21 October 2021

Central banks to issue digital currencies

Chancellor Rishi Sunak and Governor of the Bank of England Andrew Bailey sponsored a paper that highlights the intention of central banks to issue digital currencies. Below, LGB CEO Andrew Boyle provided his remarks:


Anyone interested in the future of the financial and fiscal systems should be paying close attention to the BoE’s consideration of Central Bank Digital Currencies (CBDCs).  On 14th October the UK published a Public Policy Principles paper on the topic in the context of its current presidency of the G7.  The paper is very cautious in tone because the BoE is well aware of both the merits of CBDCs for central banks and the potential disadvantages to the private sector.  Monopoly CBDCs could eliminate leakage in the financial system in terms of the black economy and underpayment of tax.  The shadow economy (unregistered economic transactions) is estimated to be equal to at least 10% of UK GDP.  CBDCs could improve data collection, the implementation of monetary policy and the prevention of financial crime.  On the other hand, if a monopoly is established every transaction completed in a financial system would be known with obvious implications and risks for privacy.  The paper also mentions the opportunity for the government to provide facilities to the unbanked, but it is unlikely that the retail banking system as a whole would survive the introduction of a CBDC. The government could become the provider of bank accounts, which would bring the opportunity to retire the Financial Services Compensation Scheme.  CBDCs would increase the risks of operational failure or sabotage, but at least in this area the paper offers the carrot that building the infrastructure for CBDCs would be an opportunity for entrepreneurial private sector firms.  No doubt many will seize it.


The direction of travel towards CBDCs being introduced and developing a monopoly is very clear, particularly when one considers the measures implemented in the last few years to move us away from cash and the FCA’s ongoing efforts to stifle crypto currencies as unregulated investments rather than recognise them as alternative currencies. Soon the case will be made that unlike Bitcoin, CBDCs involve no environmentally harmful mining.  Is this trend a good thing?  Ultimately your view will reflect the degree to which you believe in the goodness or otherwise of government.


Read the full paper here.

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