The good, the bad and the unknown of “Britcoin”

Last week on the blog, we asked whether the UK was set to become the world’s next crypto haven. This week, more news surfaced in the UK-digital asset space as the Bank of England and Treasury published a paper on the potential launch of “Britcoin,” a digital pound. 

But what is Britcoin? And what does it mean for both crypto and Britain? 

The basics 

The full paper from the BoE and Treasury is worth a read. It’s titled: The digital pound: a new form of money for households and businesses? Note the question mark. This is exploratory, and the topics discussed are mere possibilities at this stage, but some of the basics are instructive. 

It’s important to note that the BoE is talking here about a retail central bank digital currency (CBDC). Separately the BoE is working on a wholesale CBDC for high value transactions between banks, but this paper focuses on a digital pound for consumers and businesses to use in everyday life, i.e. Britcoin. 

To support Britcoin, the BoE plans to run the “core ledger” and the private sector provides digital wallets. The BoE also set out how the value of a Britcoin would equal the cash pound. £10 of digital will always be exchangeable for £10 of cash and the exchange rate would always be 1:1. This mechanism should calm those who declare all digital assets to be extremely volatile. 

Privacy? 

The most obvious first question surrounding a “digital currency” with an immutable record of every transaction is privacy. As private companies provide the wallets, they would obviously hold a client’s identifying data, just as our banks hold data about each of us today. 

But, critically, the paper states that when each transaction is written into the ledger, (run by the BoE),  the client-identifying data would be anonymised. Thus, in theory, the Government wouldn’t know who is doing what – and this should be a counter for those who believe the age of digital currencies leaves us open to more Orwell-style surveillance methods. 

An exemption to the above is for criminal investigation, which is again no different to how the police can force trad-fi to reveal information about a client’s financial transactions. So far, so solid, with crypto-sceptics, hopefully, reassured by an approach that maps the real world today. 

Why?

It seems the BoE has two main motivations for this project.

First, FOMO. 

Second, an existential worry about the future of money. To illustrate the point, the paper lays out a distinction between “public” and “private” money. Currently, the only “public” money out there is physical cash (issued by the central bank). These days, most of the “money” we use, such as deposits in commercial banks (money sent via bank transfer to family, spent via credit cards etc) is “private”, issued and managed entirely by private enterprises (e.g. Barclays, Apple, VISA, Revolut). 

With the rise of digital payments, the balance of the economy using public money is diminishing. The BoE fears its remaining share could further drop to such an extent that the bank loses its ability to provide stability if/when the payments landscape becomes even more fragmented our private, walled ecosystems. 

Further, the BoE is aware of financial innovations utilising smart contracts (“DeFi”) and privately issued stablecoins. In the absence of a decision on whether those innovations are actually beneficial to society, the BoE is stating that it would at least prefer people to use the “official” digital pound, rather than a private alternative. Additionally, if digital currency usage surges internationally, a digital pound ensures the pound remains relevant from the perspective of international trade.

Questions and answers 

Of course, privacy is always a concern when tech meets personal finances. Can consumers count on the privacy mechanisms? Do we trust our Government to adhere to the principle of anonymity? With trust in Government at all-time lows, the answer is, likely, no. History shows that the UK is notoriously privacy-focused, as the repealing of the move towards a national ID card showed.

Programmability raises serious questions, too. Who would design the CBDC? Who embeds the functionality that manages the BoE’s control? Can the government control how, where, and when the currency is spent? Can certain wallets/address be blocked? lThe answers are not clear. The always-amusing FT comments show scepticism about the benefits and lack of trust in the Government to deliver.

There are also concerns from a trad-fi perspective. Take a scenario where all citizens withdraw deposits and convert them into digital pounds. This would essentially cause a run on commercial banks. A limit has been proposed – but the fact there needs to be a limit proves the concern. Commercial banks also lend their deposits. If my savings aren’t at the bank because they’re in Britcoin in a digital wallet, this could play out in a massive monetary contraction. 

Thus, I’d expect lobbying by banks, credit card companies, payments providers etc. to ensure their concerns are addressed, if not to ensure that this project never gets beyond ideation. 

What’s the point? 

It’s important to ask the biggest question – what’s the point? For the average UK citizen (age thirty-something, smartphone user, has a high street bank account), what problem does this solve? Digital payments, instant bank to bank transfers, and mobile wallets already exist today. 

I can’t help but feeling a bit of wariness toward mandated CBDCs given the slippery slope of authoritarianism and a loss of civil liberties. 

However, perhaps us doubters needn’t worry. The example of China’s launch of an e-yuan in 2020, shows that central banks can’t guarantee adoption. In an economy already driven by extremely high smartphone penetration and digital payments (where everything is done by WeChat), the feeling is one of apathy. 3 years later, and China is giving away millions in e-yuan to try and get people to use it. Maybe the launch of Britcoin would meet the same anticlimactic fate?