There is much discussion in the media today about the possibility that the Bank of England might create a digital currency for use in the UK by 2030.
I stress that all of this is speculation. No final decision on the development of such a currency will be taken until 2025. It will not, therefore, be the responsibility of the current government. Given the near certainty that the Tories will be out of office at the next election this means that, like almost any announcement that the current government now makes, the current speculation is essentially meaningless.
This does not mean, however, that this issue is not worth thinking about, although to spend more than a few minutes on it is a waste of time: there is no evidence that we require a digital currency in the UK.
The most obvious reason for saying this is that we do already have a digital currency in this country. Excepting the £80 billion or so of notes and coins that are in circulation all the money that we now have is electronic, and so digital. The only record of its existence is a digital entry in a computer maintained by a bank that produces statements of the sums owing to and from that bank. Those balances, which are without any form of physical asset backing of any sort whatsoever, are digital currency. The question as to why we need another digital currency is, in that case, hard to answer.
One answer that central banks provide for pursuing this issue is that they must provide a legitimate alternative to cryptocurrencies. This is obviously disingenuous. Given that almost no one has ever used a cryptocurrency to actually settle a real liability, at least in the normal course of trade, a digital currency is not required as an alternative to any crypto asset.
When the Bank of England is also making clear that any digital currency it creates will not carry any interest rate and will be denominated in sterling it also becomes very obvious that the digital currency that they will create will have none of the attraction of the supposed cryptocurrencies now in use. The supposed appeal of cryptocurrencies is in their speculative worth, even though much of that appears to be entirely illusory (to use the kindest possible words). In that case, it is glaringly apparent that any central bank-created digital currency without any speculative value to it and without a rate of return paid on it is not an alternative to cryptocurrencies. To pretend otherwise is to be disingenuous.
So, what is the reason for a central bank created digital currency? The only one that appears to be available is to replace cash. The claim would appear to be that digital currencies will be available to anybody who wants them, albeit through a commercial provider, and not apparently direct from the Bank of England. They will be issued in what are being called digital wallets. I think those already used to making payments from their phones are already in possession of these, and quite how these digital wallets will in practice differ from a charge card is hard to work out.
In that case, digital currencies answer no known question unless that question is “how do we get rid of notes and coins?” Even then, however, quite how a digital currency will really work is hard to know. Are children to be forced to carry digital wallets? Similarly, will those mainly older people who still like to use cash just be told to give it up and instead use a digital wallet when that might very well be alien to them? And is the population as a whole willing to give up cash as yet? I am not sure it is, even though, somewhat to my own surprise, I now go for long periods without ever using it. I am not sure there are any good answers to these questions as yet.
That might be, especially true, if, as is likely introduction of a digital currency to replace notes and coins is really designed to, firstly, permit the possibility of negative interest rates, because the alternative of holding cash will have been eliminated and, secondly, to permit all transactions within the economy to be traced digitally, increasing the likelihood of tax compliance, albeit centrally imposed, and with significant resistance arising.
This then leads to the political questions within this proposal. Is any government willing to take the risk of introducing a digital currency to replace cash and accept the risk of political backlash from doing so?
And is any government actually so keen to introduce a digital currency, and so eliminate cash, that it is actually willing to drive people into the hands of much less stable currency providers so that those who do not wish the government to have access to information on all their transactions can continue to hide them from scrutiny (at least in their own imagination)? I think that the appeal of such currencies will rise significantly if the government tries to eliminate cash.
Finally, there is a curious macroeconomic twist to this. What is currently being made clear is that this digital currency will not be an alternative to a banking service. All that a digital wallet will apparently do is hold digital currency that is equivalent to cash. No interest will be paid. There will be no overdraft facility. There will be no loan facility. There is, then, no banking arrangement, as such, although it is being suggested that commercial banks will actually issue these digital wallets, although why they would wish to do, so is hard to see. In that case, all that is being provided is a quite limited opportunity to deposit some funds with the Bank of England as an alternative to depositing them with a bank itself. That, however, by default means that government borrowing increases, because this is lending to the government and that always increases the national debt. I wonder if anyone in the government has thought this through because it shatters the myth that there is no money?
In summary, what the government is proposing is incoherent, makes no banking sense, makes no macroeconomic, sense, answers, no known problem, and would appear to be a dead cat issue, dumped on the table to distract from the reality which is that the Bank of England is currently trashing the UK economy by pushing up interest rates, wholly unnecessarily. Unless the government comes up with something much better than this I suspect we are a long way from having a digital currency unless the vanity central bankers demands it.
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As you say Richard, when Private individuals are granted the mind-bogglingly unjust privilege of creating as much money as they like i.e, banks, the big problem is how to turn it in to the kind of money that they can claim is real and the answer to that it is to lend it to speculators such as other banks and so on, down through the food chain of more and more unlikely forms speculation.
Sometimes it ends up in the hands of buffoons who pay millions for a tweet, but mostly it just becomes yet another cog in the Finance sector machine for parasitically extracting wealth from the value creating part of the economy.
Since the BoE doesn’t appear to understand the implications of the digitisation of the currency we do have (the speed of the LDI crisis, and the lack of adequate regulation that the crisis point literally demonstrates), we have no reason to believe they know what the y are doing with a new digital currency.
I am also persuaded they don’t understand what is happening, because I suspect that what Bitcoin style digital currencies and all similar represent is something that is a contradiction of a central bank as an arm of state; it is a neoliberal attempt to bypass central banks by privatising the currency. The question you need to ask is; wh is the lender of last resort for such a currency? And even beyond that; who is the dealer of last resort?
Currency is the sovereign stamp of the state. The currency, if I may put it in the rich Jacobean language that speels out what “soevereignty” really means; currency, ‘minting money’ – “inheres in the bones of princes” (Privy Council, 1605 determining a court case on the sovereignty of the currency). You can’t privatise money, it is a real ‘res publica’.
Agreed
I heard this on the early morning R4 on the way to work.
Even though the idiot advocating it – I think he was minister – kept saying over and over again that cash would not disappear (he also mentioned ‘the people’s priorities’ of which I cannot remember this being one) , it was obvious to me what the implications are which is why I’ve answered close to Mr Warren’s post because I was thinking exactly what he is thinking.
All I see is a government contemplating creating something that can only be exploited because the government is simply full of people now who are exploiters and NOT providers.
Either that or this is yet another example of where the Tories have departed from reality yet again and shows that they are at the end of their usefulness.
As for those coming here talking up digitisation, all I can say is that they need to read more about the history of where money comes from and how it actually works because their advocacy of digital is I’m afraid totally baseless.
I strongly suspect this is about data – but for commercial exploitation
“I strongly suspect this is about data – but for commercial exploitation”.
Our current digitised money makes us all the captives of the banks; every transaction passes though our bank; and the data is captured by the banks. Old fashioned money circulates free of the oversight of banks; it means people without bank accounts can still just about paly a role in society. The banks, and neoliberal business and politics don’t much like old fashioned money, that will never do; it costs them money, they hsve little control over it, and it is harder work to operate the system for not enough return. There are lots of inconvenient responsibilities that go with handling money that don’t make money.
I suspect the kind of blockchain digitised currency envisaged by the BoE is really an attempt to privatise money from any control by the sovereign currency issuer. I state this not because of specialist knowledge of blcockchain technology, but because as I understand it, blockchains are immutable, irreversible, encrypted, and allow decentralised transparency; but critically users of blockchains can remain anonymous, while preserving the blockchain transparency (so while the government may a great deal about every transaction, I am not sure they will know who made it – thr bit that really counts).
Once we all move premanently to digitised currency, there is only one step left for Capital to take; Big Tech takes over the banks – and the rest of us return to a neo-feudal state of post-democratice digitised serfdom.
The End.
Richard,
The only benefit that I can see for the government in creating a crypto currency is the inbuilt complete traceability of transactions using such a currency. I can’t think why anyone in the current government would be at all interested in such a feature, particularly in relation to their own dealings. I suppose that this would be considered as a way to speed up the killing-off of cash.
Can a case be made for a Bank Of England alternative to Visa and Mastercard?
The majority of posts I have seen about Crypto-Currencies is the ability to make a huge profit without working for it.
They have enormous power
There would be benefit in that
It could, however, very easily become a transactions tax
The Bristol Pound people have realised this and have, I gather, now abandoned the pound in favour of what they term Bristol Pay which is a local alternative to Visa/Mastercard. Very farsighted of them I think, and worth keeping an eye on.
Oh, and if no-one else mentions it, I don’t believe the so-called CBDCs are currencies at all, rather they’re remotely programmmable digital tokens. The point of them is they can be used for behavioural modification, like a known protestor finding their ‘money’ will no longer by them a train or bus ticket out and away from their immediate region. Drinkers could find they can’t buy alcohol (#shudders), smokers could find they can’t buy cigarrettes. Persistent vocal critics of the govt on social media together with informed bloggers could find their tokens don’t buy them anything at all for a day, a week, a few months, whatever. It’s a means of social control. Welcome to China.
That is creepy but in a dystopian world, I suppose it is possible
The only thing that interests Sunak and the Conservatives is whether an enterprise can make a profit for their supporters. If the digital currency has the prospect of being a nice little earner for tech and media companies, let alone the banks, the Tories will go for it, despite it just replicating the present system of financial transactions.
If they wanted a digital currency alternative to cash, it seems to me the solution wouldn’t be to make a brand new currency. As you point out, we already have digital money. If they want to make it an alternative to cash, the better solution would be to develop easier ways to transfer money we already have. And given we almost all have phones in our pockets capable of talking to bank cards or even replacing cards altogether, I don’t see any technical barrier that prevents banks from developing common interfaces within their own apps to allow anyone to accept payment from anyone else. Like systems in china have done with QR codes.
If this were ever to go ahead, it sounds like yet another excuse to give some firm a huge contract to “develop” the technology, rather than any government interest in the proposed solution itself.
We don’t really have digital currency, what we do have is the digital transfer of currency transactions, which are just basically double-entry stuff in a whole cascade of transactions until you end up with your money transferred to a creditor (eg. Tesco). Having a personal “wallet” of digital currency to transfer directly without going through the (rather large) clearing system operated by commercial banks and the likes of Visa & Mastercard might sound attractive, but, here’s the thing.
Firstly, you now rely in electricity to make it all work, and it might be a bit of a bummer if your phone/whatever is running out of charge when you need to make a payment. Not very green.
Secondly, and I hope I have this correct, when you transfer £30.00 to somewhere, that’s £30.00 that goes through the regular clearing system in a chunk. The next guy gets it, and that’s the end of it. With digital currencies, every unit is unique, so can be traced from origin to eventual destination. Some of that might end up in the hands of someone you never met, but most certainly do not want to be associated with (there is a similar problem with DNA, which we all spread about; in the forensic world, it might also end up somewhere inconvenient).
Your point is, because I can’t find it?
The point is, Richard, that every unit is traceable through its journey via the financial system. You are basically giving the government permission to tell you where you can spend your money, should they wish to.
Pretty much true already, I’d suggest
And 99.8% won’t worry
Why are you?
I am not. That’s not where the big threat is.
“every unit is traceable through its journey via the financial system.” [..] “99.8% won’t worry” [..] “Why are you?”
I’m worried. In a caring and compassionate world, we have nothing to worry about. But in a neoliberal world, with private healthcare, do you want companies to find out that you have purchased medicine for certain health conditions? How about that you have donated to certain political organisations? Or that you belong to an LGBT+ organisation and intend to visit Saudi Arabia?
In his book “How to Dismantle the NHS in 10 Easy Steps” (second edition) (2018), https://www.amazon.co.uk/How-Dismantle-Easy-Steps-second/dp/1789041783/ strongly recommended, Youssef El-Gingihy notes that “the Telegraph revealed that the medical records of all NHS hospital patients between 1997 and 2010 had already been sold to insurance companies.” Ref: https://www.telegraph.co.uk/news/health/news/10656893/Hospital-records-of-all-NHS-patients-sold-to-insurers.html
The latest data is now being sold
And this data is already being sold by supermarkets and pharmacies
“Digital currency” is a misnomer, I think, for what is being proposed. The USP for cryptocurrencies isn’t that they’re digital (what else could they be?). It’s because they’re based on something called the block chain, which is supposed to enable security and, paradoxically, transparency for transactions. I don’t understand it myself, but I wonder if you would be interested in looking into it and providing an explanation for the followers of your blog of how it’s supposed to work.
I’m also not sure if the advocates of block chain-based “currencies” understand the role of debt.
Block chain is just an accounting tool, at best
I think it far too hyped
i Very little of my cash in physical form, and I make very few payments these days with notes or coins. Most of it is held or moved as ones and zeros on a bank’s accounting system. So how would any new Bank of England “digital currency” differ from that?
Until we see cryptocurrencies being used on any scale as a medium of exchange we can dismiss them as a currency. They also don’t function very well as a store of value – as an asset class, they are more at the speculative gamble end of the spectrum, although I understand some people have done very well by getting in early and then turning their crypto back into real assets. Many won’t.
Some have referred to the Tories’ supporters as being in favour of this, but mention only the commercial ones – huge as they are. The key supporters for Tories – as we saw with the selection of Truss as leader – are the Tory members, mostly though not all getting on a bit and in the Home Counties. This is the core constituency, literally and metaphorically for the Tory govt. They make little money for the Tories of course, but they are the sine qua non. Without them no Tory govt. So a digital wallet that takes cash out of circulation? Who are the most common users of cash instead of cards? Older people (I’m 71 myself so this is not ageism, I would argue). The Mail-reading conservative Conservatives are the most likely not to be able to be happy about having no physical cash (so to speak), and the most likely to be incensed by any attempt to make cash not viable any more. That is votes thrown away, and even Sunak isn’t dumb enough to do that – though close, close. BTW up here in rural northern Scotland it has been noted that there is a return to using cash rather than cards. If it’s wider than here I do not know. It’s not a massive shift, nor necessarily long-term, but it is there. Something, most think, about keeping track of what you are spending when money is a bit tight for you. Possibly about charges on businesses for having customers use cards. At any rate the apparently inevitable slide down in cash usage may have become sticky, which is a far from uncommon process in many apparently straight-line graph processes in the real world of course
Thanks
Cash has a visual control element – you can see it going
And doesn’t cash back at the supermarket make it feel as though you haven’t spent anything?
The point about rural users is important from a technical side too. Digital currency needs an internet connection (even the so-called decentralised systems still rely on this). What happens when there’s a storm or something happens to temporarily knock out an island or isolated community’s fibre/3G? What if the currency system requires a lot of bandwidth or low latency connections to work. If not thought out, that could be yet another community of users locked out, even if they were perfectly willing to use it.
The Bank of England has not left the City
If a Digital currency arrives are there plans to add a charge for transactions.
Interesting…
> to permit all transactions within the economy to be traced digitally, increasing the likelihood of tax compliance,
I’m pretty sure Rees-Mogg has been credited or associated with a book suggesting the opposite, that Crypto can be used to get you out of that sort of thing. Don’t know if that’s worth pursuing.
Right from the beginning I have been mystified by the BoE’s interest. It seems to based on…
“Don’t understand why there is so much interest in central bank digital currency…. but must do something to make us look “modern”‘.
There is one reason it might be interesting and that is the ability for non clearing banks (ie/eg me) to hold sterling balances directly with the BoE. However, this is specifically ruled out…. and we can see why. It could lead to great instability in bank liquidity as depositors switch when a crisis looms.
So, we know this will go nowhere…. until it is quietly dropped in 2025.
I think it will be
First up, I’d like to make the disclaimer that I’m not some kind of bitcoin shill and I don’t even own any, but having researched it quite a lot in the last few years, there are several positive aspects to it (yes, there are lots of downsides as well). It was actually created in response to the global financial crisis back in 2008/09 as a means to offer an alternative that wasn’t beholden to the reckless behaviour of Wall Street investors. The key features being decentralisation, transparency, low transaction fees, self-sovereignty and being deflationary (eventually but arguably already) by design.
Decentralisation – It is not controlled by a single or small group of powerful entities who have ultimate control of it, like fiat currencies, where those closest to the money printer can take the most advantage of it.
Transparency – Every transaction ever made is recorded on the blockchain and is immutable. There are no invisible paper trails or documents ‘disappearing’. There are arguments for and against this, but it means any nefarious activity can be tracked by anybody and market manipulation is visible.
Low fees – In the traditional financial system, transaction fees can be anywhere up to 4% and can take days. With bitcoin, you could transfer £1M almost instantly for just a few quid. This is a very real threat to the likes of VISA, Swift, etc. and is one of the reasons traditional finance players are starting to sweat.
Self-sovereignty – You can hold your own funds on a cold-storage digital wallet that is not on any network. You’re in absolute control of it and there’s no risk of something like a bank run wiping out your savings because of the shady fractionalised banking systems running into liquidity problems as seen in Greece and Ukraine in recent years. Or, take for instance, the widely covered Canadian Trucker protests a few years ago, where the government were freezing assets of some of those involved. This is not possible in a decentralised system.
Deflationary – There will only ever be a maximum of 21M bitcoin created after which no more tokens can be created. It’s estimated that several million (I think maybe 4M?) have already been lost due to lost passwords and key phrases, due in part to the awkwardness of actually accessing and transacting bitcoin in the earlier years. So let’s say the maximum supply will be 17M. Demand can increase, but the supply never can (outside of that already scheduled).
This is in stark contrast to fiat currency systems, where a government / central bank can just print as much money as they want when something bad happens, effectively permanently stealing money from the public.
Now, all of that said, there are obviously a lot of downsides. It is still largely a speculative asset and as such the short-term volatility is very high, leading to a lot of people getting wrecked when they try to margin trade it like they would on the stock markets.
Then there are all the copycats. 99% of all cryptocurrencies are scams and there are regular rug-pulls and scandals, but there are some projects with actual real-world value, large infrastructure and huge active development teams, such as some of the Smart Contract Platforms that are already used in all manner of web-based transactions, from gaming and virtual reality worlds to insurance and security contracts.
Many massive institutional players who until recently scoffed at cryptocurrencies are now dipping their toes in as well. Banks like JP Morgan are opening up to crypto trading. Pension funds, hedge funds, asset managers such as BlackRock are all accumulating and/or offering their customers exposure to bitcoin. Even Vanguard who still claim to be giving crypto a wide berth are actually using blockchain technology for parts of their asset management chain.
The whole space is still in the early stages of adoption, but I think however you look at it, it’s not going anywhere for a while (at least Bitcoin and blockchain – the others maybe not so sure with the SEC looming with the threat of declaring many of them as securities).
The central banks seem to be getting a bit nervous of their cosy traditional system, in which they pull all the strings, being uprooted, hence all the talk and development of CBDCs. The problem with those being the first C – “centralised”, which flies in the face of what bitcoin was supposed to be all about. Give it a few years and there will be stories of people having their centrally-controlled assets frozen for societal infractions such as protesting or striking, I have no doubt about that.
Sorry
Crypto is meaningless and almost certainly most are Ponzi schemes, as the failures prove.
There is no apologising for it and your arguments are largely works of fantasy
My first thought was also “we already have a digital currency”. So the next step is to “follow the money” and see who gains.
The BBC article “Digital pound likely this decade, Treasury says” https://www.bbc.co.uk/news/technology-64536593 It notes that “If given the go-ahead, there would then be significant investment to launch the currency”. That money has to go to someone.
If notes and coinage are no longer being produced, you would think there would be big savings. I bet that the “technology costs” exceed the savings, on the grounds that they are “technical” and the new “infrastructure” requires “annual maintenance”.
The article also suggests that a digital currency must be “Subject to rigorous standards of privacy and data protection”. In my opinion, that means the exact opposite, and the government can track every purchase made, and make sure that we all pay our tax, NHS insurance, etc. New laws will make sure you can be prosecuted anonymously. Cynical? Just look at the proposed new laws.
And the BoE says they will still produce notes
More on this tomorrow
A CBDC adds another vulnerability. My mum in Cape Town is having to endure up to 10 hours a day of load shedding power cuts. Where is your digital currency then? I can see exactly why China likes the concept. They can see exactly what you buy and can switch off any dissident at will. How does any of that help us? For Scotland much better to take over the Post Office and use it to provide basic accounts and services for those the banks are not interested in.
Agreed
A blog on that theme tomorrow
The main reason is power. A digital currency turns each unit of the currency into an element that can be switched off at will by the the issuer. You wouldn’t need to go through the process of freezing a bank account, you just freeze at source the units owned by the holder of that money.
It also gives you the power to freeze money *after* it has been moved on by that person. So a fraudster receives some ill gotten gains and spends them onward. That money can now be frozen until it is determined to be legitimately received no matter how many times it has moved. Under the current financial system that is very difficult if not impossible.
Of course this is opening Pandora’s box, as though there are legitimate uses such as outlined above, the tech will inevitably by the powerful. You climate change protest? We turn your money off. You protest a tory government? We turn your money.
I also think it will eventually be used to collect VAT at source encoded into the transactions. Rather than receiving it and paying it over, it will be directly credited to HMRC’s account to be reclaimed later in the event of a refund.
This could likely be applied to other taxes such as payroll taxes.
Will any of it work? Probably not.
Is it likely to further entrench the dystopian nightmare we are moving towards? Probably.
I expect China will do all these things first. We’ll froth at the mouth about how authoritarian all of this is. Then copy them in 10-20 years.
I think the BoE is dabbling with providing a safer money supply ,held electronically. It is argued this would threaten the current banking system since in a crisis,folk would transfer money into these Digi accounts out of regular bank accounts.
However there is nothing to stop people doing this anyway via cash withdrawals or bank transfer as happened to Northern Rock in 2009. Digital cash would not make much difference to worsening bank runs. It would however help squeeze overall bank deposits and thus make the banks that exist smaller. This is not a bad thing in the scheme of things, the banks are far too big particularly in the UK,this would greatly weaken the City of London’s insidious power.
As Joseph Huber has pointed out, this could create a “ratchet” effect, every time we have a bank crisis, more money moves out of the banks forever, so over time we get a more secure form of digital money and a less volatile banking system. They can also be used to effect interest rates at some future point by adding interest to them, forcing the banks to follow suit(or lose deposits).So I see potential reasons for this, but as you have pointed out the banks will resist and lobby against it exactly for these reasons.
Therefore it will be dropped or limited to such small limits,that it makes no difference to anything.
I think you underestimate the impact of systemic change
Huber says it could be done piecemeal to gradually introduce the idea, which is likely the way they would do it. You could slowly increase the amount allowed to be held as digital currency so as not to frighten the horses.
Personally I see it as a way to reduce current banking power , which is used to invest in all sorts of non productive investments and all at the cost to the state that is always on hand to pick up the tab when it all goes wrong..
I think my explicit proposal more useful