The UK Govt have issued a consultation on how to implement a Central Bank Digital Currency.
The Bank by Jeff Henson CC 2021 BY-SA from flickr
The first thing I ask myself, is what is it. An EU blog article, says, “Central Bank Digital Currency (CBDC) is a new form of money that exists only in digital form. Instead of printing money, the central bank issues widely accessible digital coins so that digital transactions and transfers become simple.” I would suggest that money in a bank account already has these properties.
The Bank of England seem to be very keen. In an article, called, “ Why? “ by John Cunliffe of the Bank, he says, “This private money i.e. bank deposits, is not a claim on the state or backed with the resources of the state. It is not covered by that familiar Bank of England promise to ‘pay the bearer’.” It is then proposed that the Bank of England create a digital currency to provide this security.
There are several major problems with this line of thought. I suspect that the vast majority of bank account holders will dispute the fact that their money is worth less because its not in cash. Most people worked for that money, and if paid in cash do not accept that the act of depositing in a bank devalues it. This suggestion that money in the bank is less safe than cash is dangerous politics and dangerous economics and needs to be opposed. Money needs to be trusted.
While the Bank’s papers talk about cash and bank (i.e. lender) made money, a CBDC would be intended to replace cash as the demand for it decreases, but I ask how does a CBDC replace a private sector bank account? At the centre of the monetary policy value proposition for CBDC is the fiction that money in a bank is less safe than cash because of the government promise to ‘pay the bearer’.
This is much more acute today than when I started to write this article as the collapse of Credit Suisse shows. The issue of bank failure is serious and in the UK the primary defence is not the Bank’s promise on the bank note, but the Financial Services Deposit Guarantee System., which is capped provided the deposit taker is licensed by the PRA.
The consultation paper suggests that not having a CBDC inhibits innovation, but like accountancy, and medicine, I am not sure we want innovative financial services, just as ENRON showed we don’t want innovative accounting. The sources of innovation are suggested to be embedded finance (in-app e-commerce), blockchain (an expensive and useless technology storage platform), smart contracts (another exceptionally dangerous and opaque technology), atomic swaps ( i.e. knowing both legs of a trade have completed i.e. two phase commit) and the improvements in cryptography hopefully leading to more secure identity verification.
Embedded finance is performed by private sector payment processors, atomic swaps are currently performed by escrow agents and although this might be an application suitable for proof of stake block chain ledgers provided performance and cost problems can be solved, and no-one will use such a scheme to buy a coffee.
Sweden, one of the lowest cash using societies in Europe and a nation of 10½ million is trialling CBDC, and have been for five years; the Rijks Bank publish among other web pages, an index/home page, on their projects and a technical report. § 3 of the technical report, has very clear definitions of the technical/architectural models available and the document also has a bibliography.
The Swedish Paper outlines the design goals & potential architectures. One of the goals, and its first one for the Swedes is safety, i.e. that people can have a greater access to central bank backed money; again we are referred to a fictional world where our money if in a bank, may disappear due to bank failure and that the bank note promise to pay the bearer is real. The other goals, are competition, resilience, and privacy. The architectures vary depending on the central role of the Bank, and the role of what they call intermediaries; the central differentiator being whether the central bank will open consumer assigned accounts. The Swedes recognise that they are bound by the Payment Services Directive (as is the UK unless the brain-dead REUL goes through).
What do the bank want to do? I have found, the Minutes of the CBDC Technology Forum — November 2021, which liks to a presentation, Item 2 Models of CBDC Provision, both hosted at the BoE site. See above for my comments on the Swedish classifications. The BoE have selected the simplest solution, which the Swedes describe as “Centralised with Intermediaries”. It involves holding a ledger for all holders of the digital pound. It’s the allocation of work to the intermediaries which makes me ask if this is any more than a clearing system.
Strangely, just after reaching out for help in thinking about it, I find, Central bank digital currencies: a solution in search of a problem? issued by the House of Lords. It’s sums up how I feel although as is clear, some of the ideology, I consider dangerous.
Lord Forsyth of Drumlean, Chair of the House of Lords Economic Affairs Committee, said:
The introduction of a UK central bank digital currency would have far-reaching consequences for households, businesses, and the monetary system. We found the potential benefits of a digital pound, as set out by the Bank of England, to be overstated or achievable through less risky alternatives.
We took evidence from a variety of witnesses and none of them were able to give us a compelling reason for why the UK needed a central bank digital currency. The concept seems to present a lot of risk for very little reward. We concluded that the idea was a solution in search of a problem.
One of the things I ask myself is, “Is the simplest level of solution just a Bank of England owned Open Banking bus?” something which has had limited success. It seems to me that this is only different if the Central Bank issues accounts to consumers, which it seems the Bank are proposing, although payments for goods and services will be made by intermediaries.
If accounts are not issued, then the Bank just becomes a clearing/surveillance system which would make as much difference to what we do today as a fart in a hurricane. Have I got it wrong? Consumers, that’s you and me will still pay using a card or a phone and we will need to back it with our stored labour, because I am sure that the Treasury is not planning to issue #CBDC loans or gifts to the likes of you and me!
We should note that building an accounting system for 50m+ people is a non-trivial exercise. Even a message switching system would be hard as the experience of the Blair/Brown/Cameron Govt's attempts to computerise the NHS which failed. Admittedly, hardware and software architectures have changed driven by the need for scalability, but these proposed systems would be challenging for the best of IT organisations, and the Civil Service is not the best, although this could be solved if the will was there. (This isn’t the place for a rant about the cynical drive for profit within the government’s IT supply chain.)
This is ideologically dangerous, technically complex, and a solution in search of a problem.
This is a repost of an article on Medium and a blog article on linkedin, both posted in Mar 23. These both have active hyperlinks. I have also posted my notes and sources, at on my wiki.