DIGITAL CURRENCIES
Intro: Digital payments systems are taking hold in China and America, and the eurozone is chasing hard to set one up. The Bank of England’s lack of enthusiasm for a digital pound is a blessing in disguise
China already has one, and envious of the near monopoly American companies enjoy in European digital payments systems, the eurozone is chasing hard in setting one up.
Trump’s America has made it illegal for the Federal Reserve to pursue such a project, and instead has set its sights on privately sponsored stablecoins.
We’re talking here about so-called central bank digital currencies (CBDC) – in effect, digital versions of physical cash.
On this issue, the UK and the Bank of England stand pretty much nowhere. It might surprise you to learn that’s faintly reassuring. Digital money is not an issue to set the pulse racing, but what is amazing is how people are so exercised by it.
A Bank of England consultation on proposals for a digital pound provoked an unprecedented tidal wave of more than 50,000 responses, overwhelmingly negative in nature.
It wasn’t just issues over privacy posed by a digital currency that many respondents seemed to be upset about. Nor was it the complex and costly logistical problems in providing universal access to central bank money.
Still less was it the threat that a digital pound would pose to the future of fractional reserve banking.
Rather, it was the creeping encroachment on physical cash that people feared most.
Plain and simple, people still like the idea of notes and coins, even if they hardly ever use them.
No decision has yet formally been taken on whether to establish a digital pound, but the sense is that any appetite the Bank of England might once have had for such an enterprise has all but disappeared.
Nor does the Bank appear to be that eager on the supposed alternative of sterling-based stablecoins. Its proposed framework for regulating stablecoins has gone down in the industry like a lead balloon, and although the Bank has rowed back on some of the regime’s more costly features, is still widely thought of as too demanding to allow for the creation of a significant stablecoin presence.
George Osborne, a former UK chancellor, has claimed that Britain is in danger of being left behind in a payments revolution which is taking the rest of the world by storm.
But then, he would say that, wouldn’t he? Among a seemingly ever-widening portfolio of positions enjoyed by Osborne, he is an adviser to the US-based crypto exchange, Coinbase, which has a powerful vested interest in as lightly a regulated stablecoin environment as possible. Since Osborne went public with his concerns, Bitcoin and much of the crypto universe has crashed, and many so-called stablecoins – theoretically backed by the real-world, ultra safe, fiat currency assets – have faltered too.
At least half a dozen of them have “broken the buck”, or lost their dollar peg. Some have fallen to as low as a few cents in the dollar, resulting in losses running to hundreds of millions of dollars.
There’s plenty more damage still to come from that sell-off, so if the Bank of England has been asleep at the wheel in failing wholly to embrace the ecosystem of decentralised finance, we may have much to thank it for.
Instead, the Bank has focused its attention on its plain vanilla business of updating its systems for making direct, account-to-account payments between buyers and sellers.
It’s a kind of muddling through alternative to the European Central Bank’s (ECB) empire-building on the one hand, and Trump’s enthusiastic embrace of crypto on the other.
This should not be read as a derogatory view, but the Bank of England regards payments as a simple utility, not as either a way of maintaining the Central Bank’s grip on the “moneyverse”, which seems to be the ECB approach, or as a fintech opportunity for money-making, which is the current White House approach.
Critics complain that the Bank is further condemning the pound – and indeed the City – to the slow lane. Others would say that its safety-first approach is actually what you want out of a digital payments system.
Certainly, it needs to be faster, even instantaneous if possible, and to cost as little as possible. Above all, though, you want it to be robust, so that it acts as a wholly reliable means of exchange.
Four years ago, the House of Lords economic affairs committee concluded after a lengthy inquiry that a digital pound managed by the Bank of England was “a solution in search of a problem”.
Nothing has happened since then to change that verdict.
The vast majority of sterling transactions are already digital in nature, in any case, but they take place between commercial banks or on card networks, not via the central bank.
The benefits of a central bank digital currency are far from obvious, yet there are clear cut risks to financial stability, privacy, credit provision and security, to name just some of them.
Why then is the European Central Bank fixated on establishing a digital euro? In the main, it’s about monetary sovereignty and parallel fears of US dominance.
All the main card networks are American-owned, while existing systems for direct bank-to-bank settlement in retail transactions are clunky and inefficient in many euro-dominated countries.
And it’s about the threat posed by dollar-denominated stablecoins as an alternative means of payment.
The ECB and its political masters do not want this particular Trojan horse at the centre of the eurozone payments system.
Indeed, Scott Bessent, the US treasury secretary, has openly admitted that part of the purpose of the Genius Act, which sets out a regulatory framework for stablecoins, is to attract money into US treasuries, thereby underpinning dollar hegemony in international markets. Financing the US treasuries market is not what Frankfurt has in mind when thinking about the future of money.
Instead, the digital euro is proposed as part of Europe’s wider, statist approach to “strategic autonomy”, or making the continent less dependent on rival jurisdictions for core industrial, agricultural, and monetary functions.
The idea that money can in some way be reinvented is what really lies behind developments such as CBDCs and stablecoins.
So here’s the truth: it cannot. The Bank of England is no doubt guilty of many failings, but it does at least properly understand this basic maxim. Its overarching responsibility is to ensure that a pound is worth a pound, no more, no less.
Like cryptocurrencies, stablecoins are at root just another mechanism for rent extraction. And as long as there is scope for improving existing pubic infrastructure for digital payments, which is where the Bank of England is focusing its efforts, it is also hard to see the point of digital cash.
Paul Volcker, a one-time chairman of the Fed, had it about right when he said that the only socially useful innovation to come out of finance in the past several decades was the ATM.
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