Should the state be in the payment industry? It’s a simple question, but it’s essentially what a central bank’s digital currency will amount to. A digital pound, dollar, euro or renminbi is not a token with the illusory investment upside implied by monikers such as “Britcoin”. CBDCs are more akin to solid stablecoins rather than currencies. Unfortunately, their potential to erode free enterprise is all too real. Controlling how, what and when money is transferred is not a place where government agencies should compete, with a massive advantage, against the rest of the monetary system.
Central banks dabble in Crypto Smacks of Mission Creep
The Bank of England recently released an 80-page consultation, followed by a speech on the digital pound by Deputy Governor Jon Cunliffe. The research has already cost tens of millions of pounds, which will mushroom, but there is undeniable logic in keeping in sync with changing technology. A decision to proceed in earnest will be made by 2025, for expected completion by the end of the decade.
The BOE may be ahead, but the European Central Bank will release its thoughts in October, and the Federal Reserve is running at least two projects. Trials at the People’s Bank of China are already well advanced, but with limited success.
A CBDC seems like something we should welcome instead of letting either Big Tech or Big Finance dominate the crypto space, with the innocent-sounding benefit of cracking down on crime and tax evasion in the industry. Only institutions approved by central banks will be allowed to participate in the CBDC. But giving public bodies access to personal data is troublesome. The truckers’ dispute in Canada shows how quickly authorities can tap into people’s bank accounts to crack down on behavior they disapprove of. The prospect of central banks introducing negative interest rates and actively reducing people’s savings is truly scary.
There is another problem with the transition to digital money. Over the past decade, cash transactions in the UK have fallen to just under 15% from more than half. In theory, a CBDC can be operated without a bank account, but it is pointless if there are no outlets that will take cash. There must be a lesson in the fact that both San Francisco and New York have moved to ban cashless stores – because that’s where the insidious rot begins.
Around 4% of the UK population do not have a bank account, with a similar proportion (probably overlapping) lacking internet access. About 16% don’t have a smartphone, which basically means they don’t want one and never will. These citizens risk being completely cut off not only from the financial system, but society itself. There may be a case for facilitating digital transactions between financial institutions and companies, but creating digital wallets for retail trade in central banks would be tantamount to public agencies going directly into e-commerce.
It will be no walk in the park to create a digital stable coin that avoids the myriad of pitfalls that have befallen so many crypto tokens, as former BOE adviser Huw van Steenis outlined in a thoughtful Financial Times article. He points to five major obstacles, along with the caveat that we meddle in the financial structure at our own risk. Creating what he calls a “Goldilocks CBDC” – with not too much in circulation to undermine the existing system, but not too little to be irrelevant – requires a level of administrative skill that has not been much in evidence.
Central banks’ digital experiments so far have been based on a lack of uptake, but the greater risk is that they suddenly suck all liquidity out of the monetary system in a crisis. Van Steenis recommends sticking to the wholesale markets, a sentiment I thoroughly share, and that any new system must be properly tested on a large scale. Bringing up the A$250m ($170m) write-down from the Australian stock exchange’s seven-year failed experiment with a blockchain settlement system seems uncharitable – but it highlights the challenge. Exploring faster, safer and better payment systems can be achieved in time without putting a whole new centralized key in the works.
Digital currencies put central banks on a slippery slope towards unjustifiable infringements of civil liberties and interventions in the market. For once, both large commercial banks and startups have coordinated their interest here to resist regulatory overreach. The disruption to the banking system is potentially huge if retail money suddenly flows into a central bank depository, when the next invisible crisis is sure to come. Either way, be afraid of the consequences of stifling competition in the financial system, let alone stifling fintech participants.
The House of Lords Economic Affairs Committee described CBDCs as “a solution without a problem.” Allowing central bank tentacles into the mainstream banking system risks suffocating it. Follow the technology by all means, but central banks should regulate, not participate.
More from Bloomberg Opinion:
• Matt Levine’s Money Stuff: SEC cracks down on crypto
• Crypto is worth fixing. Regulators must get moving: Bill Dudley
• Central banks face the moment of truth on crypto: Lionel Laurent and Marcus Ashworth
–With help from Elaine He.
This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was a market strategist for Haitong Securities in London.
More stories like this are available at bloomberg.com/opinion
