Bitcoin or Britcoin? The drive towards central bank digital currencies
Although paper-based money may now seem the norm, historically the concept of money and its medium has been changing drastically throughout human history. The earliest examples of money included shells, leather, or grain.
In 1821, England became the first country to officially implement the gold standard. Fast-forward over 200 years, and the Bank of England, like many other economies’ central banks, are developing a Central Bank Digital Currency (CBDC). William Lovell, Head of Future Technologies at the Bank England shares their insight into digital currencies, and how CBDCs can enable a sustainable future.
William made his first move into the finance industry from engineering and joined the Bank of England as an application developer working on payment systems and asset liquidity management. Over time, he then took on various roles throughout the Bank of England before being promoted to Head of Future Technology bridging between business and technology. Here, William is responsible for deciding the technologies that may be required in the future including leading the development of the Bank of England’s CBDC, often colloquially referred to as ‘Britcoin’.
This effort towards the potential adoption of a digital currency by a central bank is also reflected globally. Out of 60 central banks surveyed in 2021, two thirds of these central banks are conducting CBDC experiments or pilots (Bank for International Settlements, 2021). Despite William’s role looking across all future technologies, he has led significant effort into the development of digital currencies:
“There are several major future technologies based on tools such as quantum computing or machine learning in development. However, digital currency and blockchain, have dominated the landscape in the last few years, so much so that there is significant effort by the Bank of England focused on the potential development of a CBDC.”
Taking a step back, what exactly is a digital currency? Digital currency (digital money, electronic money, or electronic currency) is any currency or money-like asset that is primarily managed, stored or exchanged on digital computer systems, particularly over the internet. Types of digital currencies include cryptocurrency, virtual currency, and central bank digital currency. Digital currency may be recorded on a distributed database on the internet, a centralized electronic computer database owned by a company or bank, within digital files, or even on a stored-value card.
The Venn diagram illustrates the four key properties of money: issuer (central bank or not); form (digital or physical); accessibility (widely or restricted); and technology (account-based or token-based). CB = central bank. Private digital tokens (general purpose) include cryptocurrencies, such as Bitcoin. For examples of how other forms of money may fit in the diagram, please refer to the source, Bank for International Settlements 2019.
Within the finance industry, central banking is almost a niche within banking. Many of the activities that take place in a central bank such as asset management, asset settlement, or liquidity management, are very similar to what is found in the investment banking sector. However, there is a key difference: central banks, unlike commercial banks are not profit-driven. Central banks are fundamentally public bodies and therefore their overarching mission is to support monetary stability for the public benefit.
At present, the Bank of England are ensuring the proposition of a CBDC for the U.K. and associated economies is correct. This includes addressing all of the concerns of CBDC such as security, privacy data storage, or overall performance. This is exactly where engineers play a part in exploring the technological solutions that can be implemented to meet those requirements or what trade-offs may be needed.
For economies with existing stable currencies like the United Kingdom, which rely on the British pound sterling (GBP), the benefits coming from a CBDC must strongly outweigh the risk of potentially destabilising the currency by moving away from an already stable system. According to William, it is interesting how across the world, economies that are reliant on a less stable currency are already transitioning to a CBDC or adopting existing digital currencies such as Bitcoin. In this case, there is less to lose and a digital currency provides a radical opportunity to stabilise their economies.
How may a CBDC affect the consumer?
Most people will only notice the benefits of a CBDC directly in retail banking which includes that which the ordinary consumer could use for everyday transactions; shopping, online shopping, decorators, or even giving relatives money. The idea of digital cash, a retail CBDC, within the United Kingdom, is that it will be equivalent to a banknote. Therefore, £10 of CBDC will be the same as a ten-pound note in your hand, it will carry the same weight legally, and will also be backed at the Bank of England in the same way.
A potential driver towards a CBDC is that in many places physical cash is no longer accepted including in major city centres. It can also be easier to pay cashless for expenses such as those for public transport. This has increased especially during the COVID-19 pandemic when physical cash was seen as a potential route of disease transmission. Even though the Bank of England stands behind the production of physical cash, if retailers are not accepting it, then there is an ‘access to a cash as a payment-medium’ question.
CBDC also has the potential for vastly increased functionality relative to paper-based money. Some of the advantages of digital currencies include programmability and the ability to transact micro-payments which current systems do not support well. Once micro-payments come into play, different and potentially more sustainable business models can be introduced. For example, for online publications, many consumers pay a monthly subscription for all content whether it is consumed or not. A micropayment approach might be that you pay the equivalent of a fraction of paper-based currency for every article you look at. Suddenly you could go to pay per use subscription model that could transform the business models for people providing that kind of content. William summarised this saying:
“The main takeaway is that payment methods and mediums of currency that currently exist drive a lot of how people’s business models work. Internet business models could be looking at different ways to support payment methods. But any CBDC needs to be a currency that operates and has increased functionality relative to a paper-based currency.”
Another potential improvement may arise for people who work and live overseas who want to send money home, which is currently difficult and expensive, William believes that digital currency can drive a significant improvement here by making it easier and cheaper.
Will global differences in internet access not create inequality?
In 2018, the United Nations estimated that 49% of the global population do not have access to internet (International Telecommunication Union, 2018). Clearly, internet access and having a stable and secure network comes into question when looking toward a future of digital currencies. William states that offline models are a plausible solution. For example, Canada, which has a geography that does not allow for stable internet access, is looking to use smart cards. The London Underground payment system in the United Kingdom is also an example of smart cards. Alternatively using a mobile phone, one could upload a balance so that even if you are offline, you can still make payments.
Just like in Canada, many countries have limited internet connection. In the 90s, William explains, there was a phenomenon of leapfrogging in telecoms, where a lot of developing countries that didn’t have stable, fixed-line telephony suddenly leapt ahead, something that is being seen in the digital currency world as well. Countries that did not previously have a particularly strong currency are leaping straight to implementing digital solutions. Kenya and Uganda have a phone-based currency system, Nigeria has just launched a digital currency, and the Bahamas are already there. Although internet access still remains a pressing issue for many regions of the world, rapid acceleration of space-based technologies by companies such as SpaceX and Starlink are may help reduce this inequality by improving access to internet.
Why not use an existing digital currency such as bitcoin?
When developing a CBDC, there is a clear question we may ask, ‘why not use a currently developed digital currency such as Bitcoin?’ There are several reasons against doing so such as it posing an increased security risk. Particularly from a sustainability perspective, there is a clear design flaw in many existing digital currencies according to William:
“When some cryptocurrencies such as Bitcoin were created, I don’t think they quite foresaw the situation that we have now, where effectively the value of bitcoin is so great, some consider it's worth expending an enormous amount of money on electricity to try and generate further amounts of this currency by mining the next Bitcoin.”
There are better solutions. William states that central bank digital currency has a central controlling authority and having a competitive process for who gets to update the ledger is less of a requirement:
“One thing that can be done if a distributed ledger type technology or blockchain type technology is used, is to use a consensus algorithm that works on a kind of voting approach.”
Overall, although much of the concerns about central bank digital currencies remain to-be addressed, there is a clear drive towards their development and a notable amount of economies who have made significant progress towards their implementation. For a more in depth analysis and review of CBDCs, we recommend the research carried out by the Bank for International Settlement.
At the end of our interviews, we ask the question ‘how engineers can create a sustainable future’. William shared that as is the case with so many industries, people now realise that a lot of the technical problems being faced by society are engineering problems or require an engineer’s approach to derive a solution. So, for people like William who have been solving engineering problems for over 30 years, or early-career engineers part of the Global Engineering Network, it’s a very exciting time.
William also highlighted how people now realise that cheaper technical solutions aren’t always the best. For example, in the 1990s and early 2000s during the time of the Web2 explosion, software engineering was thought of as a commodity and was outsourced. Here, many companies downfall was that their focus was to obtain the cheapest per day cost you could get, along with the idea that all software developers were the same. William states that we are now emerging, or have emerged from that, and people realise the importance of quality engineering skills.
In addition to having a technical skillset, ideas and creativity are extremely important. People realised the need to engineer quality, sustainable products is what gives them a differentiation, and market share, or helps them keep up to date.
“Hold on to core technical skills including the ability to break down a problem and solve it by looking for innovative solutions. Don’t be afraid to learn about different businesses and aspects of a business too.”
For engineers looking hoping for a future in this space of digital currency or within The Bank of England itself, William advises you to regularly turn to LinkedIn and the Bank of England website. There are a broad variety of roles ranging from engineering skills to finance and payments, as well as a background in retail. The Bank of England is constantly on the lookout for diversity in thought and perspective.