The case for 'BritCoin' and more central bank ventures
In a period during which public trust has been severely eroded in all manner of British institutions, from Parliament to the police force to the BBC, the country's central bank seems to have maintained its reputation. The Bank of England is trusted, respected and well known, making it one of the strongest remaining brands in the tarnished world of finance. On the morning David Cameron resigned as prime minister following the result of the EU referendum, it was left to the Bank's governor, Mark Carney, to reassure the markets.
But it seems to do very little with this brand. The Bank's two main products are monetary policy services (which are only sold to a single customer) and financial regulatory services (which, surprisingly, are sold under a separate brand of the Prudential Regulation Authority). Apart from a limited amount of training to overseas central bankers, and the selling of its tea towels in its museum gift shop, the Bank makes hardly any use of its goodwill.
This is a shame, as there are at least two areas of policy interest at the moment where a strong, trusted public sector brand could make a great deal of difference for the better.
For example, blockchain – a distributed database technology – and electronic money have a huge amount of promise, in all sorts of applications. However, the industry is currently fragmented, with potential for a significant amount of wasted time and effort between competing standards. The de facto market leader, bitcoin, is optimised for its own particular use case – that of providing an anonymous private digital currency – which potentially hampers its use as a basis for wider applications.
The reputation and status of the Bank of England is an important national intangible asset. It's time that this asset was made to sweat a bit
As a central bank, the Bank of England is a universally trusted party which is capable of certifying others, and therefore could mitigate the massive replication of effort required by bitcoin to run a trust-free network. A bank coin, or digital pound, for this reason, would have a strong case for becoming the standard for digital settlement in the sterling area, and the basis for smart contracts and other applications. As the Bank of England also has world-leading capability in the design of payment systems, along with a wide range of existing responsibilities to users, it would also be better placed than many players to assess the trade-offs.
This is not some kind of whimsy, by the way – De Nederlandsche Bank, the Dutch central bank, is already committing resources to a number of pilot projects for the design of a central bank-backed blockchain, and managing to do so within the political and monetary constraints of its membership of the Euro.
Alternatively, the Bank could get involved in addressing the known and so far unsolved problem of providing access to financial services for the unbanked. The Bank of England has been involved in retail banking in the past; up until surprisingly recently, it provided bank accounts to its staff. Giving its name to a basic banking product would certainly increase awareness and take-up, and it would allow the implicit subsidy which financial access products might require to be transparently measured and managed, rather than being lost in the web of cross-subsidy which is characteristic of UK retail banking.
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The two applications could, of course, be combined. If the Bank of England provided direct access to its own balance sheet over a digital payment network, the resulting central bank-issued digital cash (CBDC) could take over many of the functions of a basic retail payment account. This would compete with commercial banks for the payment services market although it would not offer overdraft facilities or be likely to pay a particularly competitive rate of interest. The Bank has recently published some indicative research on this possibility, finding that it might have materially beneficial effects on the economy, mainly by facilitating the retirement of an equivalent amount of government debt.
All these suggestions might sound slightly strange if one believes that these sorts of things are obviously not within the aims and objectives of the Bank. But this objection doesn't stand up to even a cursory look at the historical and institutional development of central banking in the United Kingdom. For one thing, the extent to which the Bank has been involved in financial infrastructure has always been a policy decision, rather than a matter of fundamental principle. For another, on many occasions in the past and present, the Bank has been perfectly willing to put its brand on products manufactured by other people.
Take physical money, for example. The Bank of England does not print banknotes; this is outsourced to De La Rue. Nor does it distribute them, sort them or store them; these functions are outsourced to a group of companies under the Note Circulation Scheme. The only time the Bank of England physically interacts with its notes is at the end of their lives: it is still responsible for the physical destruction of banknotes.
What the Bank does with physical currency is to commission and finalise its design, set technical standards and (most importantly) to allow its brand to be used certifying them as central bank liabilities. There is no reason it could not do the same for digital cash.
Central-bank issued digital cash could have materially beneficial effects on the economy
Or consider CREST. When the London Stock Exchange had embarrassingly failed to deliver an electronic stock settlement system, the Bank stepped in and set up a team to take on a major IT project. This had no direct relevance to monetary policy or financial stability, but was a case where it was clear that leadership was needed, and that the Bank, because of its unique status and respected leadership position, was able to provide it.
A similar leadership and design role could be possible in financial inclusion, without the Bank having to own the actual systems and liabilities.
There is no principled reason why the Bank's role has been so circumscribed over the last two decades. In fact, many of the things it has stopped doing were the consequence of an informal agreement with HMT to keep the overall pay bill flat – meaning that Bank salaries could only remain competitive if headcount numbers were reduced for most of the 1990s. This was always a poor rationale, and in any case it is no longer relevant. The reputation and status of the Bank of England is an important national intangible asset. It's time that this asset was made to sweat a bit.