Last year, while he was Chancellor, Rishi Sunak announced that he was launching a task force into the efficacy of installing a Central Bank Digital Currency. Colloquially referred to as a CBDC, this is a term that has been appearing in the global economic lexicon with more and more frequency over the past year.
Now, as Prime Minister, Sunak continues his pledge to deliver a digitised banking system, and with the IMF reporting that a total of 105 countries are also looking into this idea, a worldwide shift in how we regulate our finances may be right around the corner. But what is a CBDC, and what could this mean for the average citizen?
The term ‘digital currency’ may at first glance seem confusing as, for the most part in modern Britain, the majority of people already spend money and get paid via digital transactions. To understand the difference, we’ll take a quick crash course in economic history.
Up until the previous century, all money was essentially tied to a physical commodity, such as gold, which provided and maintained its value. This commodity would be stored in banks, which would then issue money serving as the commodity’s legal tender. This began to change in the 1970s, as the US central bank severed its ties with the gold standard, instead opting to switch to fiat currency.
Fiat currency is not commodity-backed – instead, the money has value in and of itself, provided through government backing. Operating outside the confined ties of a rigid item, this new currency provides more flexibility as governments or banks can set their own monetary policy and adjust more easily to changing global markets. Today, most countries now operate using fiat currency, and if not, a hybrid with the commodity-backed type. Even if transactions take place, that money still exists somewhere, in its physical form.
Where digital currencies differ from the seemingly computerised fiats is in their categorisation as ledgers. A ledger currency involves a type of bookkeeping, going back thousands of years in the Middle Eastern world where records of all transactions within a society would be recorded on, for example, papyrus or clay. The information regarding these ledgers was kept with society's full disclosure, so financial crimes were virtually impossible. Monetary value was decided collectively and could be adjusted thereafter.
Today, the 'blockchain' represents the modern digital equivalent of a bookkeeping ledger. Cryptocurrencies are subject to the same public scrutiny, as all transactions are fixed to the blockchain and are free for all to see. This function has been one of the main draws for people who trade cryptocurrencies; financial freedom from government regulation and the ability to hold all to account for their transactional endeavours.
With a CBDC, however, a public ledger becomes private. That blockchain of transactions still exists, but it lies in the hands of the central bank and government, hidden from the eyes of you and me. Of course, it would be easy here to say, Orwell was right, Big Brother will truly always be watching. But before outlining the dangerous potential of CBDCs in the wrong hands, I first want to look at what benefits such a system could bring.
Without a doubt, financial activity would be greatly sped up with the introduction of a CBDC. If money didn't have to pass through multiple banks on its way to you via a friend or your employer, it would arrive in your account almost instantaneously. With uniform centralisation, payday would come sooner and the anxiety of waiting around for your money to reach you would be reduced. This uniformity would also eliminate pesky transaction fees, to the disappointment of nobody but the banks.
There would be greater security in holding your money in a CBDC compared to a private bank. In times when bank failures pose a high risk – think back to 2008 – a CBDC wallet would be government-backed, much in the same way as government bonds remain far more secure than stock market investments. Furthermore, as all transactions are traceable, if you were to fall victim to a scam or some other fraudulent activity, the central bank would be far more likely to return your money back to you.
Herein, though, lies the double-edged sword. Yes, your money may be safe from criminal interference, and you may sleep better knowing the wealthy will find it harder to partake in white-collar crimes, but now all your money is in the total control of government forces.
A digital currency can be programmed in whichever way its owner pleases. This means, in theory, consumers could have transactions for certain products or services blocked, confiscate and penalise wallets, or set a spending limit on individuals. While this may seem far-fetched, a capping system on digital wallets has already been introduced in the Bahamas where CBDCs operate, and the idea has already been floated by the Bank of England.
On top of this, monetary and fiscal policy could be directly integrated into a CBDC's architecture. The central bank could set interest rates directly onto your wallet as they pleased, and the government could implement a digital tax system, whereby all transactions are subject to taxation.
The argument has also been made in favour of CBDCs due to the UK currently operating as an almost cashless society, but consider how disruptive the complete transfer away from cash would be. No more birthday cash from granny, no more fivers for mowing your neighbour's lawn, no more betting with your mates at your makeshift poker table. Are we really going to expect everyone in society to have their own digital wallet from the minute they're born? And what about the most economically vulnerable? Are the homeless going to go around with card readers seeking the generosity of others?
Of course, as it stands, things don't look so extreme. The Bank of England suggests that if a CBDC were to be implemented, it would operate alongside the current fiat system. Much like the arrival of credit and debit cards, though, I suspect the transition toward the new technology would be dangerously swift.
The Bank of England has also stated that neither themselves nor the government would be able to programme your payments or access your personal data, stressing the importance of financial privacy. Sure, it's all well and good to make such a promise, but that data's going to be inextricably tied to the blockchain; to suggest that information would be inaccessible is a flat-out lie. This makes me feel all the more uneasy considering the American hyper-surveillance by the NSA that Edward Snowden blew the whistle on just a decade ago.
With the way this current government is running, any promises from them feel more hollow than a lightbulb. The same rhetoric plays out when topics of NHS privatisation or confronting climate change are thrown about. "We will never privatise the NHS!" "We will tackle and reverse the effects of global warming!" I stopped believing them a fair few years ago, how about you?
The path that lies ahead is muddied – there's a new system on the way whether we like it or not and the reality of what it looks like won't be clear until it's already in place. In the highly improbable scenario that we are left with the choice to operate with our current tools, and CBDCs do help to keep those who want it more secure, then maybe things don't look so bad. It's nice to dream.
Along the more likely route, if the squeaky clean version of CBDCs we are being offered begins to deteriorate, resistance must be quick and collective. I suppose I have fallen down the 'Orwell was right' view of the UK here, but when the implications are this grave, can you blame me?
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