Central banks across the world have begun exploring the idea of launching CBDCs in recent years, which many interpreted as a response to the rising popularity of cryptocurrencies (specifically Bitcoin) and the decline of cash. Recently, The UK Government confirmed it was ” actively exploring” the option.
Treasury statement
On November 9, John Glen, the Economic Secretary to the Treasury, confirmed a CBDC was being reviewed in a statement made to Parliament. Mr Glen said: “The UK, like many countries, is actively exploring the potential role of a retail central bank digital currency (CBDC) as a complement to cash and bank deposits.
“A retail CBDC would be a new form of digital money, denominated in Sterling and issued by the Bank of England, for use by people and businesses for their everyday payments needs. Exploring the opportunities that a CBDC could offer is aligned with the Government’s wider agenda to remain at the forefront of innovation and technology in financial services.”
While Mr Glen noted “no decision” has been made yet, HM Treasury and the Bank of England will publish a consultation in 2022 setting out their assessment of the case for a UK CBDC.
Should a decision to proceed follow this, a subsequent build and testing phase would begin and if the results of all the testing conclude the case for CBDC were made, and that it was operationally and technologically robust, then the “earliest date for launch of a UK CBDC would be in the second half of the decade.”
In response to this announcement, some experts have played down how impactful a CBDC would be for UK consumers, while others have warned it could have dire consequences.
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Impacts explored
Eddie Robb, a commercial director at Zumo, noted consumers needn’t be worried about how they’d be affected by the changes, at least not any time soon.
“With a stated timeframe of the second half of the decade at the earliest, consumers needn’t be worried about any immediate impact of this announcement on their pensions, savings and personal finances,” he said.
“The Bank of England has made it clear that any future CBDC will sit alongside cash and bank deposits, not replace them, and that to be viable, the CBDC would need to be directly convertible into cash and deposits on a one to one basis.
“It has also been very specific that this CBDC consultation only applies to domestic retail payments – so sadly not the cross-border payments where the most friction still exists and where consumers still count the cost.”
Mr Robb went on to examine the challenge facing the BoE: “The Bank of England could find itself between a rock and a hard place. Make the CBDC too attractive, and it risks a bank run that erodes bank deposits, and therefore lending availability and banks’ own liquidity. Fail to incentivise the switch at all, and it’s a lot of expense and complexity for what amounts to an electronic banknote.”
While Mr Robb doubted consumers would be impacted greatly, Cameron Parry, Founder & CEO of Tally, warned savers could be hit hard by the changes.
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Mr Parry said: “Rather than providing consumers with more financial freedom and flexibility, central bank issued stablecoins tighten the money monopoly that works against savers in society.
“It’s the worst of both worlds – coupling the arbitrary devaluation of fiat currency with a crypto currency layer of complexity. It also enables central banks to pursue upside-down economic policies like negative rates, where we’d have to pay interest to keep their monetary product in our bank accounts, and we couldn’t escape by drawing out and holding cash.
“All the while Central Banks could spread their product wider, giving access to Dollars, Pounds, Euros, Yuan etc to people in emerging economies, temporarily increasing demand for the Central Bank’s product (currency).”
Mr Parry also noted there was a clear “elephant in the room” around CBDCs. This is the threat to privacy Britons would experience.
Mr Parry continued: “A Government agency would be able to see every single transaction an individual makes, and the state’s control over the individual, as it would give these agencies the power to simply turn off an individual’s access to their money.
“For example if a person was under suspicion, or as a way of coercing public behaviour – a relevant hypothetical situation would be instead of vaccine passports, an agency could switch off your access to your money until you became double vaccinated. You could argue the infringement to liberty afterwards, in the meantime you need to eat.”
“Britcoin”
While the Government and BoE will not make a decision on CBDCs until checks are done, it is possible to gauge where the state and financial establishment stand on the issue. In recent months Rishi Sunak has openly hoped to launch a digital currency, which the Chancellor affectionately dubbed a “Britcoin”.
Additionally, Mr Sunak backed the need for technological advancement in the financial sector in April.
“Our vision is for a more open, greener, and more technologically advanced financial services sector,” he said.
“The UK is already known for being at the forefront of innovation, but we need to go further. The steps I’ve outlined today, to boost growing fintechs, push the boundaries of digital finance and make our financial markets more efficient, will propel us forward.
“And if we can capture the extraordinary potential of technology, we’ll cement the UK’s position as the world’s pre-eminent financial centre.”
On top of this, Jon Cunliffe, the Deputy Governor for Financial Stability at the BoE, recently shared his belief that financial regulators may have to come down harder on digital assets in the future. He warned cryptocurrencies like Bitcoin may soon pose a rise to the wider financial system.
Speaking with the BBC, Mr Cunliffe said: “The point at which [digital assets] pose a risk is getting closer. I think regulators and legislators need to think hard about that.
“On the regulation on the management of crypto assets… we need to start working to ensure the regulation is there.”
In recent months, the Financial Conduct Authority has also announced plans to crack down on risky cryptocurrency investments, which further highlights how the powers that be appear to be pushing Britons and investors away from certain digital assets.
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