17 February 2022

The problem with BritCoin

By Charlie Morris

The crypto sector is fast-growing and sits at the forefront of computing, mathematics and fintech. Unfortunately, policymakers have so far tended to obstruct the sector rather than engage with it. That strategy has failed; innovation in the sector has meant that every obstacle has been overcome, and crypto and digital cash are flourishing as a result.

But we would be doing even better if the Government co-operated with the sector instead of getting in its way with a regulatory framework which holds back an industry where the UK should be a natural leader.

Yet rather than enabling our digital innovators to thrive, some seem to think the way for Britain to leapfrog into the lead would be to launch a Central Bank Digital Currency (CBDC), aka ‘Britcoin’. That might be a suitable choice for a country like China, but it isn’t right for Britain.

Like most things in finance, it is the private sector that is best placed to make the most of the opportunities offered by digital cash. Britain would be better off providing a framework where private digital currencies (PDCs) can flourish, rather than launching its own CBDC, which would at best be unnecessary, and at worse cause major problems for the UK economy, while imperilling our civil liberties.

We should certainly not be listening to the siren call of central bankers demanding the creation of a CBDC as either an addition, or even an alternative, to the crypto sector.

Take the chair of the Federal Reserve, Jerome Powell, who has said that ‘you wouldn’t need stablecoins; you wouldn’t need cryptocurrencies if you had a digital US currency’. His view is typical of central bank insiders who, though great economists, are not experts in fintech or crypto. Contrary to what Powell might think, a US dollar CBDC or PDC would serve little purpose, as its primary role would be to serve the crypto and fintech industries.

The case against BritCoin

The main argument in favour of CBDCs is that access to central banks would be opened to businesses and consumers, rather than being the preserve of commercial banks. On the face of it, having the Bank of England standing behind your digital cash is more attractive than a commercial bank such as Northern Rock, but that is where the benefits start and finish.

On the other side of the ledger are extensive political, ethical and economic repercussions that are worryingly under-discussed. A CBDC would not just be a way of facilitating payment, but an instrument of control. Were it to fall into the wrong hands in the future, the implications could be very grave indeed.

At the heart of these concerns is privacy. The digital world already leaves a trail of rich data in its wake, with valuable personal information tracked like never before. Tracing funds via traditional bank payments is time-consuming, but with digital money it is instantaneous.

Who should have access to this highly sensitive information? That is the key question facing not just this government, but its successors. However well-intentioned this administration might be, once this technology is created, reversing it will be nigh-on impossible – that means that it will become a lever for any Government of any political position in the future.

On a purely practical level, the track record of government-led technology projects is not a good one, and progress would be much faster in the private sector.

Another major downside is the systemic threat posed by a ‘BritCoin’ failure. If a private digital currency failed – either due to technology or solvency – the Government can step in to prevent systemic risk. However, if a CBDC failed, the central bank’s reputation would never recover. The upshot of that is that a CBDC would be ‘too big to fail’, with all the negative consequences that entails.

The case for PDCs

Far better, then, to leave digital currencies to the private sector, where innovation and competition provides them with an advantage over any centrally mandated scheme. Data collection and access would be subject to regulation, and companies would be responsible for ‘Know Your Customer’ (KYC) and anti-money laundering (AML) procedures, as they are today.

If there is a disadvantage to PDCs compared to a central bank currency, it’s credit risk. An overeager treasurer may invest in securities that break the buck, which would lead to capital flight. To offset this risk, a central bank might offer guarantees to PDCs with conditions attached, or offer consumer protection, as is currently the case with bank deposits.

By all other measures, PDCs have clear advantages over CBDCs. With good regulation and a clear legal framework, there’s every reason the City of London can dominate a sector which will thrive in the 21st century, in the same way it came to dominate the Eurodollar market in the 20th century.

Digital Britain

Above all, policymakers need to understand the relationship between digital cash and crypto. It’s become fashionable to say that one is in favour of blockchain, but sceptical about crypto. That is a distinction without a difference: the two cannot be separated and no useful applications for blockchain exist outside of crypto.

The idea that crypto is simply a modern version of the Dutch Tulip Mania which will eventually recede from view is badly mistaken. Every time the sector fails, it bounces back, for one simple reason – the transfer of value between computers is not a fad, it is the future of money. There are endless possibilities in how financial services can be improved and expanded by embracing crypto. Digital ownership is the future of financial markets, not just crypto, but shares, bonds and other assets which can be settled instantly with secure custody.

We would do well to remember that Britain’s economic success has come from embracing the free market and only intervening where strictly necessary.  A state-backed ‘Britcoin’ would be at best pointless and at worst immensely damaging. The crypto industry, alongside digital cash will only thrive in the private sector, and that’s an opportunity we must grab with both hands.

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Charlie Morris is Chief Investment Officer at ByteTree and former Head of Absolute Return at HSBC.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.