There are a number of widely held concerns around the concept of digital money, particularly with respect to Governmental control and access to personal data.
At the bi-monthly breakfast briefing at Rosenblatt & Memery Crystal, hosted and moderated by Laura Clatworthy (Disputes Partner Rosenblatt and Head of Digital Assets), industry specialists Jannah Patchay, Executive Director and Policy Lead Digital Pound Foundation, David Rennie, Director Digital Identity & Market Strategy IDEMIA, and Dr Robert Learney, Head of Technology, Distributed Systems Digital Catapult came together to discuss the future of Digital Money & the Digital Pound, with a focus on widely-held concerns often expressed in relation to the adoption of digital currencies.
Jannah Patchay, Policy Lead for the Digital Pound Foundation (“DPF”), the not for profit corporate membership organisation that advocates for the introduction and successful adoption of “a well designed digital pound in both publicly and privately issued forms” led the discussion by talking about the importance of creating a competitive digital currency environment in the UK that includes ‘public’ central bank digital currency issued by the Bank of England, as well as ‘private’ (commercial bank) issuances. This mirrors today’s system of wholesale Central Bank reserves and commercial bank money.
“Today’s Central Bank currency is in the form of cash (for ‘public’ use) and wholesale reserves held by the Central Bank used to support ‘private’ or commercial bank activity. In the past 20 to 30 years there has been a decline in cash in day to day public use with a corresponding increase in payment, debit and credit cards. It is envisaged that a future CBDC environment would reflect the same split between public and private money, and role for bank (and potentially new fintech disruptor) intermediaries.”
The digital future will reflect the split between Central Bank Digital Currencies (“CBDCs”) representing cash and stablecoins, and tokenised commercial bank assets (e.g. deposits) that support credit creation and economic growth.
DPF has a strong focus on CBDCs with respect to influencing the ‘flavour’ of Bank of England proposals and government implementation, looking closely at challenges around identity and privacy, and engaging with all stakeholder agencies like the FCA. Its cross-industry working groups consider specific areas such as payments infrastructure and applications, and the impact of change as we move towards a cashless society.
As thought leaders and influencers, DPF also seeks to address common concerns around the advent of digital money.
Discussion highlights
Top of the list is the concern that the Bank of England will open bank accounts for every individual in the country, through which they will be able to ‘control’ individuals’ access to, and use of, Central Bank issued currency. Central Banks typically have no desire to do this and it is not physically possible. As now, most Central Banks are pursuing an intermediated model via the commercial bank system and potentially with other authorised and regulated FinTech businesses. Digital currency ‘wallets’ (like traditional bank accounts) will be held and managed by intermediaries who will, as now, carry out required KYC/AML checks and deliver customer services.
In other words, and as is now the case, Central banks will not interact directly with the public with respect to digital currencies, instead working with intermediaries such as commercial banks and FinTechs to issue and distribute digital currency.
Another concern is that governments and central banks will be able to see and/or control individuals’ digital currency transactions. Central banks (and Governments) won’t have direct access to any transaction data and as now, enforcement agencies (e.g. AML) would require legal authority to access personal (individual) data from intermediaries.
The last thing any government wants is to see every transaction of every individual – it’s literally “too much information”. To be of use, this quantity of ‘big data’ needs to be accessed in aggregate form.
Intermediaries will themselves be subject to similar rigour with respect to data collection and use, with a need for robust governance principles and mechanisms to mitigate any opportunity to control or manipulate individuals using CBDCs.
“Probably the biggest myth to dispel is that the Bank of England will be opening CBDC accounts for every individual in the country. Apart from the fact that they are not set up to service members of the public directly, there isn’t a CBDC in the world with an operating model that enables direct interaction with the general public” (Jannah Patchay, DPF).
There is also concern that governments might be able to freeze or remove funds arbitrarily, or to ‘programme’ CBDCs to dictate how and when they can be spent or used. People often refer to the potential of being taxed at source as they spend their money.
Neither the government nor the Bank of England will have access to an individual’s transaction data. No entity or body will be able to ‘programme’ a CBDC at will to control its use or access. Enforcement agencies will have to have the legal right and, as appropriate, apply for permission through the courts, going through the same legal rigour and legal processes that they do today, to access personal data.
“The public sector represents nearly half of the economy and many things touch on both the public and private sectors. You buy a house in the private sector, for example, but are required to register ownership with the Land Registry (public sector). There must be a similar understanding (and management) of the overlap/touch points between public and private activity with respect to CBDCs.” (David Rennie, IDEMIA)
It wasdiscussed that the Central Bank’s aim is to provide public access to risk-free money, but it will struggle with execution and adoption if digital systems don’t have equivalence with fiat currency with respect to safeguards around individual control and autonomy.
Separately, both digital Euro and digital Pound proposals explicitly rule out CBDCs being interest bearing which presents a lever for competitiveness, but which is disappointing to many macroeconomists who saw the potential for digital currencies as an enabler of direct enactment of monetary policy.
“We all know that ‘interest bearing’ links to interest rates, so in an inflationary economy that means your money is worth less. Blockchain is governed in a way that makes it beyond various forms of risk. The digital currency’s original value holds true; it can’t be manipulated
by the government (or any other party) for good or bad.”
On the question of whether digital passports are a prerequisite for the use of digital currencies, or alternatively an official digital identity associated with CBDC access and use, the government has a role to play in creating an appropriate trust framework. The structure needs to be addressed and resolved around digital identity.
From a design perspective, the Bank of England has adopted an extended design phase of three or so years. While every country is different, the UK is having a particularly interesting and intense discussion around personal identity and privacy.
“The UK is unusual in its attitudes towards identity and privacy; every country is different. The UK had identity cards in WWII but got rid of them afterwards. There was an Identity Card Act in 2006 abandoned in 2010 because of ‘No to ID’ protests in Whitehall. We’ve never really resolved what we want to do with respect to citizen ID.” (David Rennie, IDEMIA)
Clearly identity is key with respect to digital currency and will be a critical element of the design phase. Unlike many other countries, for example, UK citizens are not issued with identity cards. Individuals can use driving licences, passports and other methods to validate their identity.
It is understandable that there are concerns around criminal and commercial ‘bad actor’ behaviour with respect to accessing and using personal data. The DPF is seeking to capture and articulate these concerns to inform the design phase and ensure appropriate governance is in place.
While recognising the potential for intermediaries to provide value-added services with respect to digital currencies, it is important that there is no monopoly or provider dominance in the digital identity space, as well as the need to ensure fair exchange of value. Whilst intermediaries will be required, with integration through blockchain/DLT technology the goal is to ensure security (transaction immutability), transparency and self-sovereignty over digital currency use.
“The design of any CBDC has to address concerns about trust in government [not to use individuals’ data for any pernicious purpose] and about criminals hacking and using data in what has been categorised over the last 15 years as the ‘surveillance economy’.”
Other potential benefits of a digital pound discussed at this roundtable were:
Significant benefits for supply chain efficiency, and the movement of ‘business’ money in and between links in the chain. This has been recognised in the recently enacted UK Electronic Trade Documents legislation. Whilst digital currencies enable disintermediation with participants being able to leverage digital assets and technologies to move funds directly between themselves without going through banks, intermediaries play a vital role in trade and supply chain financing so will likely continue to have a role in the process.
Digital assets and technologies enable more climate and inclusivity innovation, for example linking carbon credits directly to climate-positive projects such as wind farms. It will be very interesting to see how digitisation can support innovation in ‘value exchange’ in supply chains, for example, instantaneous distribution of monies to farmers ‘downstream’ in the supply chain from funds generated ‘upstream’ (rather than having to wait for money to trickle down from top to bottom).
Overall, the consensus around the table was that the design of digital currencies must allow sovereign ownership of your own money, absolute autonomy and control over transactions and rigorous data privacy protections, and that there is potential for enormous benefits with a digital pound, which is required to ensure that the UK retains its economic and political position on the global stage.
How we can help
If you would like to find out more about how we can help you and your business please contact Laura Clatworthy at laura.clatworthy@rosenblatt.co.uk.
Disclaimer: We at Rosenblatt (and our parent company RBG Holdings plc) support and encourage free/independent thinking in relation to issues which are sometimes considered to be controversial subject matters. However, the views and opinions of the authors do not necessarily reflect the opinions, views, practices and policies of either Rosenblatt or RBG Holdings plc.
