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What Do We Want! Digital Currency!
When do we want it! As soon as civil society has developed sufficient understanding to provide worthwhile input to the requirements formation process and appropriate design decisions can be made!
Dateline: Berlin, 30th March 2023
I was at the Merchant Payments Ecosystem conference in Berlin this week, and there was a lot of talk about central bank digital currency (CBDC), much of it from me. But around the world, it is a focus of plenty of other people’s attention. According to the Atlantic Council, 10 countries have fully launched a digital currency and China is on course to expand from its pilot CBDC in 2023. The Digital Monetary Institute “Future of Payments” report from last year said that two-thirds of central banks surveyed expect to issue a CBDC within 10 years.
Britcoin is Coming
Back home, the Bank of England has released a consultation document, together with an associated technology working paper, on Central Bank Digital Currency (CBDC). Sir Jon Cunliffe, the Deputy Governor for Financial Stability, gave an interesting speech on the need for such a digital currency. How exactly such a retail CBDC will work is yet to be determined but Sir Jon talked about a public-private partnership in which the Bank would provide the digital pound and the central infrastructure and the private sector (banks or “approved non-bank firms”) would provide the wallets and associated payment services, an instance of the “two tier” approach favoured by central banks worldwide.
Background reading: The Currency Cold War.
The Bank aside, there are many, many stakeholders who will need to form a view and provide input to the consultation process. Andrew Griffith, the Economic Secretary to the Treasury (Britain’s Ministry of Finance) says there should be a “national conversation” about it and he is spot on: In addition to the views of the government and financial institutions, it is important to understand what retailers, law enforcement agencies, consumer groups and others want from such a currency.
A Platform, not a Product
Nevertheless, while the devil is in the details, generally speaking this is very good news. Why? Well in my view, there are probably three key things to bear in mind about this interesting announcement about a retail central bank digital currency from one of the world’s oldest financial institutions.
First of all, and I think most people understand this crucial distinction now, digital currency is not cryptocurrency. Digital currency is linked to something in the real world (such as, this case, Sterling), while the value of cryptocurrency is determined only by supply and demand. When it comes to supplanting the pounds in our pockets, the stability of a digital currency is the fundamental requirement and stability supports trade, which support prosperity.
Secondly, and I think most people do not quite understand this important difference yet, digital currency is a form of electronic cash that is quite unlike the electronic money that is currently in bank accounts (which is, by the way, almost all of the money that exists today) because when you send money to a friend for a pizza or something using online banking or Swish in Sweden or Zelle in the USA or PhonePe in India, the money goes from your bank account to their bank account through the banking system. In the future, when you send them a digital ten pounds it will go directly from your laptop to their mobile phone or your car to their laptop or from your smart card to their mobile phone over the Internet, Bluetooth, NFC and who knows what over communications channels, but it will never go anywhere near the banking system. This should mean much cheaper, quicker and more transparent transactions.
Thirdly, I think it is better to think of a digital currency as a platform for innovative new products and services rather than as a product in its own right. I wrote here some time ago that the role of digital currency as a means to bring innovation to the financial world is critical for the UK. Given Britain's leading role in fintech, and the renewed commitment to the sector following the "Kalifa Review", the role of digital currency in creating a new generation of products and services will be where the long-term boost to the economy comes from. The point well made in the Bank of England's 2020 original report on digital currency, where they pointed to the creation of "smart money" (either by some form of smart contract usage or API interface) as where the benefits of a digital currency will come from. People are going to build some amazing new things on top of money that has an API!
There is no doubt that CBDC is coming. Predictions are of questionable use in this space, since so much is unknown, but it is not implausible that the global value of CBDCs out there will grow dramatically from some $100 million today to $100 billion plus at the end of the decade as suggested by Juniper Research. They predict (and I am sure that this will be the case) that 92% of CBDC transactions will be local, which suggests an uphill struggle for adoption for cross-border payments.
The Digital Monetary Institute’s report came to a similar conclusion, noting that while central banks are pursuing CBDC for various reasons and many thought that inter-linking CBDCs offers a promising avenue for improving cross-border payments, “none cited improving cross-border payments as the main motivation” despite the positive conclusions coming from early experiments in that space, such as SWIFT’s recent sandbox interoperability, which they reported as showing that both central and commercial banks see “clear potential and value” in cross-border CBDC use.
We should focus on the needs of the national economy then. And our national economy will need a CBDC. The Bank of England and Treasury (the British Finance Ministry, who are already have job listing for a head of digital currency) are indeed saying that a digital pound will be needed but that as it is what the Governor of the Bank of England calls a “profound” decision about the future of money, they quite reasonably want to get it right. I could not agree with them more on this.
Once In A Lifetime Change
As a long-time advocate for digital currency, I look forward to digital Sterling in action, but it as I said on the CBDC panel at MPE, it has to be the right kind of digital Sterling, a digital currency that responds to the needs of civil society and not simply the dreams of technologies.
The launch of digital currency will be a once in a generation change in the way that money works, so it is very important that the Bank of England, the European Central Bank, the Federal Reserve and everyone else takes the time to work out exactly how it should work and make sure that it is implemented correctly. There is no burning platform, as they say: We do need digital currency but we don't need it tomorrow and it's much more important to get it right than to get it quickly.