Peter Franklin is an Associate Editor of UnHerd.
In the last three years we’ve suffered a pandemic, a war in Europe, and an energy crisis. So the last thing we need right now is a banking crisis.
And yet, here we are. After the failure of Silicon Valley Bank and the bailout of Credit Suisse, we can only hope that the American and Swiss authorities have stopped the rot.
It makes you wonder why we bother with banks. Obviously we rely on them for savings and loans, but why do we need them for everyday transactions? Current accounts pay us little if any interest, but we still have to put up with the risk that our hard-earned cash could be lost if the bank goes belly-up.
I say cash, but of course while it’s on deposit it isn’t cash at all. The money in your current account is in fact a loan: from you to your bank.
This is the only way that most of us can participate in the digital economy. The alternative would be to conduct all our transactions in notes and coins (or other valuable objects), which would be highly inconvenient and potentially dangerous.
But what if there was a digital version of cash – a unique string of zeroes and ones that would constitute a given amount of currency just like a note or a coin does?
Like most other moveable forms of wealth, it could be stored for you by a bank or other intermediary. But it wouldn’t be a loan that could be defaulted on.
Such systems already exist in the form of cryptocurrencies like Bitcoin, but those come with all sorts of disadvantages, not least volatility of market value. Even the so-called stablecoins – i.e. cryptocurrencies that are pegged to conventional assets like the US dollar – have been known to fail.
In any case, for most of us, crypto is still too difficult to use, and that’s before reckoning with such catastrophes as the collapse of the FTX crypto exchange.
But what if a sovereign currency, such as the pound, the dollar or the euro, were to go digital?
Well, that is exactly what central banks around the world are working towards. Only last month, the Bank of England and the Treasury launched a joint consultation on the possibility of a central bank digital currency (CBDC) for the United Kingdom.
Though officially referred to as the “digital pound”, it’s already been nicknamed Britcoin. But whatever it’s called, would it be a good thing?
Not everyone is convinced. Mervyn King, the former Governor of the Bank of England, is quoted as describing the digital pound is a “solution without a problem”.
I’m not so sure about that, the fact that ordinary people can’t access the digital economy unless they lend their money to a bank does strike me as problematic. If it isn’t, then why do governments feel compelled insure (up to a point) our deposits?
The deficiencies of the status quo don’t end there. For instance, transaction costs still place a significant burden on businesses – especially small businesses. If a digital pound could reduce that overhead, we could collectively save billions.
Electronic cash could also reduce the cost of converting between currencies, and thus facilitate British trade. If the pound doesn’t go digital, then we won’t be able to participate in the cross-border CBDC projects that central banks around the world are already cooperating on.
It’s a satisfying thought that one of the few disadvantages of the UK’s rejection of the euro could soon be rendered irrelevant. However, that won’t happen if the pound stays exclusively paper-based.
Indeed, not going digital could condemn the pound to eventual obsolescence. In the decades ahead it’s likely that money will get a whole lot smarter.
Using fintech software, cash transactions will be increasingly attached to smart contracts. For example, payments could be made automatically conditional on receipt of goods. Looking further into the future, a direct debit to an energy supplier could be replaced by an artificially-intelligent agent that actively participates in energy markets on our behalf, seeking out the best deals.
The distinction between wholesale and retail could be abolished; bad news for the middle men, but great news for consumers.
To date, the banks should have done more to make the benefits of fintech available to the general public. But progress is likely to be accelerated if digital cash better integrates the market for financial services.
Currently, the digital economy is balkanised between the bog-standard online offerings from each individual bank and building society. If nothing else, breaking down these walled gardens would make it easier for third parties to offer new and better services to account holders.
That brings me to another risk of not joining the CBDC revolution. It’s conceivable that a private currency provider could offer a service that was so smart and user-friendly that a significant number of people would stop using the pound and migrate to the proprietary system.
Just imagine a company doing to money what Amazon has done to retail. Only in this case it wouldn’t just disrupt an established industry, but also (and more much more importantly) British sovereignty over the UK’s monetary system.
One major tech company has already attempted to launch a currency: Facebook, with its Libra initiative. It got nowhere, but that doesn’t mean that others won’t try again as the enabling technologies advance.
There’s an even more alarming possibility: that competition to the pound will come from a rival sovereign currency.
Imagine what could happen if the pound stays stuck in the paper age, but the euro or the dollar or the Swiss franc goes digital. If British consumers and producers switchover to access the benefits of digital cash, the UK could find itself colonised by our competitors’ currencies.
We know this could happen, because it already has. In countries whose monetary policies can’t be trusted, hard currencies – especially the US dollar – are used alongside local currencies. There’s a local price for goods and services, and then there’s the dollar price, with the difference between the two indicating the real exchange rate.
In the UK’s case, the most attractive parallel currency is likely to be the euro, due the proximity of the eurozone. It would be quite the irony if we de facto joined the single currency despite leaving the EU.
It would be doubly ironic if this happened due to right-wing opposition to Britcoin.
Of course, Conservatives are absolutely right to flag up the potential dangers. A digital pound could centralise government control over money – especially if physical cash were to be abolished. In theory, the state could spy on all of our transactions, or even deny us access to the economy if we displeased the powers-that-be.
I’m glad, therefore, that switched-on Conservative MPs like Danny Kruger are closely scrutinising the CBDC proposals. Thank goodness that at least some of our politicians concern themselves with things that actually matter.
To be fair to the Government and the Bank of England, the digital currency they’re proposing would not replace physical cash. Furthermore, transaction data would be anonymised, thus maintaining financial privacy.
Also (and somewhat to my disappointment) we wouldn’t get personal accounts with the Bank of England; instead, commercial intermediaries would operate the system.
I’d suggest further safeguards. The first would be a total prohibition on the use of the digital pound as an instrument for unrelated economic and social policies. For instance, no application of negative interest rates to force us to spend in times of recession.
Also, no financial cancel culture: access to essential banking services would be guaranteed as a human right except in cases of serious crime and threats to national security.
Perhaps most importantly, I’d include a complete ban on implanted electronic devices – for instance sub-cutaneous microchips or digital tattoos – that might otherwise be used to make financial transactions. No mark of the beast in this country, thank you very much.
This isn’t just about the avoidance of dystopia, but also making the most of a major opportunity. High standards of governance helped the City of London to establish itself as a global centre for finance. We should seek to establish the digital pound as another trusted institution.
In this respect, we have chance to steal a march on both the US and the EU. The American establishment is so rotten with wokeness that one hates to think what they might do to the digital dollar in the name of so-called equity; meanwhile, the digital euro cannot be anything other than the digital version of the house of cards that is the eurozone.
Let us therefore endeavour to make Britcoin the very model of a digital currency.