Central Banking Digital Currency

Central Bank Digital Currency (CBDC’s) 

 

What do you understand about the digital pound and how will it affect your business? 

 

A digital currency is a form of electronic money, which will be issued by the Bank of England and represents a whole new concept of money and banking. Unlike cash, digital money cannot be withdrawn and tucked away for safe keeping, as it is not a physical entity. The Bank of England and The Treasury claim that digital currency is to be used alongside cash, so why are we seeing measures to reduce the use of cash, with some businesses choosing to only accept card transactions? 

 

Cash has long been regarded as one of the oldest forms of ‘public good,’ just like fresh air and drinking water, and is a tangible product that people are familiar and secure with. A public good is something that is available to all members of society, and as such, shouldn’t they be cherished and preserved? 

Just last week a member of our team went into a well-known supermarket to be told that they were unable to take card payments due to a system crash. This also rendered their cash machine out of service, meaning only those who came armed with cash could get what they needed. Whilst we all love the efficiency and ease of digital payments when it is working, what safeguards will there be for scenarios like this if we lose cash in its entirety? 

 

99.9% of business in the UK are classed as small and medium sized enterprises, and as such you want as much profit to be fed back into your company. Are you a business that encourages card transactions and are considering going cashless? If so, how do you offset the service charges incurred for taking card payments? 

As an example, one of the major payment service providers, charge 1.5% + 20p per transaction on standard UK cards. So, to put that into context 

 

£1 card payment equates to a 21p or a 27.5% fee. 

£10 card payment equates to a 35p or 3.5% fee. 

 

Since there is no longer a cap on the amount that banks can charge businesses for processing card payments, could these figures increase exponentially putting further demands on your business? Or could the introduction of CBDC’s negate charging altogether due to the possible demise of private sector involvement? 

 

There are certainly apparent advantages to CBDC’s, such as ease and efficiency of use and cheaper and faster transactions, but do these come at a cost and do the benefits outweigh the risks? 

It is widely acknowledged there are concerns about the risk to freedoms and civil liberties, as the government will have control over all monetary transactions and may even be able to pick and choose the level of access, you and your business have to its finances. 

The freezing of bank accounts is by no means a new tool available to the banking institutions, but does the introduction of CBDC’s make this access much easier because of the direct link between the government and financial institutions? Could this lead to the exclusion of entire groups of people at the touch of a button based on Government approval? 

 

Privacy may also be of concern to many, with Central banks having the means to monitor every digital transaction made and having backdoor access into your account. The Bank of England and the Treasury accept that a digital pound “would not be anonymous because the ability to identify and verify users is needed to prevent financial crime.” So, one could argue that, if you are acting within the law, this measure should be of no consequence to you or your business? 

 

You could take this a step further…. Due to the programming capacity of CBDC’s, is it not beyond the realms of possibility to imagine prohibitions and restrictions being placed on goods and services. An example might be suspending alcohol purchase for those who are known to have alcohol dependency or have an alcohol related criminal record. How about receiving a one-off cash gift of £500 from a family member to help with paying the rent, but you want to spend £100 of this on a new coat? Could you be prevented from doing so because the £500 has been tokenized as “rent” and the full allocated amount, therefore, must only be used for that purpose? Expiration dates have already been trialled in China, whereby money can be programmed so that if you do not spend the amount in your CBDC account by a certain date, it simply expires. 

 

These are scary scenarios, but how about we reverse the way we look at programming. What if your company could be prevented from trading with another company or individuals, who are high risk, have an outstanding debt or are subject to criminal proceedings? (This could be similar to the existing UK Sanctions Regime perhaps). Wouldn’t this be of huge benefit to your business, knowing that the risk of unpaid invoices and unethical practices have been significantly reduced? Programmable money may also have the potential to support the creation of new innovative business models and bring much needed transparency and auditability to the financial world. 

 

Either way, CBDC’s are still likely to require the use of existing payment systems, such as Google Pay, Apple Pay and Venmo, which will need to integrate into central bank deposits to allow users to receive and send digital currency. As personal and private data is to be stored in one central location there is a much greater risk for data breaches, cyber-attacks and hacking and users need to be confident that all data storage/sharing is robust and secure for them to start building trust in this new digital era. 

 

With most countries exploring the use of CBDC’s and the UK launching its pilot programme in 2025, we should be encouraged to do our own research and explore all the options. Whatever conclusion you may draw, the inevitability of CBDC’s is just around the corner.