The Britcoin - would a UK CBDC be cash’s last stand against private money?
- Decoding the Bank of England’s consultation document on creating a central bank digital currency (CBDC) - what’s the point of the digital pound?
The Bank of England has published a joint Consultation Paper with the government on a proposed central bank digital currency (CBDC) for the UK. All interested parties – including the public – are invited to respond to the document here.
The Bank has also produced a Technology Working Paper, outlining the CBDC Taskforce’s thinking on a supporting infrastructure for the digital pound (aka the Britcoin).
The latter explains that the government foresees a platform model, with the Bank hosting the core ledger and API, allowing Payment Interface Providers (PIPs) and External Service Interface Providers (ESIPs) access based on what the Consultation says are underlying principles of privacy, security, resilience, performance, extensibility, and low energy usage.
Far from being an overnight dip in the waters of digital finance, as some in the media have suggested, the Taskforce has been debating these issues since its inception in 2021. So, publication offers some insights into whether the past two years have been well spent.
What the documents reveal is a government that wants to appear bold, digital, and assertive, but is terrified of the message this sends to private markets.
The first notable revelation is that the UK CBDC in consultation is a retail, rather than wholesale (interbank payments), coin. According to the BofE’s accompanying statement, the digital pound would be “used by households and businesses for their everyday payments needs”. It would exist alongside, and be “easily exchangeable with”, cash and bank deposits.
This implies that the previously stated core benefit of a retail CBDC, that it would help the financially excluded and the unbanked, is no longer a principal focus. Instead, this is something more fundamental.
In this light, the advantages it offers are not immediately obvious. After all, what is preventing citizens or consumers from transacting online today? Fintech and digital payment solutions are booming, while some estimates say the UK ecommerce market is the third largest after China and the US, representing over one-quarter of all British retail sales.
The Bank explains:
The digital pound would maintain public access to retail central bank money and, as our lifestyles and the economy become ever more digital, it would also promote innovation, choice, and efficiency in domestic payments.
‘Efficiency in domestic payments’ is an ambiguous statement, and may suggest that the programmable nature of a CBDC might lock citizens into smart contracts, including with the government, whether they like it or not. Bear in mind that UK tax affairs are becoming ever more digitized and automated, with any administrative burden now pushed onto citizens and small businesses.
Elsewhere, however, the BofE seems oddly ambivalent about the project – though in fairness, it is a consultation. In its introductory note, it says:
At this stage, we judge it likely that the digital pound will be needed in the future. It is too early to decide whether to introduce the digital pound, but we are convinced preparatory work is justified.
A bizarre, self-contradicting statement: suggesting that the digital pound will be needed, and yet it is too early to say. Arguably, this reveals a lack of ambition and leadership, a “wait and see what everyone else does first” approach.
However, in the Consultation itself the second part of that statement becomes “It is too early to commit to build the infrastructure for one, but we are convinced that further preparatory work is justified”, which is a different point entirely. (Was the report poorly summarized by an intern, or by a passing AI?)
Elsewhere, however, that ambivalence returns. The Bank notes that such a major digital infrastructure project would “take years” to create, and yet it is apparently too early to start it. All of which suggests the Bank wants to have its cake, but not eat it, despite a possible timescale of a CBDC before the end of this decade.
In other words, the document seeks to present the UK’s central bank as forward-looking, modern, and innovative, and yet also quite the reverse, as weak, cautious, and rudderless. An institution with an identity crisis – much like post-Brexit UK, in fact. Pragmatism, but with the risk of handing the advantage to bolder competitors.
So, what are the external factors influencing this mixed messaging? The answer would appear to be the unknown extent to which cryptocurrencies, stablecoins, and other digital tokens – including those issued by private companies on their own platforms – become more widely accepted in the future as money.
In short, it’s really about maintaining financial – and therefore political – sovereignty. To reassert the dominance of so-called ‘public money’ (that issued by the Bank of England) over ‘private money’ (any claim on a commercial bank). Not exactly a free-market Conservative position, hence the ambivalent, apologetic tone. The Consultation says:
A significant factor in determining whether the digital pound is needed will be how the payments landscape evolves in coming years, both in the UK and abroad. In particular, whether new forms of privately issued digital money emerge and how they interact with existing forms of money and payments.
International developments in the provision of CBDCs by other countries, and their potential to affect the UK domestically and as a global leader in finance, will also be important.
The power of private money
Far ahead of the game, China has long been issuing experimental quantities of the digital yuan. Should it oblige others to use it in international trade, this could begin to threaten the primacy of the dollar.
Notably, China’s move two years ago coincided with its government clamping down on cryptocurrencies, suggesting that Beijing was determined to rein in private digital money in favour of a state-controlled digital currency.
So, could it be that the Bank of England is terrified of appearing to act like a controlling state, and so has to whisper its public digital money ambitions instead? Meanwhile, it risks lagging behind any bolder market leaders until a decision is forced on it by circumstance. Pragmatism with common sense, probity, and stability? Or cowardice?
The BofE says it is proceeding with sensible caution:
The digital pound would maintain public access to retail central bank money, thereby anchoring trust in the monetary system in a more digitalized world and underpinning monetary and financial stability.
Also, as our lifestyles and the economy become ever more digital, it would, through partnership with the private sector, promote innovation, choice and efficiency in domestic payments, thereby boosting the UK economy, supporting growth and financial inclusion.
The first mention of digital inclusion, which was more of a selling point earlier in the project.
However, the problem with this whole argument is that UK payments are already largely digital, in a financial services world we are constantly told is both innovative and thriving. Card- and mobile-phone based payments now dominate – a point acknowledged by the Bank, which notes that roughly 60% of all payments are now made by card, with 32% contactless.
The document adds:
Around 95% of the funds held by individuals to make UK payments today are private money, held as commercial bank deposits, and typically spent electronically, such as by bank transfer or debit card. As spending has become more digital, the use of cash for payments has declined, falling from 55% of transactions to 15% over the past decade.
So, what purpose could a CBDC possibly serve, other than pushing the public away from private money and towards public digital cash – of a kind that might give the government a measure of control over, or insight into, public spending?
The answer is that the Bank is positioning the digital pound as a weapon in the fight against the power of private money:
If current trends continue, the public’s access to, or use of, central bank money will diminish and the monetary system could become fragmented, posing a risk to monetary and financial stability. The payments landscape could also become concentrated if firms’ use of new technologies in money issuance results in dominance by a small number of them. That would pose a risk to competition and diminish the incentives for longer-term innovation.
The Bank summarizes its position thus:
The digital pound would provide a public platform for private-sector innovation. The digital pound system would be a public-private partnership. The private sector would play a crucial role in offering innovative and user-friendly services.
The Bank would issue the digital pound. This means it would be a direct claim on the Bank, as cash is today. It would be denominated in sterling, the currency of the UK, and £10 of digital pounds would always have the same value as, and be interchangeable with, a £10 banknote.
And as previously mentioned, the Bank would also maintain the core ledger, enabling the issuance of digital ‘pass-through’ wallets to end users, with their holdings of digital pounds recorded anonymously “to safeguard their privacy”.
A dystopian future?
So, what do others make of the plans – such as they are?
Ian Taylor, Board Advisor at CryptoUK, the trade association for the UK’s digital asset and Web 3.0 sector, said:
We welcome today’s news that the Bank of England and His Majesty’s Treasury has announced a roadmap to a digital pound. This will bring the UK in line with the European Central Bank and a growing number of forward-thinking nations, including many G7 countries, which are exploring the benefits of this payment instrument.
Bradley Duke, co-CEO at crypto investment specialists ETC Group, was less enthusiastic, telling diginomica:
CBDCs such as the digital pound will likely be completely centralized and possibly dystopian in nature, while leading cryptocurrencies such as Bitcoin and Ethereum envisage a freer world filled with innovation and opportunity.
A bold statement in the crypto-winter and post the FTX fraud. Jai Bifulco, Chief Commercial Officer at Kinesis Money, took a similar line:
With access to previously untapped data, CBDCs could give governments new, unprecedented levels of control. The potential for governments to make instant policy changes could have negative repercussions on CBDC users – powers that, without sufficient regulation, have the potential to be misused.
But not everyone takes the alarmist or alt/defi-finance purist view. Martin Hargreaves, Chief Product Officer at blockchain provider Quant said:
The idea for a retail CBDC is a response to the declining use of cash and the corresponding rise in electronic payments. All central banks have a responsibility to make central bank money useful and accessible to citizens, and it could be argued that cash alone is now struggling to fulfil this mandate.
CBDCs could usher in a range of benefits in terms of efficiency and transparency. A digital pound could enable citizens and businesses to automate cumbersome payments and processes and implement logic into money.
Again, the feeling is hard to ignore that one core purpose of a CBDC might be to lock the population into smart, automated payments to the government.
Dialogue around the potential issuance of a UK CBDC has become increasingly alarmist, with nonsensical suggestions we are on the verge of an Orwellian nightmare in which government officials have an up-close view of what we’re buying – along with an ability to freeze the money in our bank accounts on a whim.
It is illogical to suggest that the Bank of England would program its currency in a way that could impact stability and fungibility. If constraints were put on how and when a CBDC could be spent, it would impact its value and open the door to arbitrage of the digital pound.
In summary, then, this is an oddly ambivalent, ‘push me, pull you’ document that, on the one hand, claims a UK CBDC will be necessary and it will take years to build the supporting infrastructure, but on the other, that it is too early to say or even to start such a project – unless others do it first.
Hardly the bold, independent leadership promised for Brexit UK. But at least the Consultation reveals the core purpose of the Britcoin: the pound’s last stand in a contactless, crypto-, mobile, private-money world.
No wonder the BofE and the government are so ambivalent, therefore. It’s public money versus the power of the markets: hardly something a Conservative government would shout from the rooftops. So, it has to say it quietly and apologetically instead.
Terribly sorry to bother you, but would you mind awfully if we kept a little bit of digital for ourselves? Sorry for asking, of course.