full circle

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In my continuing quest to convince you of the unbridled joy of cryptocurrency, did you know that the cash in your pocket is legal tender but the pounds in your bank account are not? Irrespective of the amount you have stashed away, if your bank hits the buffers (and several have in recent times) you are able to reclaim only the amount that is guaranteed by the government, and underwritten by our central bank, the Bank of England. However, this may be about to change as governments the world over actively explore the potential of their own Central Bank Digital Currencies (CBDCs), otherwise known as Govcoins.

In a move that would represent the most radical financial innovation since the cheque, Govcoins would be legal tender in electronic form, and would be tethered penny-for-penny, cent-for-cent and yen-for-yen to the respective currency of that country, irrespective of the amount. This currency, bitcoin by any other name, would be controlled by both the relevant government and their central bank, and distributed/spent using a centrally developed app similar to PayPal or Apple Pay. Sadly, unlike bitcoin, I do not envisage Govcoins would be limited to a predetermined, and unchangeable number and hence would suffer the same QE and inflation/deflation vagaries as the FIAT currency it’s tied to.

‘Stablecoins’, a crypto attempting to reduce wild fluctuations in price by pegging itself to a currency or commodity, have been around for several years: USD Coin is tethered to the dollar, Glint to the price of gold, and whilst operating in a fashion completely alien to the founding principles of bitcoin and ethereum, Govcoins could prove to be the most compelling reason for global acceptance. In fact, how long before such a Govcoin is tethered to a particular crypto as that coin is adopted by a country as its currency?

Governments have always feared the relative anonymity often associated with cryptos and, even though the information landscape has changed significantly over the last decade, they remain explicitly concerned about their supposed illegal use and implicitly silent wrt tax evasion. Central banks are particularly concerned by Facebook’s continuing crypto plan for a private digital currency – yep, the earlier Libra didn’t go away, it was merely renamed Diem and developed further!

If cryptos have caused consternation within the financial system for many years, it’s now time for our high street retail banks to be truly worried as Govcoins pose a genuine existential threat to commercial banks. Today’s banks are expensive, we pay an average of £150 per year in fees and, as mentioned earlier, our savings are not always legal tender and can quickly disappear in a run. CBDCs could lead to the creation of faster, cheaper, safer payment systems and with every transaction being tracked, tax evasion, money laundering and fraud could virtually disappear overnight. Furthermore, with a direct impact on consumer spending, Govcoins would prove to be a powerful monetary tool. In China’s e-yuan trial, the gifted coins were programmed with an expiry date to forcibly encourage their immediate spending, which counters the long-held believe that QE money resides too high in the financial food chain to actually make any difference to society’s spending habits. The question such a system begs is why would anyone use a high street bank if central banks were to provide the same service, more cheaply, more securely and more effectively?

Govcoins are certainly enhancing the crypto debate but it would be interesting to know bitcoin’s founding father, Satoshi Nakamoto’s view on this level of excessive state control and financial surveillance? Seeing as it was designed to achieve independence from these forces I suspect he’s somewhere spinning in his grave-like billionaire’s bunker, but we’ll never know as his identity remains, to this day, a mystery. So far, his brainchild has proved impressive as a long-term store of value but useless as a means of exchange so perhaps Govcoins could go some way to realising his dream.