Publications

Response to UK Digital Pound / Central Bank Digicel Currency (CBDC) Consultation; 

20 May 2023


Questions Addressed


This response focusses on:


Question 1/ in respect of the opportunities that arise from the evolving trends in payments;


and,


Question 10/ about whether, given the primary motivations (ensuring confidence and safety; promoting innovation, choice and efficiency; enhancing financial inclusion, payments resilience and cross-border payments) the proposed design for the digital pound meets its objectives. 


Summary


Effective currency competition is the best way to take advantage of the changes that are taking place in payment trends and to meet the primary motivations behind the proposed design for the digital pound. 


New digital payment technologies make it possible to create trustworthy digital currencies backed by commodities that can compete with fiat systems like the pound sterling in its current unbacked form. In order to compete the alternative currencies will have to exist on a level playing field. That means two things: enabling them to be used for the payment of taxes and ensuring that taxable events are not triggered when those competing currencies are exchanged with each other and with the pound. This competitive approach will enable the UK to make the most of the evolving trends in payments referred to in question 1/.


Furthermore, if innovation is permitted, enabling the public to have a choice of currencies, and if they can use competing national commodity backed digital currencies just as easily as a CBDC, that element of choice will make them less concerned with the risks of an unbacked digital pound. In contrast, unbacked digital pounds would continually be devalued through ongoing general pound sterling currency creation by the banking system. The continual erosion of value will not lead to public confidence. Moreover, the public would fear that the CBDC might be programmed to limit particular kinds of payments in the future at the expense both of privacy and human rights. Consequently, the digital pound, in the absence of the competition described, will not substantially be able meet its objectives as referred to in question 10/.


Effective competition to a CBDC would lead to the development of the CBDC in a manner that serves the country most effectively because the public would vote with their feet and use a competing currency if the CBDC did not meet public needs sufficiently. Effective competition would therefore be the best regulator. 


Furthermore, this kind of competitive approach would make the UK the world leader in the currency and money space and build tremendous confidence in our monetary system because of the commodity backed payment options. The UK would, consequently, become more successful both socially and economically and be hugely attractive to investors.


Full Response


As stated in the summary, this response focusses on questions 1/ and 10/ in the consultation and in particular the opportunities that the trends in payments provide. The opportunity that arises is to use this shift in spending behaviour and the arrival of digital currencies to introduce meaningful competition in the currency space that meets all the primary motivations behind a digital pound.


Currently there is an effective currency monopoly in the UK because only the pound sterling may be used to pay taxes. Furthermore, transactions in other currencies have to be assessed in pound sterling equivalent terms to determine what taxes may be payable every time such currencies are bought and sold. This administrative burden makes it impractical, and too costly, to use competing digital currencies as an alternative to the pound sterling, effectively crowding out those other currencies. Moreover, the pound sterling currency monopoly that persists results in a more fragile, non-resilient, monetary system. The continuation of this existing monopoly is not in harmony with UK governments’ usual opposition to monopolies. Monopolies are generally perceived not to act in the public’s best interests. 


In addition, the existing fiat-based banking system leads to the ongoing creation of additional unbacked pound sterling currency units. That leads to the debasement of the currency that the public are trying to use to help them make a living, to invest and take society forwards. The process of debasement leads to what the public perceive as price inflation. The continual erosion of the purchasing power of the pound makes it harder to plan, save and invest for the future whether for personal or business reasons.


The arrival of a CBDC risks taking the existing monopoly to another level if launched without enabling meaningful competition. There would still be no freedom of choice in terms of the currency the public could use to pay taxes based on the existing proposals. The public will also no doubt worry that the CBDC initiative will provide a framework that could enable a government to programme the currency at some point in the future. Although the consultation document states that a programmable element will not be pursued initially, almost inevitably, the public will fear, that is what will happen eventually. The public will also be concerned that the existing CBDC proposal has the potential to create further currency debasement and therefore further price inflation. In the future, it even raises the possibility of the government controlling the population’s purchasing choices via a mere tweak of the software. 


The best way to allay concerns with respect to the introduction of a CBDC is to enable national currency competition and thereby provide choice to the public. Consequently, we suggest that any CBDC launch should be accompanied with freedom for commodity backed competing national digital currencies to be used to pay taxes and without requiring conversion into pounds sterling. Nor would it be necessary for the public to assess taxes in pound sterling terms whenever those competing commodity backed national digital currencies were exchanged for each other or the pound sterling. In other words, no taxable event would be triggered when exchanges between that group of currencies took place. The competing currencies would have their backing commodity holdings vetted on a regular basis by reputable firms and the government as desired to reassure the public. An obvious choice for commodity backing would be gold. But silver, platinum and palladium might also be considered. 


Commodity backed national digital currencies would provide the public with more confidence in transactions, make it easier to plan for the future and to make saving and investment choices on a sound footing. That is because commodity backed national currencies would retain their value and therefore satisfy the strictest criteria for the definition of money. That is unlike a fiat currency such as the pound sterling in its current form that banks are permitted to create electronically without any backing. The certainty of future purchasing power from competing commodity backed currencies would better enable the UK to flourish socially and economically. Moreover, a competitive market place for currencies would showcase the UK as the most innovative, world leading and consumer friendly country in the currency space. Effective competition could establish itself quickly if the playing field was levelled. 


I hope therefore that the Bank of England and the Treasury will choose the path of greatest possible competition, consumer choice, public confidence, diversity, inclusivity and innovation and allow competing commodity backed national digital currencies to be used for tax payment purposes if a CBDC is introduced. The UK has the chance to be the currency and money world leader and to become more successful socially and economically if that happens.