The BritCoin cometh! The inside story on the digital pound. Could it drive financial inclusion?

Chris Middleton Profile picture for user cmiddleton April 27, 2021
An advisor at the Treasury’s table tells us about a project that’s exciting, but also a massive political risk.

Image of the pound coin symbol
(Image by Pete 😀 from Pixabay )

The UK could be about to get a national digital currency. On 19 April, the Bank of England announced the launch of a Central Bank Digital Currency (CBDC) Taskforce to explore the concept of a digital coin for the nation: a digital Pound - a BritCoin, if you will. The BofE and the Treasury are jointly driving the initiative.

This could be a stablecoin for unstable times as the home nations decouple from Europe and, potentially, from each other. The prospect of a digital coin holding the economic union together is not beyond the realms of possibility: a token gesture of unity, perhaps? More on that later.

The move comes after months of sometimes hysterical media coverage about cryptocurrencies, with the value of Bitcoin tripling since last autumn. Throw in non-fungible tokens (NFTs) and blockchain and you have a digital Kool-Aid that traditional financiers are wary of sipping, but evangelists are guzzling by the bucketload.

The global context is the limited, experimental launch of China's digital Yuan. Also in play are 200 or more other coins worldwide, such as the Facebook-originated Diem*, in a transformation of the financial system that has accelerated under the Coronavirus.

The fear among central banks is that China's lead in this area risks letting the digital Yuan become established as the world's de facto digital currency.

The US is a long way behind in establishing a CBDC, perhaps held back by the dollar's status as the lingua franca of the current financial system (not to mention the previous administration's adherence to old-world economics). Either way, Wall Street may have no choice but to act quickly under President Biden.

But for a financial system as old, traditional, and respected as the UK's, the idea of a national digital coin seems like a singularly bold move. So, what's behind it and who has been driving it?

Blockchain specialist Antony Welfare, Executive Director of Enterprise at NEM and an advisor to the government on distributed ledger systems, has helped the City and HMRC scope the idea, so I pulled up a chair with him to see what's inside Britain's digital wallet.

Welfare (proof that nominative determinism has an escape clause) says he has been involved in "months" of discussions about financial technology (FinTech) at London's Whitechapel thin ktank, alongside the Bank of England and the government's finance and payments working groups; the concept of a UK CBDC emerged from those conversations, he says.

He acknowledges that the idea is loaded with danger for the UK, as well as with future promise. Welfare says:

It's not an easy place to go. It seems like an easy fix, but it's complex, because it's our money and it's the core of the financial system. Ultimately, a CBDC is one of the riskiest projects that any government, anytime, can ever do. The currency of a country is critically important to manage and maintain correctly. Our entire life depends on a functioning GBP.

So, how did the project take hold in a context of such massive risk? It's not as though the UK hasn't gambled enough in recent years…

Within the payments working group, there's HMRC represented along with other people. We looked at setting up a UK centre for distributed ledger technology or blockchain. The driver of that was looking around the world and saying, ‘We're miles behind'.

It's as simple as that, we are a long way behind in terms of really grasping this technology. There are lots of companies, lots of organisations, doing great work in the UK, but not as a whole and definitely not at government level.

According to Welfare, the CBDC project eventually emerged via a combination of the coronavirus hitting the country and Rishi Sunak arriving in Downing Street and assembling the building blocks of the idea (though any forward-looking Chancellor would have done the same thing, says Welfare). He adds:

HMRC tried to implement distributed ledger technology for COVID-19 payments, but that didn't really take at the time. But what's happened since then is lots of tiny interactions, let's say. And obviously Rishi came onboard and has taken all these parts and put them together.

COVID-19 has focused minds

So, the project doesn't seem to be a single, bold policy move from the top, but more a slow realisation that the UK isn't as on top of the FinTech world as it likes to imagine.

Welfare adds that COVID-19 has given the BritCoin added impetus:

A lot has happened to make a CBDC critical. For example, we wanted to make COVID-19 payments to self-employed people, and there was the neighbourhood scheme […] And it became clear that to do all this, distributed ledger technology needed to be there.

There was a whole problem of going through the banks, of getting money to people quickly. It took a long time to get the money out. I suppose the crux of this is if we had a CBDC, with a just a QR code or a prepaid card installed on people's phones, for example, then we could send money to them instantly.

This takes us to financial inclusion. Some people will still want to use cash, and some people don't have a bank account, but most people have some sort of mobile device. [A CBDC] would be a lot better for financial inclusion than anything we've heard of previously.

For example, women who've had problem relationships, perhaps, and don't want to open a bank account or divulge their information because of risks to their safety, they could be given an anonymous wallet. The blockchain would know who they were, so she can then go and get the food for her kids, she can do what she needs to do.

It's inclusion on a bigger level, rather than just the unbanked. But the unbanked are very important too, in terms of taking hurdles away from them.

But what about the risks to financial transparency, and the ever-present spectres of money laundering and terrorist financing? Welfare explains:

I'm not saying it takes away KYC [Know Your Customer] and those sorts of things. You still have to do - and should do - best practice around knowing your customer and anti-money-laundering, but you can do that anonymously on a blockchain.

But how could people be authenticated if they are financially excluded, say, and don't have a bank account, a driver's licence, or a passport? He adds: 

Most people have some form of ID. I previously did some work in South Africa where we had kiosks where you went in and it took your photo or your fingerprints and gave you an anonymous wallet. You didn't need to say who you were. Ultimately, biometrics could be tied into any criminal investigation.

You're proposing anonymous-wallet kiosks for the UK? Welfare says: 

No, that's just my example.

Global context

So, let's look at the big picture. Where does a UK CBDC stand on the world stage?

In China, obviously, they've done a lot of work with the digital Yuan and are dropping money to their citizens to use it. They're obviously a very different regime to us, but they could legislate that if you wanted to trade with China, then you would have to use the digital Yuan. So, one of the biggest risks - and Biden has picked up on this quickly - is China taking over the currency world by default.

That's helped push the agenda forward in the UK because, now being a free country let's say, we're looking at trade deals everywhere, and [China's move] could be a hindrance.

We do need to get on with this because eventually all the other countries will do them. We need to be there, but we need to do it properly. For the UK, our legal system, our history, means that if we do a CBDC we'll do it properly, and I would expect us to have high standards. That takes time, but we also need to move quickly.

How big a concern has Facebook been in this space? The scaled-back Diem coin, in its original form as Libra, was talked about as being a digital dollar by proxy - one owned by a private platform that's driven by advertising and woeful standards of data protection. Were authorities worried about Zuckerberg owning a currency used by billions of people? Welfare says: 

I'm in two minds about this. I don't agree with large corporates owning and running this, so that side of it is very dangerous. But that aside, the concept is very powerful and important, because nobody in the central banks is talking about a global currency.

If you're in one of these crazy-inflation countries and you get paid, say, the equivalent of $1,000 today, tomorrow that's equivalent to $500 and by the end of the week you've lost all your money and can't pay your rent.

Imagine if you got paid in Diem, then that wouldn't happen. You'd still have your $1,000, give or take a few cents. So, the concept of the coin, the stableness of it and the global nature of it, is very powerful.

People would think, ‘Why don't we have this?' I know there's a million reasons why not, but as a human being I'm sitting here thinking, ‘Isn't this a better way to go?'

I started this journey back in 2015. When I saw Bitcoin and I was a consultant for retailers, I said, ‘Why doesn't every company just use Bitcoin and then we wouldn't have to worry about foreign transactions?'

OK, but the problem with this train of thought is that if you spent a Bitcoin six years ago, you might have been able to buy a pizza, but today you could perhaps buy a Tesla. And the coin's rollercoaster valuation means that, tomorrow, it might only buy you a pizza again.

The so-called ‘million-dollar pizza' problem mitigates against Bitcoin, specifically, being used as anything more than a vehicle for high-risk currency speculation. In that sense, it's no different to a country experiencing stagflation or runaway deflation. But a stablecoin ought to be a different prospect - though, like any currency, its value would still rise or fall on the financial markets.

All that aside, it sounds like the UK is in a relatively good position compared with its allies in launching a digital currency, because it is no longer part of a bloc of 28 countries that must all agree on a single plan of action. Could the UK steal a march on Europe and launch a BritCoin more quickly than the EU launches its (apologies) e-uro? Welfare says: 

The European Central Bank [ECB] is doing a lot of practical work at the moment. They're doing lots of testing in different places for different types of technology and projects. The UK is not at that stage yet, but then again, the UK is just one country with one decision-making government [not if Nicola Sturgeon has anything to do with it!].

So, I think we're probably at the right time now where we need to move quickly. But we need to make sure that we don't just try to iterate the current financial system. With a CBDC there is the opportunity to architect a new system that can work alongside it and eventually even take over.

We bring in this new one, which ultimately will make the current financial system a lot more efficient. Then some of the existing system will migrate to the new system. So, I think it's a long process, but it's about architecting what a future CBDC looks like.

What's the timescale? Welfare says: 

If they fast-track some of the regulation to allow testing and trialling, you could theoretically be testing it a couple of years from now. I'd hope that's where the thinking is, but it's probably more like five years.

We are a big country with very complex systems, and we can't mess this up. For it to become the main financial system, I honestly don't know, but you're probably talking tens of years, at least. But you've got to start moving now.

With COVID-19 and these massive, horrible crises, we're moving forward at speed that we've not seen for the last five or 10 years. We are in that new openness, a world of adopting things quicker.

My advice for this taskforce and for the government is to actually think properly about the future, rather than trying to iterate where we are today. We have a tendency just to want to do things slightly better, which is great, but we now have an opportunity to transform things for long-term success.

My take

A bold, imaginative, forward-looking government would seize the day - rather than carp about the Diem - and push this project forward to stay in the vanguard of change in financial services.

But with this government, more than any other UK administration in living memory, the words, "My advice is to actually think properly of the future" must sound an alarm bell. Brexit and COVID-19 have proved that acting coherently in the national interest - and being on top of the details as well as the big picture - seems to be beyond the current leadership.

And as ever, Brexit poses yet another problem: the increasingly real prospect of the UK breaking apart under the strain of leaving the EU. Will a BritCoin end up being yet another casualty of the Brexit era - a project sacrificed on a national bonfire, lit by some MPs' personal vanities? Or could it be the concept that (whisper it) makes Brexit work?

The answer must lie in real, sensible, grown-up, responsible, honest leadership that understands the modern world. Wherever that comes from in the political spectrum, we need it quick.

*Author's note: Diem is now a project backed by Facebook. The social network introduced the idea of Diem (as Libra at the time) in 2019. It is now overseen by the Diem Association, an independent organization in which Facebook is one of 27 member companies.

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