Currencies

Central Banks Dabbling in Crypto Smacks of Mission Creep


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Should the state be in the payments business? It’s a simple question but that is in essence what a central bank digital currency would amount to. A digital pound, dollar, euro or renminbi is not some token with illusory investment upside that is implied by monikers such as “Britcoin.” CBDCs are more akin to stolid stablecoins rather than currencies. Unfortunately, their potential to erode free enterprise is all too real. Controlling how, what and when money is transferred is not a place government bodies should be competing, with a massive advantage, against the rest of the monetary system.

The Bank of England recently released an 80-page consultation, followed by a speech on the digital pound by Deputy Governor Jon Cunliffe. The research has already cost tens of millions of pounds, which will mushroom, but there is undeniable logic in keeping in sync with changing technology. A decision on whether to proceed in earnest will be made by 2025, for expected completion by the end of the decade.

The BOE may be in the vanguard but the European Central Bank will release its thoughts in October, and the Federal Reserve is running at least two projects. Trials at the People’s Bank of China are already well advanced, though with limited success. 

A CBDC seems like something we should welcome rather than leaving either Big Tech or Big Finance to dominate the crypto field, with the innocent-sounding benefit of cracking down on crime and tax evasion in the industry. Only institutions approved by central banks will get to participate in CBDCs. But giving government bodies access to personal data is troublesome. The truckers’ dispute in Canada shows how quickly governments can slide into people’s bank accounts to counteract behavior they don’t approve of. The prospect of central banks being able to impose negative interest rates and actively reduce people’s savings is truly scary.

There’s another issue with the shift to digital money. Over the past decade, cash transactions in the UK have fallen to barely 15% from more than half. In theory, a CBDC could be operated without a bank account, but that’s pointless if there are no retail outlets that will take cash. There must be a lesson in that both San Francisco and New York have moved to ban cashless stores — because that’s where the insidious rot begins.

Some 4% of the UK population doesn’t have a bank account, with a similar proportion (probably overlapping) lacking internet access. Some 16% don’t possess a smartphone, which basically means they don’t want one and never will. These citizens risk being completely cut out not just of the financial system but society itself. There may be a case for facilitating digital transactions between financial institutions and companies, but creating retail digital wallets at central banks would be tantamount to government agencies directly stepping into e-commerce. 

It will be no walk in the park creating a digital stablecoin that avoids the myriad of pitfalls that have befallen so many crypto tokens, as former BOE adviser Huw van Steenis outlined in a thoughtful Financial Times article. He points out five major hurdles, along with the proviso that we meddle with the structure of finance at our peril. Creating what he calls a “Goldilocks CBDC” — with not too much in circulation to undermine the existing system but not too little to be irrelevant — presumes a level of administrative skill that has not been much in evidence.

Central bank digital experiments so far have foundered on lack of uptake, but the bigger risk is that they suddenly suck all the liquidity out of the monetary system in a crisis. Van Steenis recommends sticking to the wholesale markets, a sentiment I thoroughly share, and that any new system needs to be properly battle-tested at scale. It seems uncharitable to bring up the A$250 million ($170 million) writedown from the Australian Stock Exchange’s seven-year failed experiment with a blockchain settlement system — but it highlights the challenge. Exploring faster, more secure and better payment systems can be achieved in time without sticking a wholly new centrally controlled spanner in the works.

Digital currencies put central banks on a slippery slope towards unjustifiable infringement of civil liberties and encroachment into the marketplace. For once, both big commercial banks and startups have aligned interest here to resist the regulatory overreach. The disruption to the banking system is potentially vast, if retail money suddenly flooded into a central bank depository, when the next unseen crisis surely comes. Regardless, be afraid of the consequences of choking off competition in the financial system, let alone stifling fintech entrants. 

The House of Lords Economic Affairs Committee described CBDCs as “a solution without a problem.” To allow central bank tentacles into the mainstream banking system risks suffocating it. Keep up with the technology by all means, but central banks should regulate, not participate. 

More From Bloomberg Opinion:

• Matt Levine’s Money Stuff: The SEC Cracks Down on Crypto

• Crypto Is Worth Fixing. Regulators Must Get Moving: Bill Dudley

• Central Banks Face Their Moment of Truth on Crypto: Lionel Laurent & Marcus Ashworth

–With assistance from Elaine He.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was chief markets strategist for Haitong Securities in London.

More stories like this are available on bloomberg.com/opinion



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