Good morning from New Economy Brief.
Last week, the Bank of England (BoE) responded to a consultation it launched with the Treasury on the possible introduction of a digital version of the pound, or ‘Britcoin’ as it is sometimes known.
But what is a central bank digital currency (CBDC), and does the UK really need one? As the debate rumbles on, this week we explore the possible risks and benefits of a digital pound.
Central bank digital currencies. The consultation was launched in response to the risk that unregulated digital currencies pose to the financial system. A CBDC would mean households and companies could hold digital money directly with the BoE. Currently, only commercial banks create digital money, while physical cash and coins are created by the BoE. The idea is that a CBDC would be immune to runs like those seen in commercial banks. UCL’s Josh Ryan-Collins wrote a helpful explainer on CBDCs back in 2021, before the BoE launched its latest consultation.
The debate. In examining a possible digital pound, the House of Lords Economic Affairs Committee concluded that there is “no convincing case for why the UK needs a central bank digital currency (CBDC)”. The committee also identified a “risk of private money creation”. Positive Money’s Simon Youel has criticised the committee’s conclusion, arguing that it did not consider the views of a balanced range of witnesses, with too much weight given to those who'd lose out from “democratising the money and payments system”. He also argued that a CBDC could actually help solve the problem of private money creation (for example, money created by large tech companies), instead providing “universal access to a secure, digital form of public money”.
A missed opportunity for financial inclusion? Even among supporters of CBDCs, concerns have been raised that if designed incorrectly, a digital pound could risk perpetuating existing problems with the monetary system. During last year’s consultation, several civil society leaders and academics raised concerns that the debate was being dominated by “financial services and tech firms who have vested interests in certain designs of a digital pound”, and was failing to use this opportunity to democratise the money supply. One problem they raised was that many of the proposals being discussed envisage a 'platform' model in which the central bank would hold digital pounds in a ledger, and people would need to use private-sector payments services to get at their money. Campaigners warned that these companies would need to make such a service pay for itself somehow, whether by charging users directly or selling their data. Introducing a CBDC without giving people a free way to access their digital pounds "reinforcing existing barriers to an inclusive payments system", with citizens unable to afford to use the CBDC or being forced to accept having their personal data monetised as the price of doing so.
Privacy. Another cause for hesitation on digital pounds is the risk to citizens’ privacy. Some more conspiratorial voices are concerned that the very idea of CBDCs is driven by the state’s desire to monitor and control the public. But conspiracy theorists aren’t the only ones worrying. Last year, the House of Commons Treasury committee urged both the Bank and the Treasury to proceed “with caution” while designing a digital pound over concerns about personal privacy. However, Positive Money has pointed out that the state “does not need a CBDC to monitor the transactions of its citizens – banks already share data with security agencies upon request”. It says the privacy of any CBDC depends on whether “high standards of data protection are enforced across the public and private sectors” more generally. In its statement after the recent consultation ended, the BoE said that privacy would be a “core design feature” of a digital pound.
What happens next? The Bank of England has said it is “too early to decide” whether to introduce a digital pound, and that much more preparatory work is needed before the government can consider putting a proposal before Parliament. So while we won't be spending Britcoins in the supermarket any time soon, it's clear that the debate will continue as governments across the globe consider creating digital versions of their currencies.
The case for a more ambitious Green Prosperity Plan. Common Wealth’s Mathew Lawrence argues that Labour’s Green Prosperity Plan “reopens the question of who controls the [green] transition and for what purpose”, making a case for greater public investment and ownership: “Public money mobilised to de-risk asset manager-led energy infrastructure investment is both more expensive and less effective than direct public investment. The alternative remains to be won: public coordination of the transition”.
Global economy at a crossroads. UNCTAD’s latest Trade and Development Report 2023 warned that “The prospect of meeting the Sustainable Development Goals (SDGs) by 2030 is fading as a combination of rising interest rates, weakening currencies and slowing export growth squeezes the fiscal space needed for governments to fight climate change and provide for their people.” The report urges a change in policy direction “including by leading central banks”, including global financial reforms, “more pragmatic policies to tackle inflation”, and more.
A revolution in financial regulation? Positive Money’s Simon Youel explains how momentum is growing around the idea of ‘pre-positioning’ of collateral in financial regulation. This would force those borrowing money for the short term to pledge assets as collateral in case they can’t pay their debts, and it would address one of the main causes of financial crises – “self-fulfilling ‘doom loops’” where asset prices fall so sharply that investors need to sell them to raise cash and reduce their risk, which drives prices down even further and forces even more sales - we saw this in UK pension funds in 2022 and in the US banking crisis the year after. Youel explains that banks already have to post collateral when they borrow money, but that applying the same rules to institutional investors like insurers and pension funds could eliminate 'regulatory arbitrage' - that is, efforts to profit from inconsistencies in how regulators treat different types of asset.