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Bursting the Britcoin bubble: why consumers won’t bother with a UK CBDC

Chancellor Rishi Sunak recently announced that Bank of England and Treasury officials would set up a new task force to review the potential benefits of a UK Central Bank Digital Currency (CBDC) – a so-called ‘Britcoin’.

The news came just days after cryptocurrency exchange platform Coinbase listed on the New York Stock Exchange in a $76bn IPO. Many viewed the listing as a long-awaited legitimisation of crypto, and the timing was not uncoincidental. Like other economic decision-makers, the UK government and Bank of England have closely followed the mainstreaming of Bitcoin, Etherium and other cryptos.

Some believe a Britcoin, which under current proposals would be tied to sterling, could solve several social, financial, monetary and security problems for policymakers. But the benefits for consumers – and why anyone would use a Britcoin in the real world – are still difficult to see. 

Why policy wonks just don’t get crypto 

The early cryptocurrencies like Bitcoin were founded with idealistic goals: to create an independent universal language of money that wasn’t reliant on institutions like banks or governments. Cryptocurrencies were also created to keep financial transactions private. CBDCs would be the antithesis of this – a state-backed digital currency would never be able to offer the same privacy guarantees as today’s cryptos and would be the exact opposite of the ideals of cryptocurrency’s founders.

Admittedly, only a fraction of cryptocurrency buyers today are idealists or privacy advocates. Mostly they’re investors, attracted by the extraordinary gains made by Bitcoin, Ethereum and others. Even those who accept cryptocurrency as payment often do so because of its potential to increase in value. But CBDCs will also fail to appeal to investors: a Britcoin tied to sterling would make for a very poor investment vehicle.   

There are also those who say CBDCs could make our existing payments infrastructure more resilient. Indeed, this was cited as one of the key potential benefits in a Bank of England discussion paper, published in March 2020, that preceded the new task force. But this claim is hard to justify – our existing payments network, built on the backbone of VISA, Mastercard, Faster Payments and CHAPS has been stress-tested over many years.

What’s more, the existing payments network is already extremely fast. It’s hard to imagine the government doing a better job than the market leaders, which exist almost solely for one purpose. Why would a consumer pull out their Bank of England-backed card, as opposed to one they’ve trusted for years? And as for the argument that CBDCs are designed to serve the underbanked – grandparents reluctant to give up cash are hardly likely to switch to a state-backed Bitcoin, and those who live in rural areas far from a bank branch would be better off with a Starling or Monzo account.

How CBDCs could help the state

While figuring out the benefits for consumers can be head-scratching, it’s not hard to see how a Britcoin would be good for central banks. Theoretically, CBDCs could provide neat solutions to several tough challenges for policymakers.

The first challenge is the UK’s reliance on VISA and Mastercard, which are both American companies. The two market leaders manage more than 90% of payments in the UK (Mastercard owns Vocalink which also runs Faster Payments and BACS), and some see risk in a foreign government having control over critical national payments infrastructure.

Already mindful of this, the EU is in the process of setting up the European Payments Initiative (EPI), an alternative interbank network for the eurozone. No doubt the development of a pan-European payments system is on the minds of UK decision-makers. A CBDC, if widely adopted, could provide an alternative network for transactions – but under full control of the state.  

Others have raised concerns that the UK, and the West in general, risks falling further behind China. Some believe CBDCs could one day become a critical technology, and the Chinese government is already running pilots of a digital Yuan. Western governments are apprehensive about China’s world-beating adoption of digital payments platforms like Alipay and are keen to avoid a similar situation with CBDCs.    

It’s also sensible to be concerned about the risk of a future where private cryptocurrencies dominate payments. While few people use Bitcoin, Ethereum or Dogecoin to buy their lunch today, gradual stabilising of their value could change this – and without control of currency, central banks lose the powerful levers of monetary policy and taxation which underpin their ability to right the economic ship in a crisis.

Yet for all these valid central bank concerns, one fundamental problem remains: why would consumers use a CBDC in the first place? Even comparisons with China are misleading given its completely different set of economic and social norms.

CBDCs – no silver bullet

The chancellor’s Britcoin task force may yet put forward a convincing case for the consumer benefits of CBDCs. The proposals are in their infancy, and policymakers may find some clever way of boosting their appeal. But because many of these issues are fundamental to the nature of cryptocurrencies and to the people who use them, decision-makers will likely find it difficult or nigh-on impossible to overcome them – no matter how valid their concerns for national security and economic stability.

Crypto is ‘cool’ right now – there’s no doubt about that. But more importantly, in any scenario in which CBDCs were introduced and used as legal or financial instruments of the state, it would be vital to properly scrutinise their impact on existing legislation and consumer rights. The government wants to stay on top of trends, and it was right to start the conversation sooner rather than later.  

But before it invests masses of time and taxpayer money in a Britcoin experiment, we need a convincing answer to perhaps the simplest question of all: why use it?

 

 

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Comments: (1)

Adrian Pollard
Adrian Pollard - ISTANEX - Turkey 21 May, 2021, 05:47Be the first to give this comment the thumbs up 0 likes

Lot of great points here and I think you summerized many of the same conerns: privacy and incentives.

I also think native crypto are already on a roll and will be very hard to compete with now. I do think some 'force' is going to be required to get peope to use CBDCs.

The other way gain transaction is to give out generous free money, stimuls or UBI (insert creative name) through CBDCs. That is what China did, just hand out free money--who is going to say no?

Todd Latham

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