UK hesitates on digital currency as EU moves forward

As crunch time beckons for a decision on digital cash, the EU is plowing ahead, while the UK appears to be having second thoughts.

An exploratory phase into central bank digital currencies is nearing a conclusion, with policymakers all over the world due to decide whether it is worth introducing an electronic version of their currencies.

Although no major economy has committed to a central bank digital currency (CBDC), the EU appears likely to do so relatively soon, whereas the UK is still tentative.

On Monday evening, policymakers on both sides of the Channel gave major updates — coincidentally — on their respective digital cash projects.

In Brussels, finance ministers in the informal Eurogroup meeting, which represents countries that use the euro — now 20 after Croatia joined at the start of this year — set out their latest thinking on the digital euro project. Discussions centered around privacy, as ministers and officials seek to strike a balance between allowing some anonymity for smaller transactions, while preventing a digital euro from becoming a tool for money laundering.

The European Central Bank will present its findings on a potential digital coin in the autumn, and the European Commission would make any legal proposals next year.

In the UK, officials appear to have gone back to the drawing board. Speaking in front of a parliamentary committee yesterday, Bank of England Governor Andrew Bailey said he wasn’t convinced of the use case.

“Before we get carried away with the technology and the idea, and I think some of the problems that we might be trying to solve, I'm not necessarily convinced that the retail payment systems need this sort of upgrade at the moment. We’re not trying to replace cash. If the public wants banknotes, the public gets banknotes. If they want digital currency? Well, we'll consider it.”

On the topic of a wholesale CBDC, which would be a settlement of interbank transfers and wholesale transactions in central bank funds, Bailey questioned whether it would act in a different way to the BOE’s real-time gross settlement (RTGS) system, especially as that accounting operation is being upgraded currently to improve payments and settlements between financial institutions.

“I’m not saying that as a Luddite. I sometimes get payments experts come to me and say: ‘It's great to see distributed ledgers, but an RTGS system is faster.’ It’s an open question whether wholesale central bank digital currency is needed. Because we’ve got a wholesale central bank money settlement system that we’re doing a major upgrade on,” Bailey said.

Danny Kruger, the lawmaker in the Treasury Committee asking Bailey the questions on CBDC, said he was “pleased” to hear that Bailey is not “absolutely giddy with excitement at the prospect of CBDC because I think there’s a bit too irrational exuberance around it.”

Skepticism

But even on a retail CBDC, Bailey seemed similarly skeptical. A retail digital coin would be available to the public and would act in much the same way as money viewed in an online bank account currently, but it would be a direct claim on the central bank, while funds in an online account are commercial bank money.

The positives and negatives of a retail CBDC have been discussed at length. On the one hand, it gives citizens continued access to central bank cash, which is generally viewed as infinitely safe, even when physical cash is harder to come by owing to reduced cash machines, and fewer merchants accept physical cash. But on the other hand, there are concerns it could sap deposits from commercial banks, particularly in times of stress, as individuals rush to the safe harbor of central bank cash, which would be even easier to do with one click of a button on a smartphone.

Bailey nodded to the risk of bank runs in yesterday’s committee hearing: “The only way the public can get central bank money is banknotes. And there's probably a limit on the number of banknotes any of us want to have, for obvious reasons. So the question that about how you would imagine limiting the boundary between central bank money and commercial bank money in a digital world is an important one, both in normal times and in stress times, because it will make bank runs easier.”

Enabling bank runs is not something the BOE wants to do, he added: “Commercial bank money is where there is lending into the economy. We don't lend into the economy, that's not our job. And we wouldn't want that to become our job — we’re not going to get into the business of being a retail bank. That's clear. But we have to think about the economic stuff pretty hard, because it changes potentially changes the boundary,” he said.

It’s unclear whether Bailey’s views represent those of the government. Just last week, the minister responsible for financial services told the same committee that the BOE would publish a consultation setting out what a CBDC might look like.

But a bit of healthy skepticism could be no bad thing. As investigations continue across the globe, the main question remains whether there is a use case for a CBDC — in other words, would anyone actually bother using one when it appears much the same as what exists already.

There’s no point in central banks wasting money putting digital cash in place if the public doesn’t know what to do with it. But, after the latest developments, it might not be a surprise if the EU forges ahead while the UK waivers.