Have your say on the future of money

September 2, 2021

What is the Bank of England consulting on?

Our money and banking system could soon be transformed by two new forms of digital money: private sector digital money, such as ‘stablecoins’, and a publicly provided alternative in the form of a central bank digital currency (CBDC).

The Bank of England has published a discussion paper outlining its thinking on these new forms of money, and invited the public to have their say. Big finance and tech firms will no doubt be trying to shape Bank of England policy to serve their interests. It is vital that we as the public also make our voices heard to ensure the future of money is fair, democratic and sustainable.

This blog explains some of the key issues being discussed, and puts forward some of Positive Money’s thinking on them.

You can have your say by responding to the Bank of England’s survey here by 7th September 2021. If you only have a few minutes, you can see Positive Money’s instructions here to answer just the main question (question 6). Or if you want more background information and to answer more of the survey questions, read on…

What is a CBDC?

A central bank digital currency (CBDC) would be a digital form of public money issued by the Bank of England, our publicly owned central bank. It would not replace cash, but work alongside and complement it.

Right now, cash is the only public form of money available to ordinary people. The digital money we currently use is actually private sector money, created by private banks when they make loans. This gives banks a lot of power and control over the economy and over us as individuals. They get to decide where new money goes, and we are forced to provide huge public subsidies and bail them out when they hit a crisis – to stop the payments system we all rely on going under. It also means private banks can control who has access to digital money and on what terms.

A CBDC would provide a public alternative which would allow us to circumvent the extractive middlemen of the private banking system. Designed correctly, it could break banks’ stranglehold over our economy and provide the building blocks for a system which is fairer, more democratic and sustainable.

Key questions

Accessibility

A key question is whether a CBDC will be directly accessible to the general public, or whether access will be under the control of private banks. Banks already enjoy privileged access to the only form of public digital money which currently exists – central bank reserves, a special form of central bank money that commercial banks use for the final settlement of large flows of transactions. This privileged access is what makes us depend on banks to make digital payments, and allows them to extract easy profits from us. If the public is able to directly access CBDC, we will no longer be reliant on middlemen like profit-maximising private banks, and this will create the foundations for us to build a new money and banking system which truly serves people and planet.

No doubt the big banks will be lobbying against direct public access to a CBDC, as it would threaten their power and exploitative business model.

We would therefore encourage people to answer question 6, ‘How important is direct access for the general public to central bank money in a digital world?’ with ‘very important’.

• Very important ✅

• Somewhat important

• Not important

We also suggest people respond to question 7 with this key point:

• To make CBDC accessible and inclusive, people should be able to access their accounts through a trusted public organisation, such as the Post Office.

Privacy

Like all personal data that big corporations collect, payments data can be used to profile us, and decide whether or not we get access to different services, like credit or insurance. The new “stablecoins” that big tech companies like Facebook are trying to launch could be especially invasive, because they would combine our payments data with all the other data those companies already collect about us, like our search histories and activity on social media.

Stablecoins represent the most recent attack on privacy from big corporations, but card companies like Visa and Mastercard have been waging a war on cash for years. As a result, cash is becoming harder to access, with bank branches and free ATMs being closed down all over the UK. Protecting cash is absolutely essential, and Positive Money is determined to keep fighting for universal access to cash. But in the aftermath of the COVID-19 crisis, digital payments are quickly taking over our economy. This is a fight over whether money is run for profit by private companies, or provided as a public service by institutions like the Bank of England.

The bank cards and phone apps that are dominating are falling far short of the level of privacy protection we need. We need to work together to push the Bank of England, and other key regulators like the Financial Conduct Authority, to step up and ensure stronger protections for privacy are in place for digital payments.

The Bank of England could also provide a CBDC to help protect privacy. Simply by collecting the minimum amount of personal data required to make the payment, and stopping the data being used for commercial purposes, a CBDC would have a higher level of privacy than regular bank accounts.

We would therefore encourage people to answer question 8, ‘Do you agree with the Bank’s view on protection and privacy?’  with ‘disagree’ or ‘strongly disagree’.

• Strongly agree

• Agree

• Neutral

• Disagree ✅

• Strongly disagree

In question 9, we recommend responding with the following key points:

• The Bank of England must provide a CBDC with a high level of privacy protection.

• The Bank should also continue to provide universal access to cash, which is currently the best privacy-protecting means of payment.

Money and credit creation

A key question in the Bank of England’s consultation is how new forms of digital money could affect the creation of new money and credit (question 5). The Bank of England points out that the introduction of a CBDC could make it harder for banks to create new money, and suggests that market-based finance could and should step up to provide the funding needs of the economy instead (question 14). Positive Money will be arguing that this should be an opportunity for more public money creation instead.

To explain, around 95% of the money in the economy is private money created by banks when they make loans. One of the reasons why it is so easy for banks to create new money is because this money mostly stays in the banking system as bank deposits, allowing banks to fund their loans with a big supply of customer deposits at very low interest rates. People hold deposits with banks in return for very little interest not just because they have little choice, but also because these deposits are backed by the government up to £85,000, which help ensure they are redeemable at par with safer public forms of money, i.e cash.

But with the emergence of new alternatives to bank deposits, be it CBDC or private stablecoins, many people might exchange their bank balances into these new forms of money. A CBDC in particular could be very attractive to people as it will be fully risk-free, faster and more efficient, more accessible and could even pay higher interest rates than bank deposits. If lots of people move away from bank deposits, banks will lose their ability to easily fund their loans at low rates. This means that bank lending could become more expensive, and private banks’ money creation could dry up.

The Bank of England believes that a decline in money creation from private banks could and should be made up with an increase in market-based finance. This would mean borrowers getting funds from non-banks, through the sale of bonds and shares on financial markets for instance, instead of bank lending. But this could mean simply handing over control over finance from banks to other unaccountable private institutions, and could be even more undemocratic and unfair than the current system. We could just end up handing over control from Barclays to Blackrock.

Our banks currently neglect the country’s needs, with only around £1 out of every £10 they create going towards businesses and activities in the real economy – which is where most people operate. This power and dynamic is what causes the UK to have an overly financialised (and unequal) economy instead of a healthy, productive real economy. But the situation could become even more dire with a shift to market-based finance. SMEs in particular, who aren’t able to issue bonds or shares, would find it even more difficult to access market-based finance, especially not at affordable rates. Our economy would become increasingly dependent on global financial markets and at the whim of volatile capital flows seeking the highest return, as former Bank of England governor Mark Carney has suggested.

Instead, this could be an opportunity to introduce fairer and more democratic means of providing funds to the real economy. Private bank credit creation could be replaced with forms of public money creation. For instance, if the private sector isn’t creating enough money, the Bank of England could credit the government with new funds to spend directly, or provide a ‘helicopter drop’ of CBDC money directly to all the households. The latter could even form the basis of a universal basic income.

The Bank of England could also use the funds it creates to capitalise public development banks or other stakeholder banks which are equipped to meet the needs of local economies and communities.

Stablecoins

What are stablecoins?

Stablecoins are new forms of digital money, created by the private sector (as opposed to public digital money in the form of a CBDC). Unlike ‘decentralised’ cryptoassets, such as Bitcoin and Ethereum, stablecoins seek to maintain a stable value through being backed by other assets. There are already cryptoassets marketed as stablecoins, such as the controversial Tether, but large technology companies like Facebook are also trying to launch their own versions. Stablecoins provided by companies that already operate huge social networks and online marketplaces could rapidly scale up and become ‘systemic’, meaning that the overall payment system would rely on them to function properly. This presents huge concerns about who would have control over money, payments and the wider economy, and could also pave the way to another financial crisis.

The Bank of England, and many other central banks around the world, are concerned that stablecoins could end up being backed by assets that are not actually very stable at all. This would threaten financial stability, and could cause another financial crisis. They would also add a new layer of privately controlled money on top of the existing money and banking system, and transfer even more power to large technology companies.

How should stablecoins be regulated?

In the discussion paper, the Bank of England puts forward four different options for how stablecoins could be regulated. The most important distinction between the four models is what kind of assets will back the stablecoin. The Bank of England will make this decision, which will lay down the tracks for how all stablecoins will work in the UK — and how much power over our economy large technology companies stand to gain.

Positive Money is calling for stablecoins to be 100% backed by the safest possible financial asset: money issued by the Bank of England. The technical term the Bank of England uses for this approach is the “central bank liability (CBL) reserve backing model”.

We also want everyone to be able to withdraw their money from a stablecoin quickly and safely, on demand: just like we can with our bank accounts. The Financial Policy Committee at the Bank of England has made it clear that any stablecoins that are widely relied on to make payments must support withdrawals. The best way to ensure this is for stablecoins to be fully backed by a CBDC, because making a ‘withdrawal’ from a stablecoin would be as simple as moving money between bank accounts online. So we’re calling on the Bank of England to launch a CBDC and put it at the heart of all new forms of digital money.

We encourage people to reply to question 17, ‘Do respondents agree with the Bank’s assessment of the four possible regulatory models for stablecoins?’ with “Agree”, like so:

• Strongly agree

• Agree ✅

• Neutral

• Disagree

• Strongly disagree

We encourage people to reply to question 18 with the following key points:

• The Bank of England should adopt the “central bank liability reserve backing model” for stablecoins.

• The central bank liability should be a CBDC.

Thank you for taking the time to respond with us!