May 7, 2021 On April 19th, the UK government and the Bank of England announced they are setting up a Central Bank Digital Currency Taskforce. This an important opportunity — if the Bank of England chose to launch a Central Bank Digital Currency (CBDC), it could be a big step towards a fairer money and banking system that serves ordinary people and the real economy.
In this blog, we give an introduction to what CBDC is, why it’s different to the money we use already, and what would change if the Bank of England chose to issue a CBDC.
What is “CBDC”?
A CBDC would be money in bank accounts provided by the Bank of England, instead of the high street banks (like Lloyds or Barclays). Like banknotes, it would be issued by the Bank of England as a public currency, but could be used to make payments with cards and for shopping online. This is one of Positive Money’s core proposals, and we’re excited to see the Bank of England and the government exploring implementing CBDC.
What makes CBDC different to the money we already use?
Despite being called “bank deposits”, the money we see in our bank accounts does not represent banknotes and coins stored within the bank. When we deposit cash in the bank, the cash becomes the legal property of that bank—a financial asset on its balance sheet. In exchange, the bank issues a liability of its own (in the form of a deposit, which functions as new money) into your bank account. This can be exchanged for cash at a later date, or used to make payments to other people who have bank accounts.
The problem with this system is that we are forced to rely completely on high street banks to make digital payments. On top of that, the UK’s banking sector is highly concentrated, with just a few firms controlling most of the market. This results in banks being deemed ‘too big to fail’: if the government allowed banks to fail in the event of another financial crisis, we would lose the ability to access our money and make payments completely, causing economic chaos. Banks also decide who is permitted to have bank accounts, and who can access different kinds of financial services. This allows banks to take on much more risk while relying on taxpayer bailouts from the government and special support from the Bank of England to cover the costs further down the line.
Why is the Bank of England considering launching a CBDC now?
Reason 1: Declining cash use, which risks a privatised money system
Cash use is falling rapidly. In 2013, approximately 20 billion payments were made with cash across the UK. In 2016, that number had fallen to 15 billion, and in 2019 it was lower than 10 billion. Assuming the current rate of decline continues, we would expect the number of payments made with cash to fall to the lowest extent possible by 2025. The government has already committed to protecting access to cash, but the greatly reduced usage of cash in our economy risks the payment system becoming almost completely privatised. This would represent a further concentration of power in the UK’s financial sector, entrenching the ‘too big to fail’ dynamic that led to the 2008 financial crisis.
Reason 2: More threats from the private sector, especially the rise of stablecoins
Big technology companies like Facebook are planning to launch digital currencies of their own, called stablecoins. These would be run purely for profit, and central banks are concerned they could be very competitive with existing forms of money, because big tech companies already have large existing networks of users. Stablecoins would pose new financial risks: firms like Facebook are not currently regulated by central banks, and they don’t have the same regulatory protections and standards that high street banks have.
The prospect of big tech and big finance merging together and gaining even more power over our economies is very concerning. Positive Money made a submission to the government’s call for evidence on how stablecoins should be regulated, advising that they should be held to the same standards of safety, stability and fairness as any other financial company. The rise of private digital currencies threatens the UK’s monetary sovereignty, and risks undermining democraticeconomic policymaking — especially if stablecoins and crypto assets are given a free pass to ignore the regulatory protections we have in place in the current payments system.
What would change if a CBDC was launched in the UK?
Right now, cash is the only form of public money accessible to ordinary people. By launching a CBDC, the Bank of England would be opening up to the whole of society, allowing members of the public to store their money safely in Bank of England accounts. This would reduce the power of big banks and big tech, and help bring about a shift to a more innovative and diverse banking sector, with a greater role for small financial technology companies (known as “fintechs”). It could also benefit ‘challenger’ banks, such as regional banks set up with a social purpose.
If CBDC is designed in the right way, it could lay the foundation for making money and banking fairer and more inclusive. The big banks would have less power over the shape of our economy and people’s money, and would be forced to provide better services in order to stay in business.
Will CBDC replace cash?
Cash is an irreplaceable part of our economy. It’s free, straightforward and accessible to use, and allows people to make transactions without their personal data being collected. While CBDC has many important advantages over bank deposits, it has a different set of strengths and weaknesses to cash. Different people have different payment needs and to reflect this, the Bank of England has committed to designing a CBDC that works with cash, not against it. Positive Money will continue to campaign and advocate for people’s right to access and use cash, especially those who would face financial exclusion in a cashless society.
What would a fairer money and banking system look like?
Over the past 40 years, successive UK governments have handed more and more power over to big banks and the financial sector. In the aftermath of the 2008 crash ten years ago, and in the midst of the COVID-19 crisis now, the government and the Bank of England are still beholden to a broken banking system. The lack of a public platform for digital payments makes high street banks critical for our economy, meaning we can’t risk allowing the banks to fail. As we saw after the 2008 crash, this resulted in the transfer of hundreds of billions of pounds of public money into private banks and the financial markets to keep them afloat.
Positive Money’s vision is for cash and a CBDC to be the foundation of a public payments system.
Shaping the design of a CBDC
If the Bank of England launched a CBDC, it would need other bodies or companies to operate the user-facing payment platforms for accessing our CBDC accounts. So far, the Bank has envisioned these platforms as being provided by the private sector. But if we are still relying exclusively on profit-making firms to operate crucial parts of the payments system, it wouldn’t be enough to transform our money and banking system for the better, because the banks would still be a crucial part of the system and ‘too big to fail’.
That’s why we’re calling for a public company to be created that would provide CBDC accounts directly to ordinary people, alongside other firms. This company would have a mission to serve vulnerable groups excluded by the rest of the banking system. One promising candidate for such a company is the Post Office, which already provides banking services to vulnerable customers across the UK.
The government’s new Central Bank Digital Currency Taskforce is an important opportunity. We’ll be actively engaging with it, and making the case to move against the power of big finance and big tech by establishing a truly public payments system that works for people and communities everywhere.
This post was amended on 10-05-2021.