In a speech to the Brookings institution on Thursday, the Bank of England (BoE) governor, Andrew Bailey warned against digital currencies like bitcoin, demonstrating an unwillingness to come to terms with its inevitability.
In Brief
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The BoE is set to introduce a UK-based Central Bank Digital Currency (CBDC).
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In the Governor’s view, anything that isn’t issued by the Central Bank carries risk.
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Physical cash is no longer trendy, opening the door for standardised digital payments.
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Owning bitcoin has never been more attractive proposition.
During the speech, the governor insisted that bitcoin has “no connection” to money, asserting that there was “no intrinsic value” in the leading crypto. He added that the bank is still discussing a central bank-backed digital currency (CBDC).
In spite of this warning, Bank of England Governor Andrew Bailey discussed automation in finance, so much so that the title of the speech was “reinventing the wheel (with more automation)”, sounding a distinctly familiar tune in the crypto-verse.
While the elephant in the room that is bitcoin was not meaningfully addressed, the thesis of the speech was that finance was awash with innovation. Bailey admitted that there were many new ways that facilitated payments, and back in July, said that the BoE was floating the idea of its own digital currency.
However, innovation is not enough according to Bailey, who was critical towards cryptocurrencies.
As could be expected, the governor pointed out that while blockchain technology may be impressive, the innovation has not led to efficiency in his view.
Bailey continued to underline his view on digital currency, stating that “payments regulation should reflect the financial stability risk, rather than the legal or technological form of payment activities.“
This is a notable change of tune from March when he told bitcoin holders to be prepared to lose all their money.
BREAKING: The Bank of England governor-designate, Andrew Bailey, says those holding bitcoin should “be prepared to lose all of your money” and “bitcoin has not caught on much”
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— FTX (formerly Blockfolio) (@ftx_app) March 4, 2020
Currency, but not money?
In a nutshell, Bailey is sure that the role of the central bank is to create and manage fiat money. As such, monetary policy must be dictated by bureaucrats in suits who will go out of their way to ensure the status quo reigns supreme.
Theoretically, government is able to claim fiat cash as its own because it can levy taxes in order to back up the value of its currency. However, given that the central bank has full control over the money supply, the question as to whether such taxes are really necessary beggars belief.
According to Bailey, however, the problem is that physical cash is going out of fashion, and that digital payments were on the rise before the pandemic, with UK withdrawals down 60% from their levels prior to the quarantine.
Bailey then argued that this underlines the need for payments to become digital, but cryptocurrencies like bitcoin were not the answer in his view.
He said: “they have no connection at all to money. They may have extrinsic value – you may like to collect them for instance, and as such they are a highly risky investment opportunity. Their value can fluctuate quite wildly, unsurprisingly. They strike me as unsuited to the world of payments, where certainty of value matters.”
‘Stability’ in a race to the bottom matters
Shifting his thesis to stablecoins, he commented on their stability, saying the stablecoins “offer useful benefits”, providing a consistent basis for money transfers with lower frictions.
Should stablecoins become widely adopted as a means of payment, there must be equal standards to those that are in place today for other forms of payment types, argued Bailey. He went on to propose that a useful stablecoin must present “no risk” and not low risk. Exchange for fiat must be available at all times.
Needless to say, the governor’s speech strongly suggests an imminent introduction of a CBDC for the UK, which will probably come about sometime in 2021 shortly after the USD and Yuan digital currency launch.
Of course, amidst the flurry of fear, uncertainty and doubt on anything that isn’t issued by the BoE in Bailey’s stance, concerns of mass cash flow surveillance and currency debasement weren’t addressed in any regard, nor were the risks of keeping cash reserves as a main investment.
That said, if a Bank of England CBDC is inevitable and physical cash is doomed, then what’s to stop people in the UK from hoping on an exchange and trading their cash for a digitally scarce asset such as bitcoin?
