WHEN the Treasury, the Bank of England and the Chancellor all float an idea it is wise to pay attention. The idea I’m referring to is the Central Bank Digital Currency (CBDC) or ‘Britcoin’ as the media have dubbed it – the Government’s possible answer to Bitcoin and other private digital currencies (PDC).
The Chancellor’s tone is interesting, attempting to reassure that any new digital currency would run alongside cash and not replace it, initially at least. That is the claim but there are strong reasons to believe the game plan is ultimately to replace cash, given apparent commitments within the Treasury and the expertise of the team and vested interests assembled.
Rishi Sunak has been careful not to frighten the horses, but even making statements about its hypothetical introduction in this context, coupled with the investment the Bank of England is making into researching the idea, demonstrates they are very serious. We need to take note and fully understand the implications which I believe could potentially result in a huge increase in state control over the individual.
CBDC would be revolutionary and without very strong and legally binding safeguards its adoption would hand the state very significant power not just over money supply but also potentially on how and on what one’s private wealth is spent. So far CBDC is below the radar and of specialist technical interest – but make no mistake, this is big and needs very close analysis and scrutiny.
Before we examine its advantages and disadvantages it is worth investigating exactly how a digital currency differs from conventional currency because on the face of it almost all Sterling is already in one sense digital: it is held in bank ledgers electronically with only a tiny and declining fraction held as conventional cash.
However, this misses the point. Traditional currency is ultimately backed, in theory at least, by the central bank with commercial banks, Lloyds for example, who create money by lending within their capital structure and regulatory constraints. Individual accounts are subsets of this and the ultimate property of the account holder where the cleared funds, within agreed overdraft limits, can be used for any legal purpose.
Private digital currency like Bitcoin is quite different and is not backed by any central bank. Instead Bitcoin currency is generated by a competitive decentralised process called mining, with individuals rewarded by the network for their services in a competitive environment.
Unlike traditional currency which can be and is created at the whim of the central bank, Bitcoin is designed in such a way that new Bitcoins can be created only at a fixed rate which is predictable and decreases over time with the number of new bitcoins being created automatically halving each year until a maximum of 22million are in existence. Bitcoin is in theory at least limited in its quantum – fiat or conventional currency is not and in the latter case has been highly elastic in its issuance. This elasticity is the great flaw of fiat currencies in terms of preserving the value of money.
Another key difference is Bitcoin uses blockchain databases that are shared across the computer network, providing a secure and decentralised record of transactions. This guarantees fidelity and security and is designed to generate trust without the need of a third party. The traditional central bank or commercial bank is thus redundant in the crypto world.
Private digital currency is still embryonic and at most is a speculative asset class. Bitcoin, the market leader by a margin, has a market capitalisation of outstanding ‘coin’ at the time of writing of around $1trillion with a long tail of competitors whose combined worth is probably around the same again. This sounds a lot, and it is, but compared with the estimated stock of USD denominated currency it is minuscule, probably accounting for significantly less than 1 per cent of global transactions. Crypto is coming out of the shadows, for sure, but it remains a niche market.
On the face of it one might imagine it is welcome that a major central bank should be ‘forward thinking’ by examining the various options for Sterling in an increasingly digital world; however the devil is in the detail and there are very major grounds for concern.
What the UK central bank seems to have in mind is a very far cry from private digital currency with the central bank core ledger at the heart of it enabling regulated entities authorised access. These ‘payment interface providers’ are ‘the user friendly interface’ with the individual or company, as the Bank of England inelegantly puts it. This new Government-backed CBDC would thus potentially be quite different from its private equivalents in four primary spheres.
First, Government envisages the central bank sits at the core, not a decentralised process of controlled currency expansion as with private currencies.
Second, it is not clear what process the central bank would have for limiting currency expansion. The record since the global financial crisis has shown just how willing central banks are to create money via quantitative easing. A CBDC would theoretically enable that process to be taken a stage further, simply creating or withdrawing credits as centralised policy makers dictate, with a potentially much stronger transmission mechanism than the current QE and Asset Purchase programmes.
Third – and critically – Tom Mutton, the director at the Bank of England responsible for overseeing analysis into CBDC, has argued that politicians must decide whether this government-backed digital currency is ‘programmable’ or not.
This sounds innocuous but it is anything but. There are two aspects to it: one is the potential directly to micromanage interest rates and the second is the potential for the state to nudge or control purchases.
CBDC would enable an immediate transmission process where the central bank’s rate was affected and would potentially allow for highly negative interest rates if policy makers deemed demand was sluggish. While in parts of the eurozone, under conventional money, rates are already negative CBDC would allow this to be taken a stage further with a much greater potential for materially negative rates, with clear implications for savers and indeed personal choice and liberty.
A second aspect means that in effect the state could have control over how you spend your money, not just the quantum of it. Even to float this revolutionary and completely illiberal idea is very revealing indeed as to the thought process of some in the Treasury and Bank of England. It needs very careful watching and clarification, for without very strong safeguards CBDC would result in the greatest power grab of the state over the individual yet.
With current money held in one’s account one is free to do with it as one pleases (within understood and accepted laws). It’s yours to spend or invest as you like. A ‘programmable’ CBDC currency could theoretically override that freedom based not just on the sum in the account but also other variables at the whim of the central bank or politicians – for example ethical or environmental objectives.
Unless a CBDC was set up entirely legally neutrally, it could be used to block expenditure on items deemed ‘socially harmful’. Carbon intensive purchases are an obvious example (diesel or indeed any fossil fuel). The direction of spending of state benefits (no sugar, salt, fat, alcohol or tobacco products) is another area that might attract attention. What might politicians dream up as bad in future?
The point is that under the current monetary system there is no direct check on what you do with your money so long as it is legal – be it to buy red meat or go vegan – and rightly so: that is what a free society is all about.
But unless explicitly excluded it would not be hard to imagine a CBDC tax or credit system introduced simply at the whim of government to suit whatever short term target it might have.
Nudge inducements to invest in politicians’ latest green paradise, or a digital penalty for purchasing a non-sustainable item, or perhaps some helicoptered social credits would all be temptingly possible. This may sound ridiculous but by even proposing the means as a possibility the door is opened to the mad world of politicians’ imaginations. One does not need to be a genius to understand that this potentiallyis a very serious new threat to individual liberty.
If lockdown has shown us anything, it is how easy it is for the state to control our thoughts, words and deeds.
Sure, central banks have caused serious damage to fiat currency with their interference and constant desire to micromanage. The CBDC, unlike the private equivalent, potentially opens up a whole new avenue of state power to direct, control, helicopter in and withdrawn back at the flick of a switch.
We need to watch these developments very carefully. I should welcome a sound currency where its value fluctuated only down to productive achievement, not artificial debasement. Small chance of that, I fear.
But any attempt to make this ‘programmable’, even if the authorities generously allow this digital currency initially to run in tandem with traditional currency, would effectively mark a major breach of an individual’s or corporate freedom to buy legally what they like.
The Man from the Ministry already demands a state over half the size of economy but to nudge, direct and dictate how the remainder might be spent goes well beyond the pale. Break the link between currency and productivity/production in all its forms and you play with fire; breaking the link with personal choice and preference of what to buy and you cease to have a free society.
The irony is should our political class and their institutions attempt this currency change, they will only hasten the collapse in confidence of the very monetary system they so heavily rely on.
This first appeared in Brexit Watch on December 7, 2021, and is republished by kind permission.