Digital Money

Be Careful What You Wish For

Are digital currencies an Orwellian nightmare in the making or a valuable solution for continued global trade? In the company of a technical expert, we examine some of the polarising perspectives currently in circulation.

Some ideas just seem to take on a life of their own. CBDCs, for example, have been propelled into the limelight in recent years. Central banks that are now exploring the viability of issuing a CBDC together represent around 98% of global GDP, and include every G20 country. And yet just three have fully launched a CBDC to date: the Bahamas, Jamaica, and Nigeria.

While there is no denying a CBDC represents a fundamental change in how money is used, and robust processes - and thus time - are essential to bring them to life, the current radio silence from most quarters leaves room for some interesting ideas about them to float to the surface.

In January 2024, the Bank of England (BoE) and HM Treasury (HMT) published its response to a consultation on the digital pound, alongside its technology working paper. The response states that “no decision has yet been made either way on adoption”.

Hell in a handcart

Many who engaged with the BoE’s CBDC consultation paper expressed concerns about the implications of a digital pound for access to cash, users’ privacy, and control of their money. Some of the thinking behind these concerns, as expressed on LinkedIn, could be viewed as extreme.

The conspiracy theory cat was really let out of the bag when one individual was driven to foretell a dystopian future, where CBDCs were “the final step in the 1984 nightmare”. The same doom-laden literary viewpoint was harboured by another, imploring all-comers to understand that “the Orwellian implications of CBDCs must not be underestimated”.

The rationalisation process behind a dystopian outcome was “the fear that it will eventually be used as a soft weapon to control the masses”. A chilling future scenario was thus proffered, in which payment for a bar of chocolate at a supermarket checkout is denied “because within the state-controlled pool of big data, including centralised health information, some AI deems you to be statistically overweight, and therefore has triggered a block on the payment of such items as positive action in your best health interest”.

Project fear was then ramped up with the accompanying suggestion that citizens could find their ability to pay for anything “suddenly severely restricted to minimal essentials, until you have completed an online ‘re-education course’ because of an alternative-view Tweet you ‘liked’”.

A sympathiser of the Orwellian camp contributed to this dire prophecy, imploring all to understand this: “The freedoms you surrender today are the freedoms your grandchildren will never know existed.” They signed off with the simple message: “Say no to the digital pound.”

A considered view

However, for Luke Sully, Founder and CEO, Haycen, a digital currency payment and settlement solution provider for global trade, “if the focus of CBDCs is to erode privacy rights and the ability of an individual to make certain payments, I think it completely misses the point”. There are, he asserts, “far easier ways to do that if that is what is being sought. But I really don’t believe this is what’s driving the pursuit of CBDCs”.

First, Sully argues that digital money privacy and security is already “baked into the design thinking”, precisely because the central banks cannot afford to have a payment system tied to manipulating retail behaviours. But he is also convinced of the need for digital money to evolve.

“I think at a strategic level, while the UK has a very mature payments system, absolutely it should be developing new formats for sterling, and building the new systems that can support that,” he states. “It’s important that the UK occupies the same strategic space as its global trading competitors and allies, because they are all building these systems with the intent to move liquidity in new ways, including cross-border.”

But then the real focus for digital money development, he suggests, has to be on improving the chances of pound sterling becoming a more compelling trading currency globally. “Achieving this relies on new digital formats of pound sterling being available for global commerce and trade partners to interact, and in creating a distribution network for pounds sterling that moves faster than it ordinarily would.”

The motivation for pound sterling to gain in prominence, Sully believes, is informed in part by current views of the so-called third era of globalisation, which arguably began in 1989. This saw the deeper intertwining of nations and commercial relationships. Globalisation continues today, but with an increasingly marked pushback, with certain regions seeking decoupling. This, he contends, is creating “the Balkanisation of financial infrastructures and payment systems”.

With some territories now appearing to be “seeking more sovereignty over their own financial systems”, Sully argues that a CBDC, alongside DLT, is a tool that is both “catalyst and enabler” of that quest. In the next few years, he believes that this shift will see certain countries and regions developing their own standards and financial systems for moving and settling money. The rise of these new systems means corporate treasurers “will have to become very nimble to ensure that trade can continue throughout these territories”.

Power to the people

The shift towards wider acceptance of a digital pound will, like the rise of stablecoin, be driven by bottom-up demand; uptake will not be dictated by authorities or banks, says Sully. One reason why stablecoin usage is gathering momentum, he notes, is because these coins are typically pegged to a fiat currency on a one-to-one collateralised basis. A digital pound underpinned by a fiat pound enables it to be traded and redeemed with no additional risk. This is facilitating a growing global payment system that operates in parallel with the banking system.

This is good news for professional cash managers, Sully believes. Within cross-border trade, not all domestic banking infrastructures are the same around the world. “Payments can be inefficient, slow, and expensive. Digital money enables businesses to connect directly to a counterparty in any part of the world, with instant transmission and settlement, also allowing finance to be recycled faster, potentially reducing cost of capital.”

However, a major stumbling block for acceptance of digital monies is their mistaken bundling together as one with the rather more unstable world of cryptocurrencies. The perception of a global payment system that is connected to a risk-heavy crypto-trading system dissuades many businesses from engaging.

Indeed, buying stablecoins or moving fiat balances into crypto-exchanges where risks are heightened, makes no sense at all in a trade context, agrees Sully. One issue with stablecoin values is that some are exposed to secondary trading markets. Arbitrage traders can then de-peg a stablecoin’s price from its fiat currency. This remains a huge and unnecessary risk for professional participants, such as treasurers, who may wish to use digital money for the benefit of real-world use cases.

The solution Sully recommends is the “verticalisation of digital monies and stablecoins solely focused around on- and off-ramping business users”. For this to occur, in the corporate treasury space, new digital monies need to be created that are fully disassociated with crypto-trading. CBDCs already have legitimacy because they are central bank creations. Stablecoin legitimacy is initially derived from the trust and transparency afforded its creating company or financial institution being regulated (by the UK’s Financial Conduct Authority, for example).

A common approach

Even when the issue of legitimacy is fixed, the apparent “lack of perspective” within the BoE’s response paper around the value of CBDCs in the global payments system alarmed one critic writing on LinkedIn. They quizzed how the infrastructures built by different central banks “will be able to link to other countries, and operate internally or externally of the current global payments system, in a way that would be beneficial to the international monetary system, trade, and the global flow of money”. The commentator determined that while CBDCs could be a valuable local and global proposition, there was no evidence as to “who is leading the global discussion in a way that can actually build the use case for CBDCs as part of the international monetary system”.

In response, Sully points out that the Bank for International Settlements (BIS) is attempting to create common technical and operating standards by which central banks design and implement CBDCs. “However, this is a one-to-two-decade evolution that will inevitably require commercial banking infrastructure to follow suit. In other words, it will take a long time.”

Whether viewed as a dystopian nightmare, a waste of time, a flawed possibility, or the best possible future state for money and payments, CBDCs in any major economy are a long way off. It’s a time span that will inevitably give rise to further polarised debate on the validity or otherwise of digital money. But with so many unknowns still to tackle, the advice to be careful what you wish for may seem appropriate at this stage of the journey.