The author is the author of “Cryptocurrencies: money, trust and regulation”
The Bank of England is still considering the introduction of a central bank digital currency (CBDC), a digital version of banknotes and coins, directly convertible into cash and deposits. The bank argues that this will increase financial inclusion. But the introduction of the basic bank account has already achieved this target – by 2018-19 the number of ‘unbanked’ in the UK had fallen to just 1.2 million out of a total population of 67.1 million.
The bank also says the public should have access to faster and cheaper retail payments. This is true, but more and more payment services are already offering just that.
Meanwhile, the Common Treasury and the BoE CBDC Working Group continues its work, but without much indication of how the following dangers will be overcome – if, indeed, this is possible.
The first concerns the effect on credit. The conservative assumption is that 20 percent of the deposit base of commercial banks could exit the banking system after the introduction of a CBDC; that is, all uninsured deposits. Sir Jon Cunliffe, Deputy Governor for Financial Stability at the BoE, admits there is no way to know the extent and speed of change.
Obviously, the central bank could undercut commercial banks in terms of fees. But, says Cunliffe, “banks should adapt.” This has broader implications for the economy as a whole. The BoE cannot afford the enormous costs of providing credit, especially for businesses and mortgages, but it is credit (not just money) that makes the world go round.
Then there is the thorny issue of privacy. The proposed CDBC structure is a central bank account, accessible through the Payment Interface Provider (PIP) responsible for Know Your Customer requirements. All transactions are recorded in the bank’s ledger, a fast, secure and resilient technology platform. People could transfer money from their bank accounts and put the digital money in a digital âwalletâ authorized and regulated by authorities. PIP âownsâ the relationship with the customer and provides value-added payment services. It can only connect to the general ledger through the application programming interface (API).
Potentially, this structure gives the central bank access to data on transactions and personal expenditure. Such data is obviously valuable: expenditure models for different income groups would be available. Changes in monetary policy and interest rates may have more immediate effects than in the current structure of the banking system, as they will inevitably restrict the freedom of commercial banks. The discount rate currently influences but does not determine the rates applied by banks on loans or deposits.
When testifying before the House of Lords economic affairs committeeBoE Governor Andrew Bailey tried to maintain that the CBDC was not about monetary policy. To which the chairman of the commission rightly replied: âBut it could be. It all depends on who is in charge and under what circumstances.
The prospect of CBDC also opens up the possibility of programming the âwalletâ via the API. The BoE called on ministers to intervene on the programming, so that “money is programmed to be released only when something happens” through the use of “smart contracts”. The bank could restrict the future use of the money for activities considered to be “socially harmful” in one way or another. But who will judge what is socially harmful? It has the potential to become as severe a restriction on personal freedom as China’s “social credit” system.
Such restrictions may not be technically possible at present, but the pace of technological innovation is rapid, so extensive programming may be possible in the future. CBDC looks like a solution looking for a problem. The risks are too great to pursue a purely digital book.