A Central Bank Digital Currency: 'Britcoin' - A Risky Unnecessary Venture

A Letter to the Chancellor

In the late summer, we were asked by a UK member of parliament, Steve Baker MP, to help make the case against central bank digital currencies. ByteTree, being a digital asset research hub, is very much in favour of digital assets and currencies but is more comfortable seeing them in the hands of the private sector as opposed to the Government.

When answered Steve Baker’s call for help, he responded,

“I am grateful for Charlie Morris for an excellent briefing on central bank digital currencies. I was pleased to send it to the Chancellor and other Ministers. I am confident that Ministers will want to keep in touch with the full range of views on CBDCs.”

The letter we wrote is below.

A Central Bank Digital Currency: “Britcoin” - A Risky Unnecessary Venture

- Charlie Morris, Chief Investment Officer, ByteTree

The crypto sector is fast growing and sits at the forefront of computing, mathematics and fintech. Policy makers so far have tended to obstruct the sector rather than engage with it. That strategy has failed; innovation in the sector has meant that every obstacle has been overcome, and crypto and digital cash are flourishing as a result.

It is a popular view to embrace blockchain technology, but dislike crypto. Yet they cannot be separated and no useful applications for blockchain exist outside of crypto. This is an industry at the forefront of computing, which requires greater interoperability for the exchange of data and value in a secure manner.

Crypto and stablecoins (or private digital currency: PDC) feed off each other and have grown hand in hand. The recent boom in stablecoin issuance can be attributed to polices that saw banks block capital flows to crypto exchanges. Being a highly versatile and innovative sector, the stablecoin effectively took on the role of banks, strengthening the entire ecosystem in the process.

No one can disagree that Britain needs to embrace this digital era. Engagement not obstruction is required. Engagement rather than attempts to take over or have the state join the sector would better serve British better. Current regulations are stifling innovation in crypto-related fintech, a sector where Britain should be a natural leader. Some believe that a way to leapfrog into the lead would be to launch a Central Bank Digital Currency (CBDC). This would be a suitable choice for China, but not for Britain.

Like most things in finance, it is the private sector that is best placed to make the most of the opportunities offered by digital cash. Britain would be better off providing a framework where PDCs could flourish, rather than launching its own CBDC which would at best be unnecessary and at worse cause major problems for the UK economy and the future of liberty within the UK.

A successful digital policy needs to embrace the entire digital asset ecosystem, which puts crypto and digital cash side by side. These innovations cannot be separated and a policy which aims to cherry pick what suits current regulations, will see Britain left behind. As has been seen time and again, bad policy has unintended consequences.

Britain Must Demonstrate Digital

Crypto has grown to become a $3 trillion industry, with 65% of that represented by Bitcoin ($1.2bn), Ethereum ($560bn) and PDCs (stablecoins $140bn). The latter is the newcomer, and the area of most interest for banks and regulators. There can be little doubt that the crypto space is volatile, speculative, and subject to boom-and-bust cycles, but that is true for most new technologies, and especially so when they are directly linked to value creation.

There are many actions that this Government can take to embrace the crypto sector. By banning crypto ETFs, Britain sent a “no-to-crypto” message to the world. That may not have been the intention, as London is still a crypto hub of sorts, but one that could be much larger if this was overturned. Sweden, Switzerland, France, Germany and Canada all host these products, as does the USA to a lesser extent, while Australia has just approved new products. The ban on crypto ETFs has damaged the UK’s international reputation in this sector and sets us apart from our allies and competitors. A reverse on the crypto ETFs ban would send a message that the UK wants to be at the centre of the crypto sector’s evolution.

The London Stock Exchange currently hosts just two fintech companies, Boku and Network International, and one crypto stock, Argo Blockchain. Some banks have blocked access to Argo on their dealing platforms despite it being a legitimate business. The launching of a £1.4bn fund for overseas life sciences and tech investment into Britain demonstrates a willingness to attract global talent and embrace change. Fintech is an area in which Britain should thrive, and the way to cement this is by embracing the crypto sector as it lies at the forefront of the fintech revolution.

There seems to be a misunderstanding of the sector when a state offers a CBDC as an alternative, or even addition, to the crypto sector. The Chair of the Federal Reserve, Jerome Powell, has stated, “You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies if you had a digital U.S. currency.” This represents the view of many inside central banks who, while are great economists and central bankers, are not experts in crypto and fintech. With regards to Chair Powell’s comments, a US dollar CBDC or PDC would serve little purpose, as its primary role would be to serve the crypto and fintech industries.

Digital Cash Has Many Advantages

Digital cash, whether it be a CBDC or a PDC, is an electronic bearer instrument that can cross borders with instant settlement. Its improved mobility makes it more useful than a bank deposit, and the instant settlement boosts the efficiency of the financial system.

There are countless possibilities for the design of digital cash. It could be run by either the private sector or the government. It could be interest bearing, which would see deposits leave the commercial banks, but since cash pays no interest, there is no reason why digital cash should. There are compliance issues relating to KYC and AML. There is the creditworthiness, liquidity and backing. There are privacy issues relating to the data gathered, and endless possibilities for the underlying technologies, which is where the private sector has the upper hand.

A vision for the future would see Britain host multiple different digital currencies, not just in sterling but in all fiat currencies, and other assets too. The issuers would be far reaching and include the banks, tech, fintech, crypto and existing leaders in payment. Britain could host a thriving ecosystem of competition and innovation across multiple sectors, or it could host a single CBDC issued by the Government. We should be under no doubt that the UK economy would be better served by the former.

CBDCs

The introduction of CBDCs means that access to central banks will no longer be constrained to commercial banks and will be opened to businesses and consumers alike. On the face of it, having the Bank of England standing behind your digital cash is more attractive than a commercial bank such as Northern Rock, but this is where the benefits start and finish.

CBDCs come with extensive political, ethical and economic repercussions that are worryingly under-discussed. A CBDC would be seen by many as an instrument of control. If this instrument were to fall into the wrong hands in the future, it could lead to grave implications for the future of our society.

Snooping has never been a British value. It must be recognised though that the digital world leaves a trail of rich data in its wake. This valuable and personal information would track the movement of money like never before. Tracing funds via bank payments is time-consuming, but with digital money, it is instantaneous. Who should have access to this highly sensitive information? This would be a question that not only the present Government would have to ask itself, but future Governments too. While the present Government may not possess any bad intentions, this data in the hands of technocrats or future Government deciding to use this infrastructure to for nefarious means could have disastrous consequences. Once this technology is created, it will not be possible to reverse it which means that it will become a lever for any Government of any political position in the future.

The potential problems associated with technological advancement should be met by the state’s ability to solve those problems. The track record of government-led technology projects is not a good one, and progress would be much faster in the private sector. There is also the risk of failure. If a PDC were to fail, either due to technology or solvency, Government could intervene to prevent systemic risk. However, if a CBDC failed, the central bank’s reputation would never recover. A CBDC would be a project that could not fail given what failure would mean political and economically for the UK.

PDCs

It would be best to leave digital currencies to the private sector whose innovation and competition provides them with an advantage over any centrally compiled schemes. The data access and collection would be subject to regulation, while companies would be responsible for KYC and AML procedures as they are today. The one disadvantage the PDCs have over CBDCs is credit risk.

Today’s PDCs are effectively money market funds that trade over crypto infrastructure. That technology works but transactions costs will need to fall over time. This will happen as the efficiency and scalability of the platforms improve.

Credit risk for PDCs is the single disadvantage they have over CBDCs. An overeager treasurer may invest in securities that break the buck, which would lead to capital flight. The central bank might offer guarantees to PDCs with conditions attached, or consumer protection as is currently the case with bank deposits. Good regulation and a clear legal framework would see Britain host a digital boom.

By all other measures, PDCs have clear advantages over CBDCs. This would see the City of London dominate a sector which will thrive in the 21^st^ century. The success of the Eurodollar market is a historical equivalent.

Digital Britain

Digital cash is intertwined with crypto. This industry lies at the heart of the next generation of computing and its application. The popular establishment view is that it is tulips and will quietly go away. It will not. Every time it falls, it bounces back stronger, and the reason is simple. The transfer of value between computers is not a fad, it is the future of money.

To separate digital cash from crypto is to misunderstand its application. Digital ownership is the future of financial markets, not just crypto, but shares, bonds and other assets which can be settled instantly with secure custody. There are endless possibilities in how financial services can be improved and expanded by embracing crypto. Historically, Britain’s international vision has been born out of embracing the free market and only intervening where necessary. A CBDC will prove to be at best pointless and at worst immensely damaging.The crypto industry, alongside digital cash will only thrive in the private sector. This is an opportunity that Britain needs to embrace.