Slouching towards Britcoin, part 1: Threadneedy Street

If you build it, maybe they will come, maybe not. Or maybe you don’t care, and you just want to build it anyway.

That seems to be the attitude being taken by the Bank of England, which launched its consultation on a ‘digital pound’ — which, painfully, appears to have assumed the moniker Britcoin — to mild fanfare last week.

The FT Alphaville team are not Luddites — we have embraced Midjourney, picked up and then dumped Mastodon, and some readers may have noticed we replaced Robin with ChatGPT months ago — but we have got to confess: it’s the why of Britcoin that’s really eluding us.

The launch would require three broad steps . ..

1. Developing a working blueprint/protocol for the digital pound

2. Partnering with third parties to create a system of wallets for said pounds

3. Convincing people to actually use said pounds

. . . none of which are simple. So, why bother?

Hunt and Bailey say a digital pound “is part of the Government’s vision for a technologically advanced, sustainable, and open financial services sector”*, and that it “would help to ensure that central bank money remains available and useful in an ever more digital economy, continuing to bolster UK monetary and financial stability while safeguarding the UK’s monetary sovereignty in a changing global financial system”.

Tl;dr, it’s FOMO, at least on one level, or (generously) action born out of an abundance of caution.

*yes, this is the same government that has already taken nearly a year to make an official UK NFT.

Reason not the need

The existential question is perhaps best explored in Sir Jon’s launch speech. The deputy governor said (our emphasis):

Our assessment is that on current trends it is likely that a retail, general purpose digital central bank currency — a digital pound — will be needed in the UK. This would be a new, digital form of money, issued by the Bank of England for use by households and businesses for everyday payments.

Without wanting to get all ‘Webster’s Dictionary says…’ about this, need is a strong word — it’s more forceful than saying something simply “could be beneficial”. Do we need Britcoin?

Cunliffe:

There are a number of considerations behind our assessment that a digital pound is likely to be needed. The assessment is forward looking. It turns first on current trends in the way we use money to make payments and the potential of emerging digital technologies and second on the public policy response necessary to ensure innovation and competition can flourish without jeopardising the safety and uniformity of the money we use in the UK.

He later added, mildly tautologically:

Our assessment that a digital pound is likely to be needed is grounded first in the view that further decline in cash use and further development in the digitalisation of money and payments is likely and second in the view that these developments raise important questions to which the Bank of England and the Government should respond.

In the second part of the latter quote, Sir Jon comes very close to saying “we’re doing this out of a sense that we should be doing something”.

Let’s assess his arguments on those two points.

Trends

Cunliffe gets through the history of money up to its present form pretty quickly, emphasising trust in money as fundamental to an innovation and evolution in “[the] forms that money takes and the ways it is used”.

He notes plunging possession of cash (now less than 5 per cent of the funds Britons hold for payments), and a sharp decline in its usage to 15pc of payments (graphs from the BoE and Bank of America here):

He reiterates the BoE’s commitment to keeping cash available, adding (our emphasis):

However, we cannot ignore the fact that the safest form of money, ‘public’ money, that it is to say money issued by the state for general use, will become increasingly less useful and useable and of shrinking relevance to a large part of the population. Nor can we ignore the likelihood that we will see the emergence of new forms of money, offering new possibilities and issued by new as well as established players.

This raises, particularly for the Bank of England, the question of how we can continue to ensure that all of the types of money used in the UK are denominated in Sterling, remain safe and that each is interchangeable on demand and to all of the other types of money without loss of value, including publicly issued, Bank of England money.

The point about the emergence of new forms of money is so simultaneously blind to both the present and the past that it almost hurts to look at. So here’s two points:

— The horse has already bolted on new forms of money, indeed it is faintly awe-inspiring to read these words in a country the Prime Minister previously pledged to make into a “global hub” for crypto.
— The Bank of England vs Private Money war has been running for about two centuries (cf. the Bank Charter Act 1844), so framing this is as an emergent challenge is . . . interesting.

So, err, that’s it for trends because we’re about to get into competition. Cash use is falling, yes, but the UK has been in a broadly smooth and successful transition to digital money for decades — indeed, the declining use of cash is likely to be evidence that this transition is going well. Meanwhile, new forms of money have arrived and, perhaps obviously, integrated with the firmly-established pound system already in place.

What difference would it make if those pounds were digital?

Increasing competition

Cunliffe goes on (rounding out the trends point, with our emphasis):

We ensure trust in money at present by regulation of the commercial banks that issue money, by requiring banks to settle amongst themselves in Bank of England money (i.e. Bank of England reserves) and, crucially, by requiring all private money to be exchangeable for Bank of England money, cash, on demand by the holder and without loss of value . ..

The experience of digitalisation is that new products and services, enabled by new technology, can be adopted rapidly at scale. The Government has identified several characteristics of digital markets that may lead to concentration. Such characteristics include network effects, economies of scale and scope and data advantages, which can act as barriers to entry. This suggests that the future development of private money issuance could tend towards a small number of firms taking a significant market share.

Given that, in practical terms, most of the pounds borrowed and spent are being created as digital deposits by a handful of commercial banks, it’s perhaps not totally clear what this last point means. We could also point to the stranglehold that, for example, Visa and Mastercard have over how digital payments actually operate.

The implied bogeyman is something perhaps something like an GoogleCoin or BezosBuck, in which a super-powerful tech company suddenly creates its own money and then tries to build a moat.

Cunliffe:

While concentration and market power are not inherently harmful and may reflect innovative products and services, they can damage consumer choice, competition and innovation. Dominant issuers of new forms of private digital money may create ‘walled gardens’ — payment systems that are not fully interoperable or restrict the development by smaller firms of payment services using the money they issue.

A question that might reasonably enter your mind at this point is “what is money?”. We strongly recommend your repress it.

Moving on . ..

A digital pound issued by the Bank of England would provide an alternative, public, digital money — an open platform, which would be available to all developers of new digital payment services. Moreover, if designed appropriately, a digital pound could complement and support new forms of private digital money and payment services, for example by acting as the ‘bridging asset’ between different platforms enabling convertibility. By establishing technical standards available to all, it could help ensure interoperability between different platforms. Our assessment is that a digital pound, an alternative, publicly issued form of digital money, available to all, would help ensure competition and innovation and drive efficiency in payments.

Questions that this paragraph prompts:

— What is the likelihood that a tech giant, for example, would create a system that is interoperable with the Britcoin protocol but NOT with the established digital financial system?
— Does the Bank of England have the technical capabilities to create such a protocol?
— Is the Bank of England more capable of creating this protocol than other global monetary authorities?
— Should the Bank of England be creating a “bridging asset” to “new forms of private digital money and payment services” that include cryptocurrencies — described by Sir Jon (in this same speech”) as “highly speculative assets, whose value is extremely volatile, because there is nothing behind them”?

Rounding out the “need” section:

The digital pound could also complement existing financial inclusion initiatives, for example if it were able to provide for offline payments.

How did humanity manage to make payments before the invention of the internet?

Cunliffe adds:

It could, with international co-operation, present an opportunity to improve cross-border payments. And, by providing a highly resilient, alternative payment rail it could reinforce the overall resilience of the UK payments system.

These seem like fine ideas, although we’re not convinced reinventing the wheel would get to them any more quickly.

What are we left with? We’re going to try our best to steelman the argument Cunliffe and the BoE/Treasury are making.

The good
— Being open-minded to technological development = a good thing
— Finding new ways to potentially shield regular people from the predations of monopolistic capitalism = a good thing

The bad:
— Creating digital money when money is already effectively digital = probably a waste of time
— Bridging to assets that are highly speculative or expose people to the predations of monopolistic capitalism = probably a waste of time

The unknowable:
— Can the Bank of England/Treasury actually do this?

In part two, we’ll take a look at the nascent ideas the BoE has for a digital pound protocol, and what they might mean for the UK’s existing banking system.