Cryptocurrency

The Bank of England and the Treasury announced on 6 February that they would begin a four-month consultation on a central bank digital currency (CBDC), or – you guessed it – “Britcoin”. The governor of the Bank of England, Andrew Bailey, said: “As the world around us and the way we pay for things becomes more digitalised, the case for a digital pound in the future continues to grow.” The Chancellor, Jeremy Hunt, agreed that “a digital pound issued and backed by the Bank of England could be a new way to pay”. A new way to pay? Do the Chancellor of the Exchequer and the governor of the Bank of England only use cash? Given Bailey’s £575,000 salary and Hunt’s eight-figure personal wealth, this presumably involves at least one wheelbarrow. They’re going to feel sheepish when they find out all the rest of us already transact in “digital pounds”. Just £82bn of the UK’s money (3.5 per cent of our M1 money supply, meaning currency and liquid deposits) is in the form of proper folding notes; the other £2.3trn is all just numbers on a screen. What Hunt really means by a “new way to pay” is not something that would be new to a consumer – the Bank’s own materials make it clear that it would involve paying people and businesses from a digitally recorded account, which people in the UK do more than 40 billion times a year. What he means is that the technology underlying the payment would change: the code beneath the banking system would become based on a shared database (what the Bank calls a “core ledger”), in a similar manner to cryptocurrencies, which use technologies like the blockchain. Well-informed readers may at this point ask why any government in its right mind would want to get involved in the seedy world of crypto, an industry that exists to evade the laws and taxes that it is a government’s duty to impose. Does Jeremy Hunt think the Purchasing Manager’s Index will rise if the purchasing managers all start buying guns on the dark web? The reason given in the Bank’s consultation paper on a digital pound is that this is about who gets to produce money. Almost all the money we use is created by commercial banks, when they extend loans to customers. This is “private money”. Meanwhile, the Bank of England creates a relatively small amount of cash (“public money”) and controls a much larger amount of financial-system money that does not make its way directly into the real economy. As the Bank’s deputy governor, Jon Cunliffe, explained in a speech in 2021, public money (as cash) was once the norm for payments, but private money has (thanks to digital payments) come to dominate. Ten years ago 55 per cent of transactions were in cash; now it’s 15 per cent. In his speech Cunliffe warned that in times of “systemic stress”, the privatisation of money could turn out to be an even greater disaster than the privatisation of energy or water. If providers of private money failed, "the perception that there is no route out of private money, that there is no access to safe liquid assets backed by the state, could undermine confidence". The Bank’s worry is that if people feel the deposit protections offered by the state aren’t strong enough, they might turn to the ironically-named “stablecoins” that underpin the crypto market. The biggest of these, Tether, is sold as a kind of digital dollar, its price pegged to the real dollar and backed by real assets that uphold its value – but this backing has been repeatedly questioned by financial experts and the attorney-general of New York, who found that the company had “misrepresented” its reserves, banned it from trading in New York and fined it $18.5m. It would certainly not be a good thing if the whole of the UK migrated their cash to virtual currencies magicked up by secretive companies in the British Virgin Islands. The still greater worry is that other governments are doing this, too. What if people started using the digital euro instead? What if one CBDC became the global currency of exchange for things like oil and soybeans, as the dollar is now? What if that currency was Chinese? The problem is that building your own CBDC comes with its own very considerable risks. The Bank’s consultation paper argues that a digital pound “would be subject to rigorous standards of privacy and data protection”, but Silkie Carlo, director of Big Brother Watch, the civil liberties NGO, points out that “there will be an element of surveillance because, obviously, it's a regulated space. So there will be a legal imperative to monitor what people spend, and then potentially to put limitations on what people can spend.” Cunliffe appeared to confirm this when he told Sky News in 2021 that the programmable nature of a digital currency could allow cases such as “giving the children pocket money but programming the money so that it couldn't be used for sweets”. Nor is that a new idea in government: in 2016 the Department for Work and Pensions trialled a blockchain-based digital payment system called “Govcoin” that could be used to track what people receiving benefits spent their money on, and could have been used to limit their spending to certain items. Carlo points out that asylum seekers are already asked to use debit cards on which spending is tracked by the Home Office, and that data collection by the government in the past – the Home Office has also used NHS data for immigration enforcement – does not inspire confidence. “When the data is there, and it's collected, people will want to get it. And it might not even be your own government.” One consolation is that, like the Royal Mint’s long-awaited NFT, it might never happen. “Central bank researchers have to spend their time contemplating possibilities and writing banking science fiction,” explains David Gerard, a technologist and author of Attack of the 50-Foot Blockchain. “There's a whole scale of possibilities, none of them have been picked yet, and a lot of this talk is crypto hype.” Gerard says that while concerns about privacy are valid, the more immediate problem is that unscrupulous crypto promoters will claim “Britcoin” headlines as a sign that even the government is trading crypto now, and that the average punter can safely gamble on junk. “The crypto guys will absolutely use that angle as hard as they can,” he says. “I think the Treasury suggesting that crypto may be government-endorsed is not a good move, and they should reconsider.” A real cynic might suggest that that’s the real point, given that one of the Conservative Party’s biggest backers is a major crypto investor. It’s probably not a situation that needs a conspiracy, however. The safest assumption is that if our government is doing something potentially dangerous that it doesn’t fully understand, it’s just because everyone else is doing it. [See also: The amateur sleuths who helped to bring down Sam Bankman-Fried]

Britcoin is a weird and dangerous idea

Coinbase’s USD stablecoin – what is it and why should you use it?

Allegations of corruption, from Qatar to FTX

The amateur sleuths who helped to bring down Sam Bankman-Fried

Sam Bankman-Fried exposes the moral conceit of effective altruism

Bitcoin’s most basic principle has become crypto’s biggest problem

The crash of Sam Bankman-Fried’s FTX may yet strengthen the crypto industry

Will the crypto crash bring down Bitcoin?