The government’s consultation on a digital pound is ultimately a debate over whether the public should have access to publicly issued money, or whether we should only use privately issued money. Positive Money believes money is a public good, and we will be supporting the introduction of digital cash alongside physical cash in order to prevent the wholesale privatisation of the money and payments system. Take part in the consultation by emailing the Bank of England using our template here to demand a digital pound that works for people – not banks.
It might at first be difficult to convey to people what a digital pound is, and why we need one. A House of Lords Committee last year asserted that it is a ‘solution looking for a problem’. While recent banking crises may have since given an example of one of the big problems a digital pound is a solution to, as far as many people are concerned, they already have access to digital pounds. People may assume the pounds in their bank accounts are digital equivalents to the notes and coins in their wallet, but there are in fact fundamental differences. Crucially, while cash is risk-free publicly issued money, the money in your account is private money issued by the bank. Right now, the vast bulk of the money system on which our democracy and economy depend, is controlled by a handful of private banks. We believe the introduction of a digital pound is a rare and significant opportunity to change this, with a new publicly issued form of money that would enable us to reclaim the monetary system as the public good it is.
As Positive Money has long-argued, a digital pound in itself offers a range of tangible improvements to the current system, in areas such as payments and financial stability. But perhaps a more useful way of illustrating the importance of digital public money is to consider what the future would look like without it.
The privatisation of money
While notes and coins are publicly issued by the Bank of England and Royal Mint, the money in your bank account is a private form of money issued by commercial banks. This private money makes up the vast majority of money in our economy, and is created by banks when they make loans.
As a risk-free publicly issued asset, cash allows us to settle transactions peer to peer without any banks or other intermediaries involved. But currently, only banks have access to risk-free public money for settling payments digitally, through central bank reserves. This means that we have to rely on the private money banks issue to make electronic payments. In this way, the public good of the money and payments system is bound up with the risk-taking of profit-maximising private banks, which leads to the public getting ripped-off and repeated financial and economic disaster. Private banks abusing this unique privilege is a core driver of why we have such high house prices and inequality, and why bankers in the city of London have such huge influence over our politicians and political system.
With the rise of card and electronic payments and the marginalisation of cash, we are thus seeing the privatisation of our money and payments system, ceding more power and profits to private interests. A digital pound would protect against this by offering people the same access to risk-free public money enjoyed by commercial banks, allowing us to level the playing field and bypass rent-extracting middlemen. In practice this might look like everyone being able to store their money directly with the Bank of England, perhaps via an instituttion such as the Post Office.
Corporate and state surveillance
One of the biggest worries surrounding central bank digital currencies is the potential for them to be used to surveil and ultimately control how citizens spend their money. These concerns should of course not be dismissed, but they are often blind to the ways in which our payments are already surveiled and controlled by state and non-state actors under the current system.
When you pay with a card or payment app, user data, as well as fees, are collected not only by the merchant, but all the intermediaries involved, including card companies, the acquirer (the company providing the payments infrastructure your card interacts with), and both parties’ banks. And this information is routinely accessed by the state and sold off to other third parties.
The digital pound design being developed would at the very least offer as much privacy as private bank money, and has the potential to offer more. Even under an account-based digital pound, the central bank and government will only be able to see anonymised transaction data, rather than users’ personal information. But there is also potential for a genuine form of digital cash, which offers much more privacy and security than current electronic payment methods.
Currently, physical cash represents the most privacy-enhancing form of payment. Rather than requiring authentication by being linked to an account, cash is a ‘bearer instrument’ that is authenticated simply by possession, allowing peer-to-peer settlement without any intermediaries, and generating no user data. Positive Money wholeheartedly supports keeping physical cash, and we advocate for a digital pound as a complement to it rather than a replacement. But it has limitations: as a result of a war on cash it is increasingly not accepted by retailers, and it of course cannot be used for online payments. So without a digital equivalent of cash, there would be no privacy in the digital economy.
Alongside the account-based model the current government consultation focuses on, there should be a more decentralised token-based version, which replicates key features of physical cash: reliable publicly-issued money that allows high-privacy peer-to-peer transactions offline without intermediaries or costs. Example models have been put forward for implementing digital cash, such as the eCash 2.0 proposal, and the ECASH Act in the US.
What about cryptoassets?
For many, the original appeal of cryptoassets like Bitcoin was their ability to function as a digital version of cash, enabling users to make peer-to-peer payments without the approval of intermediaries or the state. Unfortunately, Bitcoin has since lost its appeal as a means of payment, degenerating into a speculative asset for investors. One of the key reasons cryptoassets have failed to take-off as actual currencies is because they have struggled to become established as a unit of account – i.e the thing which prices are measured in. Not only are people generally unwilling to transact with currencies that can wildly fluctuate in value, most goods and services are priced in national fiat currencies, and there is little prospect of cryptocurrencies changing that without state or corporate adoption.
As such, the crypto industry has pivoted towards so-called ‘stablecoins’ – cryptoassets which are designed to maintain stable values. The most successful of these have been those that are linked to national fiat currencies. However, the crypto industry is rife with fraud and ponzi schemes, making it difficult to trust that stablecoins are really that stable, as illustrated by issues surrounding some of the biggest players, such as Terra and Tether. It is true that stablecoins could offer more efficient and cheaper payments, as well as enhanced privacy, but this could be achieved at much less cost to the public with a genuine digital version of cash via a digital pound.
Big Tech for payments, shadow banks for investment? Or an opportunity for a better system?
As well as surveillance, another key concern surrounding a digital pound is ‘disintermediation’. Put simply, the worry is that people holding their money in the form of a digital pound would (like with cash) impact the role of the banking system as an intermediary matching savers with borrowers. Though of course banks don’t ‘lend out’ customers’ deposits, the fact that most of our money stays in the banking system as deposits gives banks a deep pool of reliable and cheap funding to support their lending. Banks would be constrained in their credit creation if the deposits they create left the banking system as digital pounds. This raises concerns that banks would be less able to provide credit to the economy.
But the reality is that banks currently do a poor job of providing credit to the economy. Only a small fraction of bank credit creation goes to the ‘real economy’, with most going towards bidding up the price of pre-existing assets, particularly through mortgage lending.
The truth is we are already seeing disintermediation, with market-based finance and ‘shadow banks’ (think pension funds, insurers and asset managers like BlackRock) playing an increasingly large role in business investment. Regardless of whether a digital pound is introduced, we are likely to see greater disintermediation, especially if other new forms of money are adopted, such as stablecoins. But without a digital pound, we could end up having little choice but to use stablecoins issued by Big Tech for payments, and relying on unaccountable asset managers like BlackRock to provide investment.
If the government and Bank of England were really worried about the threat of people moving their money to a digital pound and defunding the banks, they could simply recycle those funds back to banks through the discount window or other funding schemes, if they so wish, as Professor Rohan Grey has outlined. But as Professor Saule Omarova has also proposed and Positive Money supports, this could also be an opportunity to democratise the financial system and distribute investment to where it is most needed.
For instance, digital pounds could be backed by assets funding a decentralised public development bank. This bank could then distribute funds to regional and local governments to implement their own Green New Deals in every community, designed to meet people’s essential needs, bring down the cost of living, and build towards a fairer and more sustainable economy.
A digital pound could be one of the most profound changes to our monetary system since the Bank of England was given a monopoly on issuing banknotes nearly 200 years ago. We therefore need to ensure we can have our say on the future of money, so that isn’t decided by banks and Big Tech behind closed doors. Hopefully this consultation will be just the start of a genuine national conversation, and the first step towards a genuine public option for digital payments.
Add your voice to the consultation and email the Bank of England now to demand a digital pound that works for people – not banks.