If the Bank of England launched its own cryptocurrency, what would it mean for Bitcoin?
Cryptocurrencies today got a reputational shot in the arm from the Treasury today just days after the first blue chip flotation of a major crypto exchange burnished their credentials.
The government announced the launch of a taskforce bringing together the Treasury and the Bank of England to examine whether to introduce a so-called central bank digital currency (CBDC).
The taskforce is to be headed by Bank of England deputy governor Jon Cunliffe, and the Treasury’s Katharine Braddick.
What is a CBDC?
CBDCs are inspired by bitcoin but differ because they are electronic versions of a fiat currency such as the pound.
Basically, the central bank creates e-money tokens just as it creates paper money, allowing the public to use it as a store of value to buy and sell goods and services, or simply to hold onto it as a form of savings.
Central banks could enable people to hold money electronically with a universal central bank account and not have to rely on banks and clearing houses.
This would mean people and businesses could bypass middlemen like banks and settlement services, transferring ownership of the tokenised pounds instantly and seamlessly between each other.
China is already working on a CBDC system as it races towards a cashless society. Work on a digital euro is underway and US policymakers have also talked of a possible digital dollar.
Because the emoney tokens are all stored on one universal central bank database, the ownership of every one is digitally stored and known, meaning fraud, moneylaundering and tax avoidance would be far more difficult for citizens.
So what are the key differences with Bitcoin, then?
Unlike Bitcoin, the database of who owns what currency would probably be held centrally at the Bank of England, rather than, as with a cryptocurrency, on a distributed ledger or blockchain held on multiple computers with multiple people controlling them.
Also, of course, Bitcoin and other currencies are not based on a fiat currency – meaning a traditional currency such as the pound or the dollar.
Cryptocurrencies’ value is in the limited number in circulation – the rarity – and the amount of uses they can have. Traditional currencies are notionally based on the value of the economy behind them.
You said this review is good for cryptos. Why?
It’s a potentially controversial statement, but many people argue that anything making cryptos, or crypto-like currencies, look more legitimate and normalised is good for them.
That the Bank of England is considering launching one highlights how the technology – or aspects of it – cannot be all bad.
The review announced today comes just a few days after Coinbase, the most heavily regulated crypto exchange, launched blue chip shares on the Nasdaq exchange. This, too, lends lustre to the respectability of electronic money and crypto.
Why is that controversial?
Because plenty of crypto fans will accuse the Bank and the Treasury of doing just the opposite from lending cryptos respectability.
Rather, they say central banks are trying to compete cryptos out of the marketplace by using their monopoly strength and power over fiat currencies to see off the real new forms of currency.
One of main benefits to Bitcoin and other cryptos for investors is that they are nothing to do with any government or central bank.
That means they are potentially immune from political interference such as the massive issuance of new pounds, dollars and euros to support quantitative easing programmes through the Covid crisis.
This has led to fears of inflation and driven investors to Bitcoin, which is limited to the issue of 21 million coins.
What do the crypto chieftains say about the prospect of a pound CBDC?
For a flavour of that, a London fintec with a crypto called Glint provides a fine example. Its founder and CEO Jason Cozens said: “This is the clearest indication yet that the Bank of England is looking to control or, better yet, crush the rise of alternative currencies.”
He said CBDCs would be just as vulnerable to inflation, QE and public borrowing as fiat currencies are.
“Plus,” he added, “There is concern around the unprecedented level of data that governments and central banks will hold as well as to what extent they may implement this level of control over consumers.
“Big brother is no longer just watching you, it’s increasingly interfering with our finances.”
Banks, central governments and central banks would counter that they are merely trying to interfere with criminals who notoriously use cryptocurrencies to hide and trade their ill-gotten gains. After all, Bitcoin was the currency of choice on Silk Road, the underworld bazaar for drug dealers which was shut down by the FBI in 2013.