Digital currencies are a hot topic. Over the past year, we have seen wild gyrations in the best-known digital currencies, though most of us have never owned or used them. The price of bitcoin has swung between less than $10,000 (£7,000) and more than $64,000 over the past 12 months, depending on what Elon Musk has been saying.
The Bank of England is set to provide an update this week on its progress on the question of whether it should issue its own digital currency. Further work will be needed, and no decision has been taken, but already the prospect of an officially issued digital currency has been dubbed Britcoin — though I doubt that would ever be its official name.
Cash, meanwhile, is in retreat — a long-term trend exacerbated by the pandemic, when there has been a big shift both to online spending and, in shops, to contactless payments. In a report last week, Worldpay, the financial technology firm, said that cash use for point-of-sale transactions more than halved last year, from 27.4 per cent in 2019, to 13.4 per cent. It is projected to decline further — to 6.9 per cent in 2024.
People still using cash will be in a minority, though not in as small a minority as in some other countries. The equivalent 2024 projection for Sweden is just 0.4 per cent of purchases; Denmark, 0.8 per cent; Norway, 0.9 per cent; Hong Kong, 1.6 per cent; Australia, 2.1 per cent; and the Netherlands, 2.8 per cent.
This matters. In a speech last month, Sir Jon Cunliffe, a deputy governor of the Bank, asked whether we still need public money — money issued by the state to its citizens — in an increasingly digital age.
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Cunliffe is co-chairman of the Bank of England-Treasury taskforce on an officially issued digital currency — a central bank digital currency — announced in April.
In his speech, he noted that “I promise to pay the bearer” banknotes — public money — are still used in millions of transactions. Most transactions, though, are not in the form of public money but, as he put it, “digital private money” issued by commercial banks. This is also true for the money that people hold, 95 per cent of which is in the form of bank deposits.
And, while most people are unaware of the distinction, this private money differs from public money. As Cunliffe said: “This private money is not a claim on the state or backed with the resources of the state. It is not covered by that familiar Bank of England promise to ‘pay the bearer’.”
He was not suggesting that people should mistrust private money. It can, as he pointed out, be exchanged for public money at any time at a cash machine — though if everybody tried to do so at once, there would be a problem.
The institutional framework that backs the UK’s predominantly private money system is a strong one — though as the deputy governor also noted, it is only just over a decade since the state had to step in and bail out the banking system, ensuring that millions of people with claims on the commercial banks did not lose large sums of money.
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The question is what the government and the Bank of England should do about the accelerating shift from public money, cash — which not so long ago accounted for 60 per cent of transactions — to private money. Public money is available only in physical form and the evidence is that, for some people, this is what they want. Despite the declining use of cash in transactions, the number of banknotes in circulation doubled between 2005 and 2017 and increased even during the pandemic. This is the so-called banknote paradox, which may also be partly explained by ultra-low interest rates on savings.
When we talk about digital currency for transactions, that does not, in general, mean cryptocurrencies such as bitcoin. Although this may have been the original intention of bitcoin’s mysterious inventor, it has not turned out like that. Cryptocurrencies have become energy-hungry speculative plays, not mediums of exchange. There are digital currencies that come closer to this original vision — “stablecoins”, issued not by banks but by big technology firms. Stablecoins are pegged to other assets, such as the dollar. Facebook’s Libra, now called Diem, is an example — as is Tether, USD Coin and the splendidly named Dai, which sadly has nothing to do with the Welsh valleys.
Stablecoins pose more regulatory challenges for central banks than bank private money, not least because technology firms operate outside their normal sphere of influence.
There are other arguments about whether we should have a digital pound and digital versions of other currencies — central bank digital currencies. Some would say that the private sector should be allowed to innovate freely and that the public sector should stand back. But that would create a serious danger of a “Wild West” in the provision of money.
As cash use declines further, public money as we know it will become less important. Cash will continue to be provided for those who want it, Cunliffe insisted, but the switch to digital looks like an unstoppable force.
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It is not the only factor. As Cunliffe put it: “Any decision that the state should issue a new form of digital money to its citizens cannot rest simply on the fact that the role in society of public money is declining. It must rest on an assessment of the benefits of ensuring available and useable public money, and the costs and risks of letting it disappear.”
That assessment is now under way. It could go either way, but I would be surprised if we did not see a digital pound, issued by the Bank. Logic points inescapably to it.
PS
Economic forecasters can never win, though they get it right more than they are given credit for. If they are bullish, they are attacked for being too optimistic, and vice-versa. The Organisation for Economic Co-operation and Development (OECD) has been criticised for revising up its growth forecast for the UK and, by implication, for being too gloomy before.
This, it seemed to me, was pretty wide of the mark, and reflected a fundamental misunderstanding of the forecasting process. The OECD revised up its growth forecast for the global economy this year, made last December, from 4.2 per cent to 5.8 per cent. For the UK, the upward revision was from 4.2 per cent in December 2020 to 7.2 per cent now.
That earlier UK forecast was a little below the consensus at the time, but not by much, and it is important to remember that important things have changed since then. In the UK and other western economies, vaccine rollout has been faster than expected. The first Covid-19 vaccination, to 90-year-old Margaret Keenan, was not administered until December 8.
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Not only that, but the UK and others learnt to cope better with lockdowns than had been feared. Last December, the impact of the November lockdown was not known, let alone the one that began in early January. As in other countries, their impact has been milder than the spring 2020 lockdowns.
There is also the contribution of Rishi Sunak’s March budget, and the so-called super deduction that will bring forward business investment and was one bit of the budget that was not leaked in advance.
These were all important changes.
The growth forecast that looks most out of line, incidentally, is the UK official one. In March, the Office for Budget Responsibility predicted only 4 per cent growth this year, expecting a bigger fall in GDP in the first quarter than occurred and a slower boost to investment from the super deduction.
Unless it knows something we don’t, that forecast will have to be revised higher later this year.
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This year’s rebound will leave the UK with plenty of work to do. According to the OECD, the combination of Covid-19 and the economic damage from Brexit will hit potential output harder in the UK than most other industrial countries over the 2019-22 period. The UK will also be at the bottom of the G7 league in 2025, it says, in terms of the level of GDP on the basis of consensus projections now — compared with forecasts made before the pandemic and the government’s thin EU trade deal.
The UK shortfall, in other words, is expected to be larger than others. America, thanks to the Biden stimulus, is expected to have a bigger economy in 2025 than was predicted by forecasters before the pandemic.