The power struggle behind plans to introduce “Britcoin”

The Bank of England’s digital currency initiative is less about making the monetary system more efficient than it is about retaining control.

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The joint announcement by the Bank of England and the Treasury of a taskforce to explore options for introducing a central bank digital currency (CBDC) is another sign that some of the disruptions to the economy caused by the 2008 financial crisis and the pandemic are permanent. “Britcoin”, if it comes to pass, would overhaul the monetary system – potentially giving all of us access to our own virtual Bank of England bank accounts, undermining the middlemen of the private banking system, and (so the bank estimates) cutting the costs of doing business enough to raise GDP by 3 per cent in perpetuity. But, alleged economic benefits aside, the real reason for CBDCs is the growing struggle for power over our monetary systems.

Electronic money now dominates our spending, with only 23 per cent of transactions in the UK relying on cash in 2019, down from close to 60 per cent a decade earlier. Covid has squeezed cash out of circulation still further, with ATM withdrawals down 60 per cent in March last year compared to the same month in 2019. Contactless payments have been encouraged for real-world shopping to avoid contact with potentially contaminated notes and coins, and spending in general fell sharply as lockdowns were imposed. Both factors can be expected to recover somewhat, but the rapid expansion of online shopping, accelerating a pre-pandemic trend, now looks largely irreversible.

[see also: Beyond “Zoomshock”: The death and life of the British high street]

This has coincided with the rise of cryptocurrencies, such as Bitcoin and Ethereum, which advocates believe offer a radical, decentralised alternative to the central bank-backed currencies we are used to. Bitcoin, developed from a paper first published in 2008, was designed to replicate the features of money based on a valuable commodity such as gold. Bitcoin and similar cryptocurrencies are “mined” through the completion of increasingly hard-to-solve algorithms by a computer. And because Bitcoin used a second innovation – the “blockchain”, which acts as a decentralised record of its ownership – usage could be made, if not anonymous, then at least very hard to trace.

Cryptocurrencies initially gained a niche in transactions where buyers and sellers had pressing reasons to remain untraceable (such as illegal drugs), but their primary use so far has been as a speculative asset, oscillating wildly in value and offering the potential for big, rapid returns on trading. Most recently, cryptos have found favour among large corporations and the wealthy as a hedge against inflation, taking the place of gold. Tesla, for instance, is now a Bitcoin repository with a car manufacturer attached: its accounts for 2020 suggest the company’s Bitcoin earnings made up two-thirds of all its profits in the last year.

But Tesla isn’t the only new-economy corporation getting in on crypto. In mid-2019, Facebook announced plans to monetise its platform, currently used by 2.7 billion people, via the creation of a new cryptocurrency, provisionally called Libra. The idea was that Facebook would provide a secure, cross-border payments system for its users to buy and sell from each other, using Libras – with Facebook, like other providers of payments services from Visa to Paypal, taking a slender cut each time.

[see also: Is the Dogecoin bubble as irrational as it looks?]

Facebook’s problem in recent years has been the slowing growth of its user base, with younger people dropping off the platform, and increased regulatory oversight of its core business model of monetised personal data. In common with other Big Tech companies, including Apple, which expanded Apple Pay into loan provision, Facebook has turned to payments systems and money-dealing as a potentially profitable means to further monetise its existing networks. But Facebook's plan ran afoul of central banks across the globe, including the Reserve Bank of India and the Bank of England, which insisted on tight regulations being applied to the proposed crypto, effectively killing it off – at least for now.

Market-based cryptocurrencies are one challenge to the power of conventional banking systems, in which the central banks of major currencies, such as the pound or the euro, are able to exercise huge influence – as ably demonstrated in the last year, when the Bank of England expanded its money-printing quantitative easing programme to all but cover the cost of emergency Covid funding. The less that the conventional banking systems’ currencies are in use – whether in transactions, as savings, or as reserve holdings – the less powerful are their central banks. Central bank digital currencies, by offering an alternative form of real money that most will assume is safer than any cryptocurrency, have the potential to squash the use of crypto, as a new Deutsche Bank report argues.

The multipolar world we live in still operates with a distinct hierarchy of currencies in use that reflects the balance of power: the dollar is clearly at the top, the closest we have to a global currency, accepted and used everywhere, but the pound is somewhere near the top, too. As the global balance of power has shifted, so too has the hierarchy: and it is the People’s Bank of China (PBOC) that has now gone furthest of any G20 country in implementing a CBDC. Pilot projects have been running, with plans for a beta version of the currency to be rolled out in the second half of this year. Currently billed by the People’s Bank merely as a “back-up” to existing payment providers such as Alipay and WeChat, its caution reflects the technical and logistical difficulties in providing a functioning CBDC.

But the possibility, somewhere down the line, is that a renminbi CBDC could provide real-time data on economic activity – deemed essential for domestic economic planning – as well as further the PBOC’s own ambitions to turn the renminbi into a genuinely global currency alongside, or even supplanting, the dollar.

More than the promised boost to GDP, it’s the emerging threat to the UK’s sovereignty from two different directions – China and market-based cryptos – that is pushing the Bank of England towards a central bank digital currency. Whatever the technical obstacles, expect more of this in future.

James Meadway is an economist and Director of the Progressive Economy Forum.

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