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.

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, “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.


What will happen to the price of gold in 2022?

What will happen to the price of gold in 2022?

Gold is traditionally the go-to asset during inflation. But with inflation at 30-year highs, it has gone nowhere. Dominic Frisby investigates why, and…
20 Jan 2022
UK inflation is at a 30-year high and it hasn’t peaked yet

UK inflation is at a 30-year high and it hasn’t peaked yet

UK inflation has hit 5.4% - its highest in 30 years. And it could be heading higher. John Stepek explains what it means for you and your money.
19 Jan 2022
Index fund

Index fund

Index funds (also known as passive funds or "trackers") aim to track the performance of a particular index, such as the FTSE 100 or S&P 500.
18 Jan 2022
Model Y: Tesla has nailed it once again

Model Y: Tesla has nailed it once again

The electric carmaker’s new SUV crossover, the Model Y, sets the benchmark in the sector.
18 Jan 2022

Most Popular

Five unexpected events that could shock the markets in 2022

Five unexpected events that could shock the markets in 2022

Forget Covid-19 – it’s the unexpected twists that will rattle markets in 2022, says Matthew Lynn. Here are five possibilities
31 Dec 2021
US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at 7% – the last time it was this high interest rates were at 14%. But instead of panicking, markets just shrugged. John Stepek explai…
13 Jan 2022
Tech stocks teeter as US Treasury bond yields rise
Tech stocks

Tech stocks teeter as US Treasury bond yields rise

The realisation that central banks are about to tighten their monetary policies caused a sell-off in the tech-heavy Nasdaq stock index and the biggest…
14 Jan 2022