There are those among us who like the idea of swiping and tapping their way through life, armed with a lifetime of digital information as they enter buildings, book online appointments and take train rides to work.
Others are not so keen, fearing that big brother databases chock full of personal details will one day control their movements, if that is not happening already.
In the case of cryptocurrencies, and even their nicer sounding cousins – stablecoins – the potential for users to be tracked and traced is writ large, with the added prospect of a shift to digital money leading to unemployment-inducing financial crashes even more frequently than in the past.
All the big financial centres, including London, have begun passing laws and consulting on rules to govern a future that is lubricated by digital money, pushing cash very much to one side.
The Bank of England governor, Andrew Bailey, said last week that he wanted to “put the UK at the forefront of exciting innovation” and that meant finding a way to facilitate competing stablecoins, backed by a robust regulatory regime.
While Bailey did not rule out the most secure form of digital currency – one issued by the central bank itself – it is clear from the way his officials are tackling the subject, this ship has sailed.
So, like it or not, many and varied digital currencies are coming, bamboozling all but a minority of the population with impenetrable jargon and an impossibly long list of options.
As with all financial services, the urge to prey on customers’ fear and greed is irresistible when it means the provider can get its hands on someone’s savings and turn it into something more exciting, more profitable, and with the risk of default passed back to the customer (sorry, you’ve lost all your money) or the taxpayer (sorry, my bank is bust, can you bail it out).
A government that backed a central bank digital currency (CBDC) would be justifiably saying to the finance industry, we need to control this thing because we are on the hook when it goes wrong.
The argument in favour of privatisation rests on the moral hazard created by an explicit promise by the public sector to bail out the losers. Much better to keep up the pretence that financial services companies, when caught in a collective tailspin, will be allowed to crash.
Rachel Reeves is one of many who want to go down the private route, attracting more and bigger finance companies to the UK.
There could be some immediate and practical benefits. Costs will also be lower, we are told, because without a bank standing in between the customer and the seller, charges on credit transactions could fall from 1.5%-3% towards 0.1%. Weekend payments would not have to wait until Monday to be reconciled.
Donald Trump is the architect of the most extreme version of private digital money. A well-known crypto currency supporter, he has also pushed for a financial services regime that supports dollar-backed stablecoins.
Congress has yet to fill in the vast gaps in the Genius Act, which was passed in the summer with bi-partisan backing, so it is difficult to know exactly how risky US stablecoins will be.
A clue can be found in the explicit ban on the Federal Reserve participating in the new regime. Such a move, in contrast with China’s newly-minted, state-run stablecoin, tells us that the US will truly be the wild west of the world’s digital currencies.
As the economics professor and Nobel prize winner Simon Johnson told the Guardian: “We have been here before. I couldn’t tell you when the [stablecoin] crash will come or how severe it will be, but you know it’s coming.”
Health warning: Nigel Farage would favour the Trumpian free-for-all.
For the UK, following mainland Europe was an option. It has already committed itself to a CBDC and has nine European banks in a consortium lining up a stablecoin for launch next year.
While the UK has rejected the US model, it must be legitimate to fear the knock-on effects from Trump’s recklessness when so many US banks have outposts in London, along with many of the world’s shadiest financial firms.
In 2021, when former deputy governor Sir Jon Cunliffe kicked off the stablecoin debate in a series of speeches, the message was clear: however tight the regulation, it would be too cumbersome and too slow to prevent risky behaviour from quickly becoming a systemic problem and even a full-blown banking crisis.
At the time, it looked like the UK and the EU would move in lockstep. In the years since, London’s stance has moved westwards, to a mid-Atlantic spot that is supposed to capture the safety Brussels seeks with the competitive spirit that underpins the US model.
Maybe the UK central bank is clever enough to develop a system both safe and competitive. It’s a tall order.
