Britcoin – Bank of England Takes Step Closer to a Digital Currency

Yesterday (9 November 2021) the Bank of England announced a consultation period beginning next year on a central bank digital currency (CBDC), or ‘Britcoin‘ as it has come to be colloquially described.

The move is part of the central bank’s “research and exploration” phase to inform its policy development.

A CBDC would be issued alongside cash and bank deposits directly by the Bank of England and in theory could entail each individual having an account at the Bank.

The BoE is at pains to point out that no actual decision has been made about whether to launch a CBDC, and if such a currency was to emerge it would not be until 2025 at the earliest.

In April last year the BoE and HM Treasury created the CBDC Taskforce to look at the issues surrounding a CBDC and the desirability and feasibility of creating one.

Following on from the consultation period will be the creation of technical specifications “explaining the proposed conceptual architecture for any CBDC. This could involve in-depth testing of the optimal design for, and feasibility of, a UK CBDC,” the Bank said in a statement.

Britcoin gaining momentum as China set to launch digital yuan

A so-called ‘Britcoin’ has been gaining momentum following Facebook’s proposal for a digital currency called Libra – now renamed Diem – which in its first iteration would have been backed by a basket of international currencies.

The initial Libra announcement in June 2019 was met with a blizzard of criticism from regulators and governments who feared the reach of a currency with a market of potentially 3.4 billion users (the number of people using Facebook/Meta products).

Aside from worries relating to data privacy, there were concerns about the coin introducing huge risks into the financial system.

In weaker economies a Meta backed coin could undermine local currencies and if there were a run on the digital currency it could create liquidity issues inside the mainstream financial system because of traditional currencies use as collateral in the Libra system.

However, Libra in its new form as Diem has been redesigned to address some of those issues and in particular it will now be backed solely by the US dollar.

The wallet that will hold the currency is currently undergoing a pilot, but using Paxos as its digital currency (a so called stablecoin that is backed one to one by the US dollar), as Diem is still yet to be launched. Diem is incorporated as an  independent entity to Facebook/Meta as an association of companies and non-profit organisations.

China’s eCNY digital yuan launches at 2022 Winter Olympics

But it is the moves by China that are now concentrating the minds of central bankers in the advanced economies. The Chinese central bank, the People’s Bank of China, is planning to launch its own digital currency next year, using the Winter Olympics (opening on 4 February 2022) as the platform to show it off to the world.

China has been running large-scale CBDC pilots in a number of cities for more than a year.

Last week a PBoC officials reported that 140 million people had opened the wallet for the digital yuan as of the end of October. The value of transactions across the system was 62 billion yuan ($9.7 billion).

To encourage participation in the pilots, the government has randomly distributed digital yuan to citizens via red envelopes with codes to unlock small amounts of the digital currency. Point-of-sale devices have also been distributed to participating merchants.

China’s digital currency design envisages using existing financial institutions such as digital payments providers and banks to distribute the national digital currency to consumers and merchants.

Nigeria and Sweden also leading the way with CBDCs

Nigeria, which had previously seen its authorities set against the idea of a CBDC, began a pilot last month. The growth in the use of private digital currencies such as bitcoin is growing among the population. This is particularly the case among young well-educated people and in some areas of commerce such as impart-export. Due to the weakness of the Naira currency buying bitcoin for use as a means of exchange in international commerce or as a preferable store of value for consumers, has exploded in the country.

Sweden was an early leader in CBDC development with its e-Krona initiative, although a rollout has been delayed after worries about maintaining access to non-CBDC central bank money, i.e. cash for those unwilling to use the e-Krona.

In Europe, privacy concerns have emerged as key area of concern around CBDCs, as theoretically it would be easy for the central bank to track individual payments and associate them with an individual.

CBDC risks: loss of privacy, digital bank runs, threat to banks and payment providers

One of the reasons China is thought to be keen on CBDCs is because of the level of economic surveillance and control it allows, alongside the efficiencies in implementing monetary policy that is making an attractive – albeit risky – proposition to all central banks.

Among the risks that make central banks wary of CBDCs are the possibilities of a run on the currency given a CBDC would be a direct liability of the central bank. Also, there is a CBDC’s disintermediating potential – which in plain English means it could eradicate the need for payment intermediaries such as retail banks and digital payments providers.

John Glen, Economic Secretary to HM Treasury, said in a statement accompanying the BoE announcement: “This consultation will begin an open discussion on the role a UK central bank digital currency might play in the UK.

“I’d encourage everyone to contribute to the discussion so we can explore the opportunities this could bring, as well as understanding any risks it may pose.”

Deputy Governor for Financial Stability, Jon Cunliffe, added: “The plan to publish a consultation next year on CBDC is a crucial step in our policy development, especially as we further our thinking on the pressing issues at hand. What it will do is provide a platform for interested parties and relevant groups to engage with the key questions on the merits of CBDC, and whether the public sector should advance to a development phase.”

China’s digital yuan a challenge to the US dollar in global payments?

Western countries are worried because China will launch its currency next year, it will be in a position to set de facto standards for CBDCs. The US Federal Reserve is thought to be even further behind the Chinese than the Bank of England and the European Central Bank.

Although China has an eye to seeing off the monopoly in online transactions currently dominated by private players in the form of AliPay (Ant) and WeChat (Tencent), a longer term goal may be to extend the global reach of the currency and start to compete with the US dollar as a reserve currency. However, China has a long way to go in the latter regard.

In February 2021, according to payments messaging and settlement system Swift, it was reported that the yuan (or renminbi as the offshore version is known) accounted for 2.4% of global payments compared to the US dollar on 38%. That was a record showing for the yuan and a digital currency version is sure to boost its popularity in global payments, especially among those countries that are currently locked out of the dollar system due to sanctions.