Why Britcoin CBDC Will Take Many Years To Launch
Published April 29, 2021; Republished By SSE September 4, 2022
If you're looking for follow-up stories on this week's news that the Treasury and the Bank of England are exploring the possibility of launching the UK's own CBDC, I have broken down the major advantages and the significant challenges the taskforce will have to look into before britcoin becomes a reality.
I am happy to discuss the details of this analysis keen to provide further comment to media as new developments in this story are revealed.
The Bank of England and HM Treasury’s announcement to invoke a CBDC taskforce is welcome news. A number of countries are actively pursuing this option already because CBDCs make perfect sense in terms of speed and accountability of transactions as we move to a completely digital economy.
Such a move has the potential to provide much greater functionality for retail transactions than cash, particularly in improving cross-border payment efficiency. CBDCs have the flexibility to serve a different purpose to traditional forms of money supply and could lead to the phasing out of traditional cash altogether. The permissioned blockchain technology also means they are possible to track and so will be of assistance to countries determined to tackle money laundering and tax evasion.
The big question for every country that takes up the CBDC option is how are they going to collateralise this new form of money? If the central banks issue new securities, are they going to sell these securities on digital platforms and get digital money back, thereby establishing a proper digital trail on the blockchain that can be audited? If normal money market operations or long-term bond sales are on a completely different system, ensuring collateralisation of digital britcoin on tap will become an impossible auditing problem. So, before the Bank of England introduce a CBDC, they need to bring the gilt market into a digital space.
I have read reports that the Bank of England could be issuing e-pounds within two years. I don’t consider this to be a realistic timeframe. I do not believe a Bank of England CBDC could happen that quickly because of the need for digitisation of all money market operations. The debt financing systems need to go digital and that will take time. If you look at the private banks like JP Morgan, they have spent the last five years developing the necessary private blockchain consortia to underpin all this digitisation, so it is not a simple process.
CBDCs are a special form of stable coin, for example britcoin would be tied 1:1 to the value of GBP. However, another notorious stable coin called tether has issued around $45 billion worth of coins, amid lawsuits claiming the USD collateral is insufficient, and being closely associated with the recent bubble in bitcoin and other crypto assets. Now, if tether is actually collateralised by digital assets rather than real financial assets, the whole situation now could be a precarious house of cards which could fall at any time. Similar deception employed by a nation state could have even more devastating consequences, it all depends on proper rules for collateralisation.
My primary concern is that CBDCs could be misused without sufficient transparency and global oversight, particularly in light of the drastic impact Covid has had on many nations’ financial situation. The pandemic has forced most central banks to scale up their debt, many with longer-term bond offerings than in the past. If CBDCs existed now, I suspect some countries might be tempted to print digital currencies without sufficient collateral or debt instruments to back this up.
What we need is sufficient global oversight and agreement to ensure that CBDCs don’t become a means for countries to manipulate their national debt. I would like to see the Basel Committee take a proactive lead on this in the same way it has worked to ensure international agreement over the capitalisation of banks. We need to see the Basel Committee make strong and clear recommendations to all main central banks on the correct procedures for proper collateralisation management of CBDCs.