Digital Pounds and CBDCs - these are terms sometimes applied to a proposed new British form of digital currency. You might (wrongly) assume that these necessarily refer to novel forms of currency like Bitcoin, which tend to have a slightly controversial reputation.
The Bank of England is currently carrying out a public consultation on whether the UK should have a digital currency and what form it should take. Involved are issues around fundamental freedoms which are intrinsic to a Christian worldview (whose ethics enabled modern financial systems in the first place).
To help consider what our response as believers should be, I will first describe the key components to provide context, then look at the implications.
Banking systems
Nations have Central Banks which control their currencies. Until the twentieth century these currencies were linked to something of real commercial value, like gold. The paper note represented the gold held in the nation’s vaults. No countries now have this; rather, a ‘Fiat’ system where the value ends up being what you can get for it within the financial system. As it’s not linked to a real asset, Central Banks sometimes ‘print money (euphemistically ‘quantitative easing’) which reduces the value for all, or they can seek to rein it in.
A cryptocurrency is a digital record of a made-up unit of value that someone is prepared to buy.
Central Banks do not manage the day-to-day ‘retail’ use of money - our commercial banks do that through supplying banknotes, managing bank transfers, cheques or electronic payment (debit cards) and recording things on a central computer database ‘ledger’. We deposit money with them, which they use, often paying us interest - and we take some out again for purchases. We can also get money out via a loan (credit), often secured on an asset like our house, or on our creditworthiness to repay it, plus the accruing interest.
Credit card and mobile payment companies work in an analogous manner, while a central settlement system sorts out inter-bank and inter-nation transfers.
In a well-regulated and stable system, we trust that our savings are safe, and payments are correctly stored, though the value is just a number in the bank’s ledger database somewhere. If the financial institution cannot cover its liabilities with its assets, our savings would be lost. The UK and other governments now have schemes to cover deposits in this scenario, but as seen with recent bank failures in the US, this seems to lead to more unethical investments, which the tax-payer resents bailing-out.
Crypto banking
A cryptocurrency is a digital record of a made-up unit of value that someone is prepared to buy. Like art or actual gold its value is linked to its rarity. A cryptocurrency’s rarity is based on the difficulty and expense of generating the cryptographic data required to store transactions (who owns a given amount) in a tamper-proof form without a central intermediary. It is also limited in volume.
The drawback is that cryptocurrency is not as liquid (easily accessible to use) as Sterling
The technology used to accomplish this remarkable feat is a ‘blockchain’, where copies of all ownership transactions are held on each of a network of computer nodes. This is a distributed ledger so there is no central control. The drawback is that cryptocurrency is not as liquid (easily accessible to use) as Sterling (though this is changing) so you have to find someone who wants to swap your cryptocurrency for cash. There are various exchanges that do this – as there is with gold. The value of a cryptocurrency relative to a local currency can fluctuate in response to normal market forces.
Bitcoin (₿) started in 2009 and is the most popular cryptocurrency.
Central bank crypto?
So why would a central bank want to use cryptocurrency technology, when a good functioning retail system is already in place with commercial banks, credit card companies, etc and cryptocurrency ledger management is the exact opposite of central banks? They say that it would be helpful in ‘sustaining access to, and promoting the usefulness of, central bank money; and promoting innovation, choice and efficiency in domestic payments.’ (p4)
So why would a central bank want to use cryptocurrency technology, when a good functioning retail system is already in place?
Part of the answer also seems to be - because everyone else is doing it. There may also be a desire to emulate the edginess of the supposed rouge currencies, or to have a closer involvement with retail banking. However, the separation of banking powers is both beneficial and necessary.
It is also claimed that there will be faster transactions, but does this mean faster than getting a tenner out of the ATM or the speed of electronic banking? Either way, most would consider the current systems sufficiently fast.
It is also claimed that cryptocurrency technology would give access to ‘cash’ for people who cannot get to banks or ATMs – but what would they need it for if it’s electronic and there are existing electronic solutions?
What would it look like?
At the moment if we want cash we can go to a bank or ATM and can then buy what we need, since almost all retailers (bar an increasing minority) accept cash.
The current proposals are that the BoE ledger would have no personal data – so some sort of one-way ID would be used to identify you.
From what can be implied from the Bank of England’s Technical Spec, if we wanted Digital-pounds we would first set up an account on the BoE system through an intermediary known as a ‘Payment Interface Provider’ (PIP) and then transfer money into it from our bank. We would then need an app from the PIP to act as a digital ‘wallet’.
If we wanted to buy something in a shop, they would first have to be able to accept the new payment method (by having a contract with a PIP). The transaction would go from your phone and the retailer’s PoS device, via PIPs to the BoE’s ledger to be reconciled. The current proposals are that the BoE ledger would have no personal data – so some sort of one-way ID would be used to identify you. There has to be money in the BoE account first – you won’t be able to be overdrawn and there is also no interest added (as it’s ‘cash’).
Why?
The reality is that the retail electronic dance described above is already achieved by debit cards and mobile apps.
A key point about cash is that it is anonymous when spent, and the BoE claims to support anonymity through its digital pound. But clearly PIPs will keep records.
A key point about cash is that it is anonymous when spent, and the BoE claims to support anonymity through its digital pound. But clearly PIPs will keep records. Cash can be easily passed on to friends, family etc and these person-to-person transactions will be supported by the BoE. But of course the recipient would also need an account and be identifiable - as with the existing bank-transfer system, so it can clearly not be totally anonymous.
So overall it looks like an expensive solution looking for a problem! Unless, of course, there are other unvoiced motives ….
Maybe it’s time for us all to have an opinion. Thankfully, we can contribute to the decision - you may submit your feedback here (Consultation ends 30th June 2023). You can find advice on completing the consultation here.
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Significant concerns have been voiced about the importation of China’s dubious methods of surveillance and control into western financial systems. This will be addressed in next week's article on this topic, when we will also offer a Christian perspective to CBDCs.
Jon Sharp has worked as a software dev and latterly as a cultural apologist. He is founder of the website Knowing the Times
