The Govt have issued a consultation on how to implement a Central Bank Digital Currency. I say, that it seems to make as much difference to what we do today as a fart in a hurricane. Have I got it wrong? Consumers, that’s you and me will still pay using a card or a phone and we will need to back it with money (i.e. stored labour), because I am sure that the Treasury is not planning to issue #CBDC loans to the likes of you and me!

It seems to me that this is only different if the Central Bank issues accounts to consumers, which the bank is not proposing? Why would they do this? Although it seems they are planning to do this.

The paper’s talk about cash and bank (i.e. lender) made money. A CBDC would be intended to replace cash as the demand for it decreases, but I ask how does a CBDC replace a private sector bank account? It could be quite frightening for someone living on benefits, where the Govt is making payment and acts the banker, although it seems the Bank of England only plans to be a wholesale provider.

The EU blog article, says, “Central Bank Digital Currency (CBDC) is a new form of money that exists only in digital form. Instead of printing money, the central bank issues widely accessible digital coins so that digital transactions and transfers become simple.” But money in a bank account already has these properties.

The paper suggests that not having one inhibits innovation, but like accountancy, and medicine, I am not sure we want innovative financial services. The sources of innovation are suggested to be embedded finance (in-app e-commerce), blockchain (an expensive and useless technology storage platform), smart contracts (another exceptionally dangerous and opaque technology), atomic swaps ( i.e. knowing both legs of a trade have completed) and the improvements in cryptography hopefully leading to more secure identity verification.

Embedded finance is performed by private sector payment processors, atomic swaps are currently performed by escrow agents although this might be an application suitable for proof of stake block chain ledgers but then performance and cost becomes a problem; who aren’t going to use such a scheme to buy a coffee.

Why? By John Cunliffe of the Bank. Who says, “This private money i.e. bank deposits, is not a claim on the state or backed with the resources of the state. It is not covered by that familiar Bank of England promise to ‘pay the bearer’.” Does this mean that if one held one’s money with the Bank of England, that one needs no fear of the adequacy of the Financial Services Compensation scheme, although this only impacts people with more than £85,000

Here’s some more reading.

  1. What is a central bank digital currency? by the BoE
  2. A consultations; the digital pound. a new form of money for households & businesses on
  3. The digital pound technology working paper by the BoE, not really, more an organisational architectural options paper.
  4. I have found, the Minutes of the CBDC Technology Forum – November 2021, which hosts a presentation, Item 2 Models of CBDC Provision, both hosted at the BoE site. See below for my comments on the Swedish classifications. The BoE have selected the simplest solution, which the Swedes describe as Centralised with Intermediaries. It involves holding a ledger for all holders of the digital pound. It’s the reservation of work to the intermediaries which makes me ask if this is any more than a clearing system,

and more generally,

  1. Central bank digital currency from the EU’s EDPS, European Data Protection Supervisor.
  2. Central bank digital currency, is it a good idea? by Jonathan Sanchez, published by the Bank of Philadelphia, not so much as a cost benefit analysis, more a model of what will happen if. Also assumes that the central bank will issue consumer bank accounts. It predicts that interest rates will rise, good for savers, not so much for mortgagees.
  3. An Illustrative Industry Architecture to Mitigate Potential Fragmentation across Central Bank Digital Currency and Commercial Bank Money, by Lee Braine, Shreepad Shukla, I think this talks about models.
  4. Deloitte on the topic, a preso entitled, “Are central bank digital currencies, the currency of tomorrow?
  5. The ECB, “Tiered CBDCs and the Financial System“.
  6. CBDCs: The Good, The Bad, And The Ugly, at crunchbase, by Reuben Jackson, a block chain consultant. 🤷

Sweden, one of the lowest cash using societies in Europe and a nation of 10½ million are trialling CBDC, the UN/ITU comments, mainly historical, but states they don’t intend to act as payment processors, the Rijks Bank publish this, an index/home page, and this, a technical report. , §3 of the technical report, is a very clear definition of the technical/architectural models available and the document has a bibliography. I have taken note of these documents,

The Swedish Paper outlines the design goals & potential architectures. One of the goals, and its first one for the Swedes is safety, i.e. that people can have a greater access to central bank backed money; it seems we like in fictional world where our money if in a bank, may disappear due to bank failure and that the banj note promise to pay the bearer is real. The issue of bank failure is serious and in the UK the primary defence is not the Bank’s promise on the bank note, but the Financial Services Deposit Guarantee System., which is capped. The other goals, are competition, resilience, and privacy. The architectures vary depending on the central role of the Bank, and the role of what they call intermediaries; the central differentiator being whether the central bank will open consumer accounts. The Swedes recognise that they are bound by the Payment Services Directive (as is the UK unless the brain-dead REUL goes through).

I have discovered that the payments industry is regulated by the Payment Systems Regulator. This was officially created under the Financial Services (Banking Reform) Act 2013. I am a bit disappointed that their vision, rather than the baseline is,

Payment systems are accessible, reliable, secure and value for money.

There is an additional IT security standard applying to payment processors, the PCI DSS, which is comprehensive, rigorous and useful.

One of the things I ask myself, is the simplest level of solution just a Bank of England owned Open Banking bus, something which has had limited success. See also me on Open Banking on LinkedIn.

Strangely, just after reaching out for help in thinking about it, I find, Central bank digital currencies: a solution in search of a problem? issued by the House of Lords. It’s sums up how I feel although some of the ideology, I consider dangerous.

Lord Forsyth of Drumlean, Chair of the House of Lords Economic Affairs Committee, said:

“The introduction of a UK central bank digital currency would have far-reaching consequences for households, businesses, and the monetary system. We found the potential benefits of a digital pound, as set out by the Bank of England, to be overstated or achievable through less risky alternatives.
“We took evidence from a variety of witnesses and none of them were able to give us a compelling reason for why the UK needed a central bank digital currency. The concept seems to present a lot of risk for very little reward. We concluded that the idea was a solution in search of a problem.”

Lord Forsyth of Drumlean, Chair of the House of Lords Economic Affairs Committee

Other thoughts that occur, is this a step between regulation and nationalisation of deposit takers? To what extent is their view of money divorced from a common perception of it as a store of wealth and whether this role should rehabilitate [elements of] the labour theory of value.

Is this an attempt to re-architect UK money supply to make re-entering the EU more difficult?

The libertarian supporters of crypto-currencies hate this.

Dave Economics, Politics, Technology

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