In part one of this article we began by examining a discussion paper on central bank digital currencies, published in March by the Bank of England. Having analysed a hypothetical CBDC model that the BOE could potentially utilise, we will continue to use the paper as a guide by looking at some other aspects to the bank’s digital currency agenda.
For arguments sake, let’s assume the BOE were successful in introducing a CBDC that over time would completely displace cash. One observation to make is that people who still use banknotes as payment or a store of wealth are limited by how much cash they can withdraw each day from ATM machines. Even requesting a large sum at a bank branch could take days due to the money having to be ordered in. Would such limitations apply to CBDC?
The BOE certainly do not rule it out. Instead, they address the subject of CBDC availability by distinguishing between what they call ‘hard limits‘ and ‘soft limits‘. A hard limit would be the total amount of CBDC that an account holder is permitted to hold at any one time. A soft limit would not define a cut off point, but where the bank could exert control over CBDC holdings is by opting to make them interest bearing. As they state in the paper, this could ‘provide the economic incentive for users to limit CBDC holdings by making it less attractive to hold balances above a certain level‘.
One particular danger with an all digital currency is the imposition of negative interest rates. A CBDC that was subject to negative rates would act as a tax on people’s holdings, meaning everyone would find it harder to save money month to month.
The BOE state that were there to be a limit on CBDC, it ‘could over time change limits based on experience.’ But also mentioned is how the bank could if they wanted to impose a ceiling on an account holder’s daily transfers.
There is a real possibility that the limitations that exist today with accessing cash would migrate over to a CBDC. But whereas now you can take direct ownership of your money through banknotes, that would no longer be possible in an all digital construct.
From the research I have undertaken, this is part of a wider agenda that entails tearing down the old economic edifice and replacing it with an entirely new set-up. In the new world order of finance, discussed by former BOE governor Mark Carney in 2018, ‘a new economy, a new world and new demographics demand a new financial system‘. This ‘new world‘ would be based on intangible capital. ‘Data‘, Carney said, ‘was the new oil‘.
This leads us to the subject of how a CBDC would be regulated. The BOE already has a set of non-negotiable requirements. Any CBDC system would need to comply with AML (anti money laundering) and CFT (combating the financing of terrorism) regulations. According to the BOE, ‘the identity of CBDC users would need to be known to at least some authority or institution in the wider CBDC network who can validate the legitimacy of their transaction.’ They confirm that it would be they who set the minimum required standards around cyber security and user authentication.
As discussed in part one, anonymity in a CBDC system is a non starter. Whilst the BOE claim that in terms of transactions the payer ‘should be able to pay without revealing their identity to the payee‘, users would have no anonymity ‘with regards to law enforcement‘.
We observed in part one how in the preferred public-private CBDC model, the Bank of England would provide the ‘minimum necessary functionality‘. This is otherwise known as the core ledger, which would act as a platform for private sector firms referred to as ‘Payment Interface Providers‘. It is these providers who could connect to the ledger and offer a range of CBDC payment services to the public.
Quite how large a CBDC network would prove is open to question, but what about the idea that it would operate using a decentralised platform? Proponents of digital currency often champion decentralisation as the major positive for the digitisation of money. To some degree the BOE do this as well, but the reality looks somewhat different the further you study their approach towards a decentralised CBDC.
The BOE speak of a decentralised network as involving ‘multiple different entities storing copies of the ledger and processing updates to that data‘. For this to succeed, a ‘consensus process‘ would be necessary. This would ‘ensure all copies of the ledger are synchronised and store the same information.’
So it would not just be the BOE at the heart of a CBDC. Responsibility would branch out to other participants. But let’s be clear on what exactly the BOE are saying here. In there own words, ‘whatever degree of duplication and decentralisation is used, the Bank would need to retain overall control of the CBDC network.’
That might not sound particularly untoward given it would be the BOE issuing the CBDC. The key revelation, however, is that by retaining overall control of the network, it would ‘always need to be a ‘permissioned’ system, with the Bank granting access to the network.’
As I have written about before, a permissioned system means access must be granted by participants in the network. These participants would be controlled through regulation devised at the central bank level. This is the opposite to a permissionless network where technically anyone could take part.
The BOE’s stance on a CBDC permissioned network is that only ‘Payment Interface Providers‘ who are regulated would be granted access to the bank’s core ledger. Even using a distributed ledger approach the BOE ‘could also control which entities are allowed to operate a node in the network‘.
Former governor Mark Carney indicated as much back in 2016:
We need to be certain that the privacy of the data in those distributed copies cannot be compromised by cyber attack. One way this might be achieved is to limit the distribution of the ledger to existing trusted parties, such as other public sector entities.
Whatever design was adopted for a CBDC, the bank could not be clearer. They must retain ‘exclusive control of the creation (issuance) of new CBDC‘.
To my mind this amounts to deception, or at the very least the illusion of decentralisation. Think of a CBDC network as a consortium of share holders. The providers will all have a minimum level of ownership (access), but it is the Bank of England who would possess the majority share. And that’s because it is they and they alone who would issue the currency and dictate who can and cannot access the network. The providers would give the appearance of decentralisation, but in truth they would at all times be subservient to the central bank. The BOE would remain in complete command.
That is some of how a CBDC provided by the BOE would operate on a domestic level. But as with all central bank initiatives, they need to be considered in an international context. Two areas where this comes into play are cross border payments and interoperability.
The BOE adjudge CBDC to be an ‘enabler’ for improving cross border payments. A proposed vision is of central banks working in partnership ‘to link domestic CBDCs enabling fast and efficient cross‑border payments‘. This is why I consider it no coincidence that the leading central banks in the world are not only engaged in their own CBDC programmes, but also in the reform of their payment systems. All at the same time as one another. I believe it signifies that a major shift is coming in how people both interact and access money.
As for interoperability, this bleeds into the narrative on cross border payments. The BOE state that ‘CBDC payments should be interoperable, allowing payments between users of different providers, and between users of CBDC and users of deposit accounts.’ But that is on the national level. From a global perspective, the BOE think that ‘CBDC should be designed to interoperate with other countries’ CBDC payment systems (to support future cross‑border payments in CBDC)‘.
You have to wonder what the next step up from this would be. Is it too far a stretch to posit that with central banks this closely aligned through an international CBDC network, it will eventually morph into a global central bank digital currency?
To understand how the drive towards CBDC has reached this point, consideration must be given to the rise of stablecoins. A rudimentary definition of a stablecoin can be explained through JP Morgan’s JPM Coin project. This, like other private sector initiatives, use blockchain technology and run on a permissioned network. The value of one JPM Coin is equivalent to one U.S. Dollar. The idea is that the value of one token would always meet the value of whatever currency it was denominated in, thereby making it stable. Stablecoins run counter to the likes of Bitcoin, which is not pegged to any currency meaning it’s value fluctuates on the open market.
Doubts over how to regulate stablecoins has led to the growth in the CBDC narrative. The BOE take the view that a CBDC ‘could avoid the risks of new forms of private money creation.’ One of the BOE’s selling points is how a CBDC would be risk free in terms of holdings. A CBDC would also be denominated in pound sterling – one CBDC would always be equal to £1. Quite what the purchasing power of that pound will amount to over time is another matter.
Another aspect the BOE raise is that stablecoins ‘may not be interoperable with each other and with other payment systems, creating closed loops and inefficiencies‘. As we have seen, interoperability would be a significant factor in any CBDC set up, simply because it would bring central banks under the umbrella of a CBDC network.
Concerns over the safety of stablecoin offerings lead the BOE to conclude that ‘given the risks they could pose, it may be worth asking if CBDC can be designed to better meet those needs‘. The notion of stablecoins being a stalking horse for CBDC’s is one I have suggested before. From what the BOE have said here I think there is credence to that possibility.
The discussion paper concludes with the BOE wanting to ‘begin a dialogue on the appropriate design of a CBDC and an evaluation of whether the benefits of CBDC outweigh the risks.’ They want responses by June 12th. In the months following I would imagine the impetus behind CBDC will kick up a notch, leading into the G20 meetings in November.
At some point interest in CBDC’s is going to extend outside of financial circles and permeate the mainstream. An opening for this has already been created through the collapse in cash usage in the wake of the coronavirus pandemic. The urgency to reaffirm central bank money will become more profound should cash levels fail to recover (as appears likely given the trends we are already witnessing).
To quote from the paper, ‘any eventual decision to introduce a CBDC would involve Her Majesty’s Government, Parliament and regulatory authorities, and engagement with society more generally‘.
Engagement on a limited level has now begun, but as yet the wider population remain unfamiliar with the concept of CBDC. When the future of money enters the national conversation and with it the chambers of parliament, the introduction of a CBDC – through pilot schemes and later on a fully fledged roll out – will not be far behind.
Amidst Covid-19 time is very short. If we are to maintain any modicum of independence from central banks, people must continue to use cash and demand access to it is preserved, or else be railroaded into an all digital system where the chief beneficiaries will be the banking elite who are actively positioning for it.