UK government dreams of a state-backed digital currency
- If it goes ahead, digital wallets will replace real wallets by the late 2020s
- Claims are that all will be safe, sound, easy and convenient
- However, there are many very severe problems entailed in such a venture
- Britcoin or Britcon?
The UK Treasury and the Bank of England have confirmed that they are working on a state-authorised and backed UK digital currency to be introduced by the end of the decade. During the Covid-19 pandemic, all the countries of the UK got used to using credit and debit cards and mobile handsets and banking apps for almost all their purchases as cash simply fell out of use when many shops and businesses stopped accepting it on the grounds it could be contaminated with the virus. Since then, card payments have remained very much the usual method of paying for things, although cash is definitely making a comeback as normality reasserts itself.
Now, though, and for reasons that aren’t immediately apparent, the current UK chancellor of the exchequer, Jeremy Hunt, is pushing the idea that a central-bank digital currency would be a “trusted and accessible” payment method. “We want to investigate what is possible first, whilst always making sure we protect financial stability,” he said. Public consultations on the proposal began today and will run for four months.
The venerable “British pound sterling” would remain, but the new unit of digital currency is already being referred to by the media and by former prime minister Boris Johnson as “Britcoin”. That’ll fit nicely alongside Britpop, Britart and, of course, Brexit. Indeed, the proposed digital currency is being touted by some as a “Benefit of Brexit.”
The government is keen to reassure the sceptics, and there are many of them, that a state-backed digital currency would be very different from volatile cryptocurrencies, such as Bitcoin and its ilk, because crypto is not supported by the Bank of England, whereas Britcoin would be. Thus, it says, it would be immune to sudden market fluctuations caused by speculators and “retain its value” because each and every digital pound would always be worth £1 in cash.
Well, our one pound coins are nominally each worth a pound, but their value has diminished over the years and the current tsunami of runaway inflation (caused incidentally by a prime minister who lasted just 49 days in the job when she tried to demolish financial orthodoxy and the markets reacted) has reduced their value by at least 15% since December 2022.
For hundreds of years – except for the time of the First World War until 1925 – Britain backed-up its currency by having sufficient gold reserves in the Bank of England to fully cover the value of all the paper money in circulation. It finally abandoned the Gold Standard in 1931 but prior to that you could visit the bank, hand over say a five pound note and get £5 worth of gold in exchange honouring the promise written on each banknote to “pay the bearer on demand”. Those days are gone, never to return.
A universal financial nostrum or a can of worms?
A decision on whether to pursue the creation of a central bank digital currency will not be taken until 2025, but interest is growing and momentum is building. For example, the governor of the Bank of England, Andrew Bailey, said, “As the way we pay for things becomes more digitised, the case for a digital pound in the future continues to grow. A digital pound would provide a new way to pay, help businesses, maintain trust in money and better protect financial stability”.
Despite his enthusiasm for the project, Bailey did add a caveat or two, saying, “However, there are a number of implications which our technical work will need to carefully consider. The consultation and the further work the bank will do now will be the foundation of what would be a profound decision for the country on the way we use money”.
“Profound” is an understatement.
Meanwhile, a previous Bank of England governor, Lord Mervyn King, is worried about the prospect of a British digital currency, saying it would be a prime target for cybercriminals as well as the source of huge problems in terms of the privacy and security of immense amounts of sensitive customer data.
He added that as money in digital currencies issued and supported by a central bank is safer even than a bank deposit, it could lure savings away from high street commercial banking institutions and badly affect the established financial system. In summation, he opined that a Britcoin would come with “risks but no obvious benefits”.
In use, the virtual currency would be held in a digital wallet in various denominations of the pound sterling and then used to make electronic payments in person or online. It would be interchangeable with both bank and cash deposits. The government says that neither it nor the Bank of England will be able to access data on who does what, where and when with their digital currency but points out that should account holders decide to keep their money in digital wallets provided by other companies and institutions, it would not be able to guarantee the absolute security and privacy of their data or money. Well, as we have seen, it hasn't been able to guarantee the security and privacy of our health records either.
Thus the word is that a national state-backed digital currency would be protected by state-of-the-art, robust systems based on rigorous privacy and data protection standards and that for further protection in the early period of a Britcoin system, limits would be placed on the amount of money any individual or company could hold in a digital wallet. We all know that government systems can be breached as several have been in the past when data was stolen, and surely the notion of restricting the amount of money that could be held in an a digital wallet is tacit admission that the entire system will come under continual and sustained attacks by cybercriminals. It will be such a plum target that it’s bound to be under siege. It might be time to start thinking about keeping a bag of silver dollars to hand, just in case.
And of course, if it came to it, for whatever reason, any future UK government could prevail on the Bank of England to provide it with any digital currency transaction details it my require and could also program the system to watch and place restrictions on how the money in digital accounts is actually being spent, or it could just decide to take cash out as and when to meet particularly high and/or unexpected contingencies. Think that couldn’t happen? Think again.
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