Bank of England seeks views on ‘Britcoin’ impact
There was much excitement when, in April, the chancellor, Rishi Sunak, announced the launch of a new taskforce between the Treasury and the Bank of England to co-ordinate exploratory work on a potential central bank digital currency.
The currency was immediately nicknamed ‘Britcoin‘ although it is unlikely to take that name if or when it is eventually launched.
As part of the work, the Bank was asked to consult widely on the benefits, risks and practicalities of doing so.
That work is ongoing but, in the meantime, the Bank has published a discussion paper aiming to broaden the debate around new forms of digital money.
The issue is of huge importance to the Bank because its two main functions, as an institution, are to maintain both the monetary and financial stability in the UK. The rise of digital money has implications for both.
The Bank has already made clear that it is sceptical about cryptocurrencies, such as Bitcoin, which its governor, Andrew Bailey, has said “has no intrinsic value”.
Yet these currencies must be differentiated from a central bank digital currency.
The concept of a central bank digital currency may be confusing to some but Sir Jon Cunliffe, the Bank’s deputy governor for financial stability, said it was actually quite straightforward.
The Bank of England is responsible for UK monetary policy and financial stability
He told Sky News: “At the Bank of England, we issue banknotes, the notes that everybody holds in their pocket, but we don’t issue any money in digital form.
“So when you pay with a card or with your phone on a digital transaction, you’re actually using your bank account, you’re transferring money from your bank account to somebody else’s.
“A central bank digital currency, a digital pound, would actually be a claim on the Bank of England, issued by us, directly to the public.
“At the moment we only issue digital money to banks, we don’t issue to the general public, so it will be a digital pound – and it will be similar to some of the proposals being developed in the private sector.”
Sir Jon, who is co-chairing the taskforce with the Treasury’s Katharine Braddick, said that, while a central bank digital currency and a cryptocurrency like Bitcoin might use the same technology, there were big differences.
He went on: “[Central bank digital currencies] use the same technology but…they aim to have a stable value. They’re called stable coins and some of the technology companies, the big tech platforms, are just thinking about developing digital coins of that sort.
The European Central Bank is exploring a similar digital currency for the euro area
“A central bank digital currency would be a digital coin, actually a digital note, issued by the Bank of England.”
Sir Jon said such currencies would have to the potential to bring down costs for businesses depending on how they were developed.
He added: “They do offer the potential to bring down cost. At the moment the average cost, I think, for a credit card transaction is about just over half a per cent, but of course if you’re a small tea room in Shoreham-on-Sea, you’re going to be paying more than that in some cases, well over 1% for that transaction.
“So it could be cheaper, it could be more convenient. These new forms of money offer the ability for them to be integrated more with other things through their software. So you can think of smart contracts, in which the money would be programmed to be released only when something happened. You could think, for example, of giving the children pocket money but programming the money so that it couldn’t be used for sweets.
“There’s a whole range of things that money could do – programmable money, as it’s called – which we can’t do with the current technology.
“Now whether there’s a market, whether there’s a demand for that, whether that’s something people want in their lives, I think is another question – but we need to stay at the forefront of thinking.
“We need to stay ahead of these issues because we’ve seen changes can happen really fast in the digital world – people didn’t think smartphones had much or a market when the iPhone was first introduced – and it’s important we keep abreast of those issues.”
He noted that, under one ‘illustrative scenario’ set out in the Bank’s discussion paper, the cost of credit could rise in the event of people withdrawing deposits from the banking sector and migrated to a form of digital money.
This is why the Bank is seeking, in this discussion paper, to establish the conditions under which people might prefer using new forms of digital money to existing forms, such as cash or ‘private money’ like bank deposits. But that is easier said than done.
Sir Jon added: “It’s very difficult to know what the demand for something like this will be. It could be quite small – people might just want to keep a small wallet of digital coins for use on the internet, or whatever, but it could be quite large.
“That’s one of the things we want to try and understand better and [that’s why] we want to get views on how it would operate.
The value of cryptocurrencies such as Bitcoin have fluctuated wildly since their conception
“It’s important to say, given that it’s so difficult to estimate whether something like this would take off, that, if it were introduced, I think one would have to be quite careful at the beginning – you wouldn’t want to be in a position where something became very popular and had impacts that you hadn’t foreseen.”
To that end, the Bank’s discussion paper also considers the potential risks posed to economic stability by new forms of digital money.
The deputy governor went on: “It’s really fundamental that people can trust the money they use every day in the economy, that they don’t have to think about ‘I’m holding one form of money rather than another form of money, is this one more safe than another?’
“So the regulation is going to have to make sure – and the Financial Policy Committee of the Bank of England made this really clear – that if you issue these new forms of money, the users have to have the same level of confidence and security that they have in the money that circulates in this country at the moment, either Bank of England cash or commercial bank money in the form of bank accounts.
“It’s really crucial that people trust the money they use – we’ve seen from history that when confidence in money breaks down, for whatever reason, the social cost is enormous.”
All of which explains that, while most analysts assume the Bank will ultimately launch its own digital currency, it is taking its time to assess what the impact may be.
It is also clearly giving much thought to how it explains to households and businesses why such a move may be necessary.
Donald Trump has announced that most goods imported from Mexico are to be exempt from his trade tariff regime for at least four weeks, just days after the charges were imposed.
He confirmed the move following a phone call with his Mexican counterpart Claudia Sheinbaum and, according to his commerce secretary, was due to announce a similar concession to Canada later in the day.
“We are working hard, together, on the Border, both in terms of stopping Illegal Aliens from entering the United States and, likewise, stopping Fentanyl,” Mr Trump posted on Truth Social.
The latest climbdown by the US president came after he surprised financial markets on Wednesday by waiving tariffs against carmakers following pleas from motor industry bosses.
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The White House revealed then that parts due to flow into the US from Mexico and Canada as part of the manufacturing supply chain would not qualify for tariffs so long as they complied with an existing trade agreement struck between the three.
‘Rules of origin’ guidelines under the USMCA deal allow goods to move between the three countries tariff-free if they qualify with a designation that they were made in North America.
US commerce secretary Howard Lutnick told Sky’s US partner network CNBC that if the concession was extended to Canada, then more than half of usual cross border trade volumes would be exempt.
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Why are tariffs such a big deal?
He too signalled there were signs of progress in Mr Trump’s dispute with America’s closest trading partners, saying each had worked hard to make progress in tackling imports of Fentanyl – blamed for high crime and deaths in US communities.
But Mr Lutnick explained that, as things stand, the reprieve would only last until 2 April when the Trump administration plans to impose reciprocal tariffs – on top of the 25% charges that came into force on Tuesday.
The car industry believes that no products from Canada and Mexico are currently subject to tariffs as they comply with the USMCA deal agreed in 2020.
It should spare consumers extra costs of at least $4,000 on the purchase of a new vehicle, industry data showed.
While that could still change from 2 April, Mr Trump is under intense pressure to relax his tariff regime permanently amid a backlash from US firms and financial market investors who fear it is self defeating.
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A closely-watched forecast has even suggested that the threats of a trade war were enough to push the US economy into recession before Mr Trump took office.
The dollar has sunk in value and US government borrowing costs have risen on the back of the turmoil.
It is widely expected that the European Union will be next to face tariffs – possibly from 2 April – after Trump threatened action “very soon” just last week.
Commenting on the threat to the eurozone from such a move, the president of the European Central Bank Christine Lagarde said on Thursday: “Just the threat of those tariff increases and potential retaliations are putting a brake on – on investment, on consumption decisions, on employment, hiring, all the rest of it.
While Mr Trump has not issued a specific threat against the UK, her counterpart at the Bank of England Andrew Bailey told a committee of MPs on Wednesday that the US should work “multi-laterally” rather than bilaterally to resolve its disputes.
Donald Trump is to exclude carmakers across North America from the pain of US tariffs levelled against Mexico and Canada, following apparent pressure from motor bosses.
The White House confirmed the concession was made after the president spoke to the bosses of Ford, General Motors and Stellantis in a call on Wednesday.
Each company has manufacturing operations and suppliers in Canada and Mexico.
There will be a tariff exemption of at least a month on vehicles made across the continent but only if a previous agreement on so-called ‘rules of origin’ is implemented in full.
It governs where a product is first sourced and where a tariff may apply during transit across borders.
“Reciprocal” tariffs are still planned from April, the president’s spokesman said.
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Manufacturers have complained of being worst affected by the imposition of 25% tariffs against both Canada and Mexico since Tuesday because flows of parts between the three countries can be hit by tariffs multiple times.
The complicated nature of their operations can mean a single component crosses a border more than once during the production process.
Such a big spike in costs from tariffs poses a big risk to sales as customers are asked to pay more to help compensate for the sanctions.
Automakers’ share prices have been among the worst hit since Mr Trump took office again in January.
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Why are tariffs such a big deal?
The car bosses, according to Reuters news agency sources, pledged additional US investment but wanted clarity on tariffs ahead.
Mr Trump urged them to shift their operations to the United States, according to a White House statement.
The tariff concession marked the first compromise on the trade issue since the president signalled, on Tuesday, that there would be no U-turns and only more tariffs after Canada said it would respond in kind.
There have been growing signs this week that corporate America is uneasy, at best, with the tariff policy against both Mexico and Canada
Those US neighbours, along with China, which is facing 20% tariffs, are the country’s three biggest trading partners.
The imposition of tariffs on all goods has been received badly by financial market investors, worried that US profitability is at risk.
One closely-watched forecast for US growth suggested that the threat of tariffs since Mr Trump’s election victory was confirmed had hammered activity and plunged the country into recession.
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There are mounting reports of boycotts against US goods in Mexico and Canada.
The nerves were publicly admitted by the boss of Jack Daniel’s maker Brown Forman, Lawson Whiting, on Wednesday when he described Canadian provinces taking American-made alcohol off shop shelves as “worse than a tariff”.
US stock market values are sharply down since the inauguration and the dollar has lost more than three cents against rivals including the euro and the pound just this week amid the tariff turmoil.
Such is the growing investor concern for the health of the US economy, the tariff implications have been partly blamed for a steep fall in oil prices.
Brent crude was trading at $68 a barrel earlier on Wednesday – its lowest level for more than three years.
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