The central bank race for digital currencies is hotting up
As governments crackdown on bitcoin and other cryptocurrencies, central banks are developing their own digital currencies. That has all sorts of implications, says John Stepek – not all of them good.
Central bankers don’t really like cryptocurrencies.
We’re seeing more and more national authorities and regulators muttering about crackdowns. Last month, China effectively banned crypto “mining” in the country, which up until now was a major “producer” of digital coins.
The papers are also full of the UK regulator, the Financial Conduct Authority, warning that Binance – a big crypto exchange – is not authorised to carry out regulated activity in the UK.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
That doesn’t necessarily have any impact, as crypto trading (though not trading in derivatives) is unregulated in any case. But it’s just another sign that regulators are getting edgier.
So why the big pushback? It seems more and more likely that it’s because the authorities realise this stuff is here to stay – and they’d better get their own digital currency projects out of the door quickly if they don’t want to have big problems with the competition.
China is cracking down on bitcoin because it doesn’t want the competition
It’s easy to see why China is not keen on bitcoin: the Chinese authorities are even more fond of control than your average government body. Given this set up, the last thing you want roaming freely around your patch is a digital asset backed by libertarian ideology.
People debate whether bitcoin has any value at all. However, assuming the tech works as it’s claimed, and it doesn’t all turn out to be some sort of giant hoax or shadowy plot to undermine the dollar, then I think it’s clear that bitcoin has a very definite use case.
Its main use, as far as I can see it, is as a vehicle to evade any sort of controls – but in particular, capital controls.
You can access it from anywhere in the world. So if your country prevents or limits you from taking money or wealth beyond its borders (as China does, and as the UK did right up until 1979), then this is a pretty good solution.
No longer do you have to smuggle a load of gold coins or a wad of high-denomination notes (increasingly difficult to get hold of) past customs. You just get yourself over the border then sign in to your account.
That gives it a value regardless of its volatility – if you’re literally trying to escape a country, losing half of your money along the way is not necessarily a disaster. It also means the hassle around acquiring bitcoin becomes worth it – it’s less of a faff than finding hiding places for all those coins.
So with China attempting to open up its financial system (it needs to if it ever wants to challenge dollar hegemony) but simultaneously keen to make sure that money doesn’t flood out, cracking down on crypto is only logical.
However, there’s more to it than that. As Eoin Treacy points out on FullerTreacyMoney.com, “China is on the cusp of releasing its own digital currency and is clearing the field so that it will face no competition or arbitrage opportunities in the domestic market.”
Of course, if China launches its own digital currency, that’s a problem for the rest of the world’s central banks too. In extremis, a digital yuan could be like bitcoin, only with the backing of a massive economy. It might not just be Chinese citizens who want to use it – it could go global.
Given that, it’s no wonder the rest of the world’s central banks are also keen to launch their own digital currencies. As the FT points out, Fabio Panetta, who’s in charge of developing the digital euro, said plainly “that one of the project’s key aims was to combat the spread of digital coins created by other nations and companies”.
The Bank for International Settlements (BIS) – sometimes known as the central bank for central banks – notes that 86% of central banks are currently at least looking into central bank digital currencies (CBDCs), while 60% are “experimenting”, and 14% are “deploying pilot projects”.
Convenience trumps privacy – which means cash could be crowded out
In a recent report on the topic, the BIS makes CBDCs sound positively cuddly. If they work, then people like you or me would “retain access to the safest form of money – a claim on a central bank”.
What might that do? Well it could lead to more “diversity in payment options” as well as “make cross-border payments faster and cheaper”. Not only that, it would boost “financial inclusion” (in other words, people without bank accounts would be brought into the financial system). And it could even “facilitate fiscal transfers in times of economic crisis (such as a pandemic)”.
In other words, if we all had an account with the Bank of England then it could credit our accounts with “stimmie” payments (as our American cousins call it) whenever disaster strikes. Technically this would have to be authorised and funded by government spending, but you can see the distinction narrowing sharply, particularly if modern monetary theory becomes any more mainstream.
Andy Haldane, the outgoing chief economist of the Bank of England, talked about “Britcoin” (among many other things) with our editor-in-chief Merryn Somerset Webb in the latest MoneyWeek podcast. If you missed it, you can listen to it here.
But I’d just like to highlight a point from the conversation. Haldane notes as one of the benefits that a digital currency could pay interest. As Merryn retorts, it’s hard to see why the digital pound would pay interest at a time when the “real” one didn’t.
But if you wanted to smooth or encourage the transition from paper money then I can’t think of a better way to do it.
In any case, it’s already pretty tricky to use cash to make any major purchases, such as a car. The introduction of a digital pound would surely crowd out cash over the longer run. You might still cash the odd cheque, but when was the last time you saw someone use one at a till?
Experience should have taught us by now that convenience trumps privacy every time. If people are handed an account with the central bank that works with a tap of their phones, then they’re going to use it.
That should worry us. There is no overt desire to create a surveillance state in the UK, unlike in China. And yet a fully digital, centralised currency is the ultimate piece of surveillance apparatus. And it’s hard not to imagine that a not-too-distant-future government might decide that it’s a shame to have that functionality and not use it.
In investment terms, it’s one other reason to hang on to some gold, as a physical asset whose value can’t be entirely wiped out by a government crackdown. It’s also important to watch developments in this sector for their impact on financial stocks. I think that bank stocks generally are undervalued (in the UK, certainly) but their role in this brave new system remains unclear.
This is a topic we’ll be spending a lot more time on in MoneyWeek magazine in months to come. If you’re not already a subscriber, sign up now and get your first six issues absolutely free.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
-
TSB fined £10.9 million over ‘woeful systems and controls’ for struggling customers
News The Financial Conduct Authority issued the fine for historic failings by TSB after mortgage, loan and credit card customers were treated unfairly
By Marc Shoffman Published
-
RICS: Estate agents say house prices are up for first time in two years
Estate agents say UK house prices are rising, as buyers and sellers gradually return to the market. But the picture is less positive for renters as buy-to-let landlords sell up
By Katie Williams Published
-
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
-
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
-
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
-
Best investing apps
We round up the best investing apps. Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go?
By Ruth Emery Last updated
-
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
-
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published
-
UK recession: How to protect your portfolio
As the UK recession is confirmed, we look at ways to protect your wealth.
By Henry Sandercock Last updated