Year after year we find, without any public debate, that legislation has been passed or systems changed in ways that seem unnecessary or simply intrusive. One such intrusion coming down the road at speed is, I believe, a Central Bank Digital Currency.
Much talk has been made of a cashless society and the latest trends suggest that a very large proportion of people in the UK already use credit cards and phone wallet payments as a normal way of paying for goods and services. A large section of us already have online banking facilities and think nothing of going out without any cash in our pockets knowing we can easily access our accounts to keep track of all those expenses.
No doubt if HMRC had its way we would be compelled to carry out all transactions in just such traceable ways. And if banks have their way, cash – a perfectly legal way of tender – may soon come to an end, as strange as that idea may sound. You’ll have noticed the disappearing bank branches have been followed by disappearing ATMs. Other nations are considerably further down this road already.
But let’s consider how today’s system works when we buy something. We offer our card to the cashier and the electronic transfer of funds is registered with the card issuing bank. All that has happened is an electronic check with the bank to ascertain your ability to pay by that means.
No one knows what you have purchased other than a record of the supplier’s name and the amount you spent and at the end of each day all those millions of transactions are reconciled by all the parties involved. It is a clearing operation that has gone on in one form or another since banks came into being.
So far so good. But then comes a Central Bank Digital Currency (CBDC), if the kind being explored by a join Bank of England/HM Treasury taskforce comes into force.
This is different from privately-issued cryptocurrencies such as Bitcoin. Instead, it would be a form of electronic (digitized) money issued by the Bank of England that could be used by households and businesses to make everyday payments – in essence a ‘digital banknote’. Over 90 central banks are currently exploring CBDCs too.
It will be argued that just as cheques have mainly had their day and cash isn’t far behind the need to further simplify payments is the way to go.
Yet the new way seems to depend on the Central Bank, The Bank of England, creating a system that will in effect render all the many individual banks semi-obsolete, even though they will still exist to act as agencies for the Bank of England. Of course, we will be assured that the commercial private banks will continue to operate in conjunction with the Bank of England but one suspects that will only be for a limited time.
It will mean that the existing system of anonymity will go and each and every transaction will be identifiable back to that individual or entity. The BoE will be the clearing bank, making it the one place able to assess the spending of any given source.
That works for the banks – central banks are concerned that big tech companies, such as Meta/Facebook, have attempted to issue their own digital currencies to the users of their vast networks, enabling them to accrue excessive market power.
Second, many central banks are concerned by the decline in the use of physical cash – the ultimate form of anonymous transactions – which some have said helps to maintain public confidence in the monetary system.
The problem? One is that such power will be wide open to political interference and mark an increase in central bank power without sufficient scrutiny. The formation of a CBDC in the UK could also create fears about who is actually in control and who decides where money goes to and for what purposes. If we look to today’s economic and political model, we see extraordinary measures being introduced without parliamentary scrutiny.
The introduction of a CBDC may have far-reaching consequences for households, businesses, and the monetary system for decades to come, and may pose significant risks depending on how it is designed.
These risks include the state surveillance of people’s spending choices, as already mentioned. Indeed, this seems baked into the system. With full implementation the need or, indeed, the use of cash would in time become obsolete. A time frame could be set for all our monetary assets to be converted into a digital currency, where funds in an on-line account will only be accessible using software provided by The Bank of England or an agent bank. To prevent their use in large-scale criminal activity, any CBDC system could not support anonymous transactions, not in the way that cash can be spent anonymously.
While there are design options that would provide some privacy safeguards, technical specifications alone may be insufficient to counter public concern over the risk of state surveillance. The Bank of England risks being drawn into controversial debates on privacy.
Other risks? They could include financial instability as people convert bank deposits to CBDC accounts during periods of economic stress – potentially causing feverish activity and even panic should there not be sufficient investments left in place for pensions or other long term liabilities; and through the creation of a centralised point of failure that would be a target for a hostile nation state or criminal activity.
The overall conclusion of a House of Lords report suggests we have yet to hear a convincing case for why the UK needs a retail CBDC. Yet to date there are no safeguards to the introduction of a UK CBDC. Even some of the larger banks have expressed their reservations. And they will be at the heart of things. Under the Bank of England’s proposed CBDC model, the Bank would not provide direct CBDC accounts to customers. Instead, it would operate the core digital infrastructure to enable CBDC payments while commercial banks and other financial services providers would connect to this infrastructure to provide CBDC wallets and related services.
A Discussion Paper produced by the BoE said this model could encourage innovation and enable “the private sector to create services that support greater choice” for consumers. But many people are sceptical that a UK CBDC payments system would provide significant advantages to consumers over the existing payments system.
Indeed, this scepticism is underscored by the evident utility of the cash-based system we already have, for all that many people do not like to pay ‘contactless’ – not least that at the end of 2019 there were around one million people in the UK without access to a bank account. For some this has been a matter of choice. For others it’s a matter of computer illiteracy. For others simply a lack of internet access or a smartphone – costly items by some measures. The educational, technological and disposable requirements for CBDC transactions may exclude these people from accessing it.
Sure, there is a tendency to take a slightly sniffy attitude to ‘cash in hand’ work as a means of avoiding paying tax, or in some sense as cheating the welfare system. Others suggest that it suppresses wages and side lines employment rights. Yet cash still accounts for 10% of the UK’s GDP and cash-in-hand work is more often a matter of need and not greed – cash is vital for those unable to secure formal employment or as a means to supplementing an official low income, or while training. The Cost of Living Crisis is only going to encourage a wider reliance on cash-in-hand work for many.
But surely the most important benefit of cash is that it keeps government noses out of individuals’ private business. That’s why we should be very wary of any CDBC introduction until and unless parliament has had a say and the BoE and the Treasury produce some very convincing reports to ensure we are not being led by the nose into a situation that further undermines the democratic role of parliament and those that elect it. It is essential that there are more straightforward and targeted ways to support access to financial services than to launch a CBDC.