of digital coins.
“Follow the money”, the old adage says. But will anyone be able to do that in future? As our report on crypto crime back in February explained, the increasingly fragmented and dispersed nature of modern finance can be a nightmare when wallets are hacked, and digital assets – such as cryptocurrency – are stolen. Victims find themselves chasing anonymous perpetrators from one legal jurisdiction to another, right across the globe.
Or might digital money usher in a golden age of seamless transactions – one simplified and made more secure by adopting CBDCs instead of crypto? Riccardo Tordera Ricchi is Head of Policy and Government Relations at the Payments Association, a role that puts him at the epicentre of all these issues.
His organization was not present at the techUK ‘BritCoin’ briefing last week, but he says:
It’s no secret that the Payments Association is very supportive of this course of action [the digital pound]. We have been calling on the Bank of England to do this for a long time. A CBDC will be part of the new digital money ecosystem, the new rails and means of payment.
We are progressively seeing a digitalization of society. So, it will be impossible not to have digital currencies, because the technology behind it just offers a better solution.
But to what? The Bank of England sees the BritCoin as an everyday retail token. Yet earlier this year, the House of Lords described CBDCs as a solution in search of a problem.
You can see the Lords’ point. Nothing stops us from buying goods today with our phones, bank cards, or mobile apps – just see, order, pay – or from transferring money, both locally and across jurisdictions. So, what critical function would such a token perform that can’t already be done?
First, it's a matter of costs. Your transaction, I'm sure that wasn't for free. And even if you couldn't see the cost, it’s already in the system. The system we run is expensive, particularly for cross-border transfers. And the fees that I'm sure come onto your credit card statement, those are a cost too. So, because of how digital money works, you can cut those costs massively.
“So, I want to affirm that we consider stablecoins as a means of payment, to purchase goods. Retail stuff, where cost is clearly one of the most visible problems.
“But the second element requires a little bit of imagination. Our payment system is extremely good, but it serves a relatively small fraction of the population. There is also the world of the unbanked and the underbanked. So, [the digital pound] would be much more inclusive, because it gives everyone with a mobile phone the opportunity to have a wallet and transact.
It's true that one stated benefit of the digital pound project would be financial inclusion, including for the unbanked: a noble aim. But it is not clear what Tordera means when he says our current system serves only a small fraction of the population. Most estimates show that over 49 million UK adults have a bank account (92% of the adult population, by diginomica’s calculation), and just 1.2 million do not.
Plus, not everything that looks instant actually is. For example, if you pay with a credit card, that transaction settles much later; it's not instant at all. And it’s a very costly process that requires lots of intermediaries that most people never see. But with digital currencies, you can cut those intermediaries out.
OK, so are CBDCs really cash’s last stand against private money? Certainly, private coins are growing in influence and diversity, so the links between them and fiat currency are becoming ever more diverse too. Common sense suggests that this may become a challenge over time, especially when trying to identify, authenticate, and secure transactions across complex global networks.
Is Tordera worried that the payments world is becoming too complex, with thousands of coins, tokens, and competing technologies? Since when has replacing relative simplicity with complexity been a good idea – or any guarantor of transparency, security, and interoperability?
I understand, but things are happening slowly. Currently, CBDCs only exist in limited places. And in the countries that are testing them, adoption is very low. In Nigeria, it’s less than seven percent, for example.
But the system can work for certain things, and so we have to create interoperability for the present and the future. And we will have moments where things overlap. But then, progressively, the more people will start using them, the more there will be a need for them. So we will have progressive, slow adoption.
But at the same time, the Bank of England has made clear many times that they're going to continue issuing cash. So, this is not an alternative system. This is to prepare for a transition, to open up new possibilities, to coexist.
That hardly suggests that CBDCs solve an urgent problem, however – at least, not one that is immediately obvious to consumers. But collectively, all stablecoins serve useful purposes, he explains:
There is going to be a huge amount of privately issued money that no one controls. But stablecoins are pegged to real, state-issued money – usually that is the dollar, but sometimes baskets of currencies, or, commodities, or crypto assets. [Obviously, the digital pound would be pegged to sterling.]
Stablecoins can be extremely good. They're relatively cheap to create, and they can be the next generation of money. eMoney has challenged the legacy system, and that has been crucially important to let all the fintechs emerge. In turn, this has created competition and better opportunities for the consumer. So, eMoney is becoming digital money, and that money will eventually become stablecoin money – or sMoney.
It is in the interest of the banks. Having been sceptical about this, they are now starting to realize the huge opportunities they have. A bank could make its own stablecoin, for example, and it could create new products out of it.
The necessity of creating stablecoins in the first place was to retain the profits of cryptocurrencies’ volatility. If you buy Bitcoin or Ether or whatever, if you buy low and you sell when the market is high, then how do you trap your gain? You convert it into stablecoins.
But when it comes to CBDCs specifically, there is also the geopolitical dimension, he says:
China has been one of the very first countries, the big jurisdictions, to test their own solution to this [the digital yuan]. But that solution is not suitable for Western democracies, because of the problem of traceability and how data is used and collected.
I'm sure the Bank of England has repeated that they will not collect personal data in the design of the digital pound.
They have, as our report last week explained. Tordera concludes:
What we want is to have something in place that respects the values of our society and technology.
The digital pound seems to fall into the category of inevitable, pragmatic, and logical, yet somehow not critical. But will it really lower transaction costs? That is another matter entirely.
Are banks really going to slash customers’ costs – or simply use the digital pound to lower their own costs and rack up their profits? Some questions just answer themselves.