Backers of a digital pound believe it will protect the stability of the financial system as the UK edges closer to a cashless society. However, critics have warned that the introduction of the so-called “Britcoin” will jeopardise people’s privacy.
Jannah Patchay falls squarely into the first camp. She is an originating member and the policy lead of advocacy group the Digital Pound Foundation. She welcomed the Bank of England’s consultation this week on a UK central bank digital currency (CBDC).
The Bank of England published the consultation paper together with His Majesty’s Treasury. The probe will collect feedback on the BoE’s initial ideas about how a digital pound for the UK might work before it begins to seriously consider building the required infrastructure. At the same time, the Treasury closed its search for a new CBDC head.
The push comes despite a wave of protests against state-run digital currencies crashing into the debate whenever the prospect of introducing CBDCs is mentioned.
“In the US in particular, there have been many arguments that we don’t need a CBDC, the private sector can fill this role. So it’s good that the Bank is offering its own neat rebuttal here,” Patchay told DL News.
The BoE paper draws the distinction between private money, which refers to deposits in banks that consumers can access with their debit cards, and public money, which is cash. It’s important that there is trust in public money, even if UK consumers increasingly aren’t using it, Patchay told DL News.
“We put our money in a bank account and we are confident we’ll be able to get it out,” she said. “A, there’s a regulatory structure around banks; B, it’s protected up to an amount guaranteed by the Financial Services Compensation Scheme; and C, if I want to, I can just go to an ATM and withdraw cash and then I have this public money that is accepted everywhere.”
The BBC reported on Friday that the number of free-to-use cash machines in the UK has dropped to 39,429, the lowest since 2008. BoE data shows that cash payments in the UK have declined from 55% of transactions to 15% over the past decade. With payments increasingly digitising, the public needs to know that digital currency, too, will be accepted anywhere, Patchay said.
Some critics of CBDCs have said they are a risk for the poor, who still rely heavily on cash. The BoE paper, however, said that a digital pound is not intended to replace cash, only to complement it. Patchay also argued that a potential use case of a CBDC would be to more efficiently disburse social benefits to those in need.
Not everyone is convinced that a digital pound would be a good thing for the UK, citing concerns that it would give the government unprecedented visibility into citizens’ transactions and control over what they choose to do with their money.
“There’s a big civil liberties issue and it’s the fact that you would have central bank insight into everything everyone is doing with their money and potential control over those flows,” Virginie O’Shea, founder and CEO of capital markets research firm Firebrand Research, told DL News. “That is what you’d get if you digitised absolutely everything and had a single point of control.”
Even if consumers are making more payments digitally and even though commercial banks collect a lot of data on their consumers, the government still doesn’t have an easy view into that, O’Shea said.
“There’s no centralised point where you can see the transactions everyone is making,” she continued. “That’s the promise of cryptocurrencies –they were not controlled by one entity, no central point of oversight into what you’re doing. You can see where CBDCs have taken off, it’s almost all in authoritarian regimes.”
She is not alone in making that comparison. Crypto exchange Kraken’s former director of growth marketing and long-time CBDC critic Dan Held responded to the UK government’s CBDC paper this week by tweeting that “CBDCs are 1984 on steroids.”
CBDCs are 1984 on steroids.— Dan Held 🧙♂️ (@danheld) February 8, 2023
This is why we need #Bitcoin. pic.twitter.com/UbKL626GPk
O’Shea also argued that the centralisation of data is a cybersecurity risk. Even if the architecture of a digital pound were to be decentralised, information would still have to be centrally controlled, she said.
No visibility into personal data
Patchay argued that the BoE’s consultation paper said that it would only launch a digital pound if it met exacting standards for security, resilience and performance.
“The paper made it clear that the BoE and the government will not have access or visibility into personal data and that privacy will be maintained to the same extent as it is in current accounts today,” Patchay said.
The paper said that if the BoE were to build a digital pound, it would provide both the currency and the central infrastructure, including what it calls a “core ledger”. Private sector firms would provide wallets to end users that would then interface with the BoE.
Not only would this design enable payments innovations, but arguably also safeguard consumer privacy, the central bank said. End user data would be recorded anonymously on the core ledger and users would interact with the wallets, not directly with the BoE.
Patchay said the BoE’s approach is to balance anonymity and the prevention of financial crime. “We can’t have complete anonymity,” she said. “The Bank will respect privacy to the extent that it’s possible, but when payment integration providers are opening new wallets for account holders, they will have to go through know-your-customer and anti-money laundering processes, just as they must today,” she said.
O’Shea and Patchay believed that much of the BoE’s motivation for a CBDC is competitive, as other countries and the private sector race to gain control of digital currencies.
O’Shea said social media company Meta’s ill-fated blockchain-based stable coin Diem, née Libra, spooked central banks and sparked their interest in CBDCs. Meta’s experience revealed that the concept is not a viable product, she added.
For Patchay, however, this is a galvanising reason. In the discussion paper, the BoE cited the risk of a private sector alternative becoming more prevalent than sterling in UK transactions, compromising the Bank’s ability to achieve price stability through monetary policy.
“What if UK citizens gained access to, for example, foreign-denominated stablecoins and started using those regularly as a means of transacting?” Patchay said.” There’s a competitive aspect to introducing both the CBDC in the UK and having a regulatory regime for stablecoins that encourages pound-denominated stablecoins so that the UK maintains monetary sovereignty.”