Digital currencies are catching on fast with central banks. The idea is simple. We know from the success of bitcoin and its rivals that electronic forms of money have carved out a place in the global financial system. In a world where trade and commerce increasingly takes place on the internet, it makes sense to have a safe and secure internet-based monetary unit as well. Bitcoin offers that in a purely private form. Now central banks are looking at issuing their own version.
A bitcoin for realists
Purists attracted to bitcoin for its outlaw, anarchic qualities may not like that, but many of us will have a little more faith in a monetary unit backed by a major central bank than in an obscure algorithm no one really understands. How many people remains to be seen. But it is likely to be quite a few – and probably a lot more than were ever willing to trade in bitcoins.
The European Central Bank is furthest down the track. Launching a discussion paper last week, its president, Christine Lagarde, said a decision on whether to go ahead would be made by the middle of next year. The Bank for International Settlements, which coordinates all the major central banks, last week put out a paper outlining the core principles for national digital currencies.
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So far, the UK is simply keeping up with its rivals. The Bank of England has made its own plans for a new currency, as well as signing up for international initiatives. But it should be getting out in front and trying to win this race. At first glance, a “bitpound” may not seem a natural contender for global dominance, especially when compared with a digital dollar or euro. The British economy is relatively small in comparison. Sterling is no longer a reserve or trading currency of any significance, and the UK’s percentage of global output is only likely to get smaller over the next couple of decades as emerging countries keep growing. Yet the UK has three big advantages on its side.
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First, it can take “first-mover advantage”. Apple with its easy-to-use smartphones, Microsoft with its operating systems, Tesla with its electric cars – there are countless examples of companies and products that have managed to secure lasting dominance of an industry simply by being there first. The same could easily be true of a digital pound. If there is genuinely a market for a digital currency backed by a central bank then potential customers will start using whichever one gets there first. Once they have started using it, inertia will mean they carry on. If the Bank of England got its skates on and launched its electronic unit before any of its rivals then it would create a permanent advantage for itself.
Second, credibility. The Swiss National Bank is also looking at a digital currency of its own. So why not team up with the Swiss, merge the two plans, and create a unit backed by the two oldest central banks in the world? In many ways, Zurich and Geneva are the two most complementary financial centres to London. They are flexible, deregulated and outside the EU. A currency backed by both central banks would have instant credibility in the markets.
Play to our strengths
Finally, we should use the strength of the City. A new digital currency will only be relevant insofar as you can actually use it. London has the huge advantage of being one of the biggest centres in the world for trading currencies (London has 43% of the global market for money trading, compared with 16% for New York, its closest rival), and it has the infrastructure of legal systems, traders, and consultants to support the industry. If trading in bitpounds was legally established from day one in the UK, and if, even better, we threw in a minor tax break or two, then it would help launch the currency, and steal a march on its rivals.
There is a big prize at stake and the
UK should be trying to win it. If a bitpound established itself as the world’s pre-eminent electronic currency then it would be a huge boost both for our technology and financial services industries, two key sectors for the British economy over the next decade. We’ll have to move fast.
