Positive Money are submitting a statement to the Treasury Select Committee’s inquiry into digital currencies, calling on the Committee to consider the introduction of Digital Cash. You have until Friday 13th April to help us by adding your name to the statement, here.
Below are answers addressing some of the frequent questions we’ve received about our Digital Cash proposal.
Q: What is Digital Cash?
A: Put simply, Digital Cash would be an electronic version of pound sterling to accompany notes and coins, which like physical cash, would be issued by the Bank of England (BoE), rather than private banks.
Q: Doesn’t this already exist? Isn’t most of our money already electronic?
A: Around 97% of our money supply does indeed exist electronically, with notes and coins making up only around 3%. However, the vast majority of the electronic money in the UK is technically owned by private banks, who create most of it, rather than being digital currency created by the BoE.
The BoE does already issue a digital currency, but only to commercial banks, who have access to “reserve accounts” at the central bank. Digital Cash would extend this privilege to the rest of society, by allowing non-bank companies and individuals to also store money and make transactions directly via the Bank of England. You can read more about the technical details in Positive Money’s report on Digital Cash.
Q: Are you saying that the BoE should get rid of notes and coins?
A: No, quite the opposite! Our most recent report on the Future of Cash called for action to be taken to protect access to cash as well as the ability to use it. We believe that people should have the right to make payments in whatever way they choose, which is why we propose that the Bank of England should issue Digital Cash alongside physical cash, rather than instead of.
Q: What would be the advantages?
A: There are perhaps more advantages than you’d think. Firstly, it could help address some of the issues associated with the decline of cash, such as financial inclusion, by giving people another risk-free way to save and make payments without the need for a bank account.
Additionally, by allowing people to store money and make transactions directly via the Bank of England, the payments system could be put securely in public hands, separated from banks’ risky lending activities, and made more resilient as a result.
For instance, the issuance of a central bank digital currency would remove one of the key reasons for banks being regarded as “too big to fail”, thus potentially saving the public from having to bail out the banks. Because bank deposits are the only means by which the general public can make electronic payments in sterling, it has become necessary to guarantee those deposits to preserve the integrity of the payments system. Deposits are guaranteed up to a certain amount via the Financial Services Compensation Scheme, and although this is ostensibly funded via a levy on financial institutions, in 2008, the scheme had to borrow billions from the Treasury in loans that may never be paid back. Furthermore, the potential cost of compensating depositors in institutions like RBS was one of the main reasons why the government regarded them as “too big to fail”. By effectively guaranteeing banks’ liabilities in the event that they cannot do so themselves, the government creates perverse incentives, and potentially encourages banks’ risk-taking. If the payments system were to operate using genuinely risk-free central bank money rather than bank deposits, this need for taxpayer-funded bailouts would be reduced.
Another potential benefit of issuing a central bank digital currency is that it would allow the Bank of England to recapture a portion of seigniorage. This is the profit or proceeds that come from being able to issue money. Since most electronic money currently exists in the form of bank deposits which have been created by commercial banks when they make loans, those banks benefit from seigniorage totalling £23bn each year. But if consumers chose to hold electronic money in a central bank digital currency instead, that money would accrue to the Bank of England, and be passed onto the Treasury.
Put simply, if the Bank of England were to issue Digital Cash, it would mean we’d all have access to a safe form of electronic money without having to rely on a high street bank. Billions worth of subsidies to banks would be removed, and the payments system would be protected.
Q: Why don’t we use a cryptocurrency like Bitcoin instead?
A: Though Bitcoin was originally intended as a secure means of payment, it has increasingly become a speculative asset, and its volatility would make it very difficult for prices to remain stable. Additionally, the blockchain technology behind such currencies is extremely energy intensive and transaction costs are too high for it to be the basis of an efficient payments system. Commentators have pointed out that our planet simply wouldn’t be able to sustain a monetary system based on the blockchain, as well as the worrying prospect of 3 individuals controlling 5% of the world’s total liquid currency.
Digital Cash would offer a safer, more democratic and sustainable form of digital money than cryptocurrencies.
Q: Why should we trust the BoE any more than private banks?
A: You may be aware that Positive Money has often been constructively critical of the BoE. The BoE is by no means a perfect institution, and there is a very real question over how accountable it is to the public, especially considering how much power it wields over the economy and our lives.
However, despite being formally independent, there are mechanisms through which the BoE can be held accountable to the public. The chief decision makers on the BoE’s policy committees are for the most part appointed by elected governments, and they have a responsibility to fulfil a mandate which can ultimately be determined by Parliament.
The question is ultimately whether the future of our money and payments system should be in the hands of a small number of private banks and card companies, who are already acting to shape things in their interest, or in the hands of a public institution which at least has some scope for democratic accountability.
If a mostly digital money and payments system is inevitable, we should make sure it works in the public interest, and Digital Cash issued by a public institution like the BoE offers us the best means of doing so.
Please click here to add your name to our statement before Friday 13th April.