Technocrats and politicians reflexively justify power grabs by citing external threats. That authoritarian tendency has found an improbable exponent in Jon Cunliffe. This respected deputy governor of the Bank of England recently launched a programme to develop a digital pound. The central bank anticipates overlapping with commercial banks in some key activities while gaining sweeping new access to personal financial data.
The set-up would be something like this. The BoE would establish a central ledger to record each person’s fluctuating ownership of digital pounds. These anonymised accounts would bear no interest and have a retail deposit limit of £10,000-£20,000 each. That capacity could accommodate the monthly salary payments of many UK people.
Commercial banks and other financial institutions would administer the electronic “wallets” of customers, and presumably companies, keeping real identities to themselves unless law enforcers required otherwise.
The BoE and the Treasury are minded to adopt a technology critics dismiss as “a solution in search of a problem”. The headline external threat cited by Cunliffe is unconvincing. It is the replacement of central bank money and its extension — electronic money within commercial banks — by private digital currencies.
This would plainly be a bad thing for financial stability and law enforcement. But the danger has been retreating, not advancing. Cryptocurrencies have failed to replace fiat money in everyday transactions and have coincidentally collapsed by two-thirds in value to $1.1tn. Meta’s attempt to create a blockchain-based payments system foundered in 2019.
Moreover, nation states have access to a simple solution to private digital currencies of any stripe: prohibition.
This option has been largely discounted by the BoE in its enthusiasm for “Britcoin”. There are two underlying reasons, one explicit and one implicit. The central bank points explicitly to declining use of physical cash for transactions. This has dropped from 55 per cent to 15 per cent of the total in a decade. That represents a big shift away from central bank money and towards related electronic money managed by commercial banks. Cunliffe is setting wheels in motion for a rebalancing.
The implicit reason for the Britcoin plan is that the BoE fears falling behind EU peers. Their plans for a digital euro are well advanced. “There is an international race to develop central bank digital currencies,” says Leon Isaacs of DMA Global, a consultancy.
The BoE’s desire to make up for lost time may explain its tendency to pooh-pooh civil liberties objections to a digital pound. The key rebuttal is that it would make “no difference” to the privacy of financial data. The justification is that law enforcers would continue to follow due process to unmask criminals.
That ignores the radical centralisation of data that Britcoin would require. At present, an individual’s electronic money may be spread across multiple institutions, none of which know where the rest of it is. The BoE’s central register could theoretically show it all the digital money — and when ownership was switching. Anonymity would only be as robust as the politics and the legal system of the time permitted.
A further wrinkle is potential “personalisation” of digital money. According to one City executive, “customers could receive welfare payments that could not be used for gambling”. Supposedly, recipients would opt in for this curb. But some politicians might also relish interfering in what citizens did and did not spend digital money on.
Commercial banks would meanwhile have to plan for possible outflows from the deposits that support their lending. A Britcoin account would axiomatically be as safe as the BoE. It would be an appealing place to stash cash when rates were low or financial volatility was high.
They should certainly fret over their putative role as managers of Britcoin wallets. Banks would need to charge transaction fees, or run them at a loss. If the former applied, US payments leviathans Visa and Mastercard would doubtless muscle in.
Britcoin would roll forward the frontiers of the state. The BoE is rightly inviting scrutiny. But this needs to be harder and sharper than anything MPs mustered at a hearing last week. The plan could create serious unintended consequences. Cunliffe may be rather glad his term of office ends in October. Someone else will have to deal with the headaches a digital pound would create.
jonathan.guthrie@ft.com
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