Britcoin: Why a UK CBDC should be treated with caution
by Jai Bifulco, Chief Commercial Officer at Kinesis Money
The hype around a UK CBDC stepped up a notch this week. Although no firm decision has been taken, the Treasury announced on Tuesday that it accepts a digital pound is likely to be needed in future and that the Bank of England will proceed with further research and development of ‘Britcoin’.
The reaction has been overwhelmingly supportive, both across the crypto community and traditional finance. But let’s not be too hasty. A CBDC is a potentially powerful tool and deserves greater thought into what the repercussions of such a system could be.
It’s easy to see where the enthusiasm stems from. CBDCs have become an increasingly prominent part of the digital currency conversation and exploded onto the agenda when China launched a pilot project for its digital Yaun in October 2020. The fear of being left behind has since sparked an international race and now 114 countries are developing a CBDCs to varying degrees.
Make no mistake, CBDCs have vast potential for good. The traceable and transparent nature of blockchain transactions would provide the Treasury with access to a live central database on spending, debt, savings, tax and investments, which would allow it to expertly tailor monetary policy.
In theory, they could provide governments with insights based on real-time economic data, which could influence new fiscal policies and tax reforms that can be implemented quickly and have a faster impact than the sluggish policies of today. It would allow for an extremely efficient and effective way of managing an economy, making sure money was going to where it is needed at the time it is needed.
However, in China’s example lays a note of caution. First, for the crypto community, who should be mindful of the collision-bound course CBDCs and cryptocurrencies are on. While the Treasury’s announcement sounds like a positive endorsement of digital assets and blockchain technology, CBDCs are in fact the ideological opposite of cryptocurrencies. They are issued directly by central banks and are completely centralised, which is in direct contrast to the founding decentralised nature of cryptocurrencies.
The centralised nature of CBDCs also comes with more sinister complications. It awards the government with access to previously untapped data, including that of individuals, and unparalleled control over the population’s finances. As it does today, the government will inevitably retain the ability to freeze assets and shut down accounts when it deems necessary. But armed with such knowledge and direct control, a CBDC could be used to penalise – financially or otherwise – users based on certain behaviour.
This is what we are beginning to see unfold in China, which has an increasingly sophisticated social credit system propped up by technology like its Digital Yuan. Of course, countries like the UK are ideologically different to China, but we must take note of the potential for such a tool. After all, these are powers that have the potential to be misused in the wrong hands.
China can do as it pleases, but in the UK, we must have a more cautious attitude to supplying the Government with such enormous power because there are problems with CBDCs, even in theory.
Wherever the Treasury’s research takes them, Britcoin must have concrete, foundational principles around user privacy built into its design. Better yet, it should be independent and be driven by bringing economic freedoms to its users as well as providing the Government with useful insights to better manage the economy.
However, on top of precautions around privacy and control, we should also think carefully about the infrastructure. While CBDCs have potential as a digital tool, they are still vulnerable to inflation, which is without a doubt the most significant problem with the UK’s pound today.
So, if the government wants to create a new national digital currency, it could be based on or backed solely by stable and inflation-resistant assets such as precious metals – effectively creating a national stablecoin with intrinsic value. This would be first of its kind that would reintegrate gold back into the national economy, like the Gold Standard but for the digital age.
People across the UK would be able to opt out of the flaws and inefficiencies of traditional monetary systems – and opt into an a-political digital asset ecosystem that is stable and solves existing monetary problems with the assurance of financial sovereignty and without the risk of coercion.