Why we need digital money we can trust

May 25, 2022

In order for digital money to serve the public good, the public need to trust it. UK policymakers should look to the US’ ECASH Act for inspiration.

The spectacular collapse of Luna, a so-called ‘stablecoin’, alongside the wider fallout in crypto markets in recent weeks is another wake-up call for the need for digital currencies we can actually trust to maintain a stable value.

Crypto enthusiasts are right that the current payments system is inefficient and relies too much on the big banks and other corporations — we do need to democratise money. But as we’ve seen with Luna and other cryptoassets, giving more power to algorithms and those looking to get rich quick from ponzi schemes does not result in a stable monetary system.

Though the term central bank digital currency (CBDC) might be offputting to many, it could offer the key to building safe digital money that we can actually trust. A CBDC would be a new publicly-issued form of digital money, which would be accessible to everyone, with accounts at the central bank — in the UK’s case, the Bank of England — opened up to the public. Unlike the private bank money in your bank account which can be wiped out by banking crashes, or the coins in your cryptowallet which could collapse in value overnight, central bank money is backed by the state and risk-free, just like the notes in your pocket.

Right now, holding digital money at the Bank of England is a privilege enjoyed only by private banks and denied to ordinary people, making us reliant on them. By providing a new public option for banking and payments, a CBDC offers an opportunity to build a monetary system that truly works in the public interest, freeing us from our dependence on private banks both for our day-to-day payments and the wider functioning of the economy.

Unsurprisingly, the idea is unpopular with incumbent financial firms, who would see their power and profits squeezed by the introduction of a public banking option. But big finance may find an unlikely ally among Bitcoin enthusiasts as well as conspiracy theorists, who claim that CBDC is part of a global plot to replace paper money with digital money and give the state total control over our payments system.

Such claims are news to Positive Money, despite us being one of the first proponents of CBDC in the UK, with our thinking going on to influence the Bank of England, who have since made exploring the proposal a key area of work.

This is not to sneer at people who find the idea of CBDC scary. People are right to be cautious of the prospect of states abusing their power to surveil citizens, as governments across the world, including our own in the UK, routinely do. But the reality is that all digital payment methods, including privately-issued forms such as bank deposits and cryptocurrencies, can be made subject to surveillance and control — whether by government agencies, powerful corporations, or individual actors. How much protection our payments have from government surveillance depends much more on the legal protections of our fundamental right to privacy, and on ensuring appropriate checks and balances exist within our institutions to prevent abuses of power, than it depends on whether a public institution issues the money.

Despite the claims advanced by cryptocurrency evangelists, the currency which offers users most privacy does not involve distributed ledger technology (DLT) such as blockchain. The most privacy-respecting currency remains cash — publicly issued notes and coins which can circulate and be used for payments without leaving a data trail attached to users. This is why, as well as advocating for an account-based CBDC with the strongest possible privacy protections, Positive Money will continue to fight to keep cash for as long as people want to use it.

But what if we could also have a digital currency which replicates the key features of physical notes and coins — a publicly issued token which allows people to make payments freely and anonymously, without any intermediaries?

This is precisely what Positive Money advisory panel member Rohan Grey has been working on with his colleagues in the US, which has led to the Electronic Currency and Secure Hardware (ECASH) Act being brought to Congress. ECASH would see the US Treasury issuing a form of digital cash which would be genuinely peer-to-peer, capable of offline transactions, and able to be held and used completely anonymously. Users would be able to use ECASH devices, such as an offline payments card or a secured chip on a mobile phone, to make payments without generating transactional data or requiring the approval of any intermediaries. ECASH would be a ‘bearer instrument’, meaning that, unlike bank accounts, devices wouldn’t need to be connected to any user data – rather ownership would simply be validated by possession, just like with physical cash.

ECASH may not perfectly translate to the British context — unlike its US counterpart, the UK Treasury hasn’t played a role in issuing money in modern times, except for the brief historical aberration of ‘Bradbury notes’ during the First World War. But there is no reason why we couldn’t see a similar proposal here, which could be implemented by the Bank of England, or by a new public entity established for this purpose.

The public banking option offered by CBDC accounts at the Bank of England would then be complemented with token-based digital cash, allowing people to make day-to-day transactions anonymously, just like with notes and coins.

As we have set out, one of the most vital ingredients for money is trust. A currency is bound to fail if not enough people trust in it. This is why it is vitally important that the Bank of England takes people’s fears regarding digital currencies seriously, and makes every effort to secure public trust in public money. Central to achieving this is designing a CBDC with clear safeguards against surveillance and control, whether by the government or by powerful firms in the private sector, like banks and tech companies.

So far, the Bank of England has fuelled media misinformation about CBDC. The Telegraph was able to spin a Bank official’s comments to imply that the state would ‘programme’ digital money, raising concerns that it would only be spendable on things the government approved. CBDCs indeed have potential for programmability such as smart contracts, which could potentially offer benefits to users. But it is important to emphasise that any programmability should rest in the hands of users who could choose to use such functionality to help manage their money, not imposed top-down by governments or corporations.

Another fear is that CBDCs will be a means of imposing negative interest rates, again fuelled  by Bank of England officials, who have highlighted the potential for this. Instead of the unpopular prospect of negative interest rates for ordinary savers, the Bank England could instead be emphasising other tools that CBDC could support. For example, ‘helicopter money’ drops — where the central bank creates money and sends it directly to households. Such policies would not only be much more effective and fairer than negative rates, but they would also be more appealing to the public.

The vested interests of private finance, whether in the form of big banks or the powerful ‘whales’ who manipulate currencies like Bitcoin, will be doing their utmost to spread misinformation and fear to put people off the publicly issued forms of digital money they would be competing with. Allowing them to do this would mean losing a huge opportunity to democratise money.