Save content
Have you found this content useful? Use the button above to save it to your profile.
Dion Seymour: CBDC myth-busting piece | accountingweb
iStock_greyfebruary_digital_currency

Time to bust the digital currency myths

by

With much misunderstanding circulating about central bank digital currency, Dion Seymour looks at the difference between Bitcoin and Britcoin, and tries to dispel some myths.

15th Feb 2023
Save content
Have you found this content useful? Use the button above to save it to your profile.

Following on from Tom Herbert’s article asking What’s the value of a digital pound? I would add there is still a lot of misunderstanding around central bank digital currency (CDBC). While I am not going to go into detail on the pros and cons of a digital pound, I will try to dispel some myths. 

Just to note, however, that the development of a digital pound, or “Britcoin”, has been discussed across government departments with the UK not being alone. A review of CBDC Tracker shows that, while few CBDCs have been launched (the Bahamas were first), there is significant activity across the globe at differing stages of development.

Let’s dive into some myths. 

What’s crypto got to do with it?

CBDCs are invariably compared to cryptoassets (cryptocurrency). To a casual observer they may appear similar, but a CBDC is not a cryptoasset. A key difference is that distributed ledger technology (DLT), like blockchain, is required in order for a digital currency to be a cryptoasset by many of the current definitions. 

The topic of blockchain is often thrown into CDBC discussions. Unlike cryptoassets, a CBDC does not have to use any form of DLT and a closed system could be used as is the case for financial transactions. Also, not all distributed ledgers are open to the public in the way that Bitcoin’s blockchain is open to all. Versions of DLT exist that are private and require permission to join, and see transactions. For a CBDC it is more likely that these approaches would be used. 

Most importantly, unlike cryptoassets, a digital pound will be backed by the Bank of England (BoE). Even for cryptoassets that have some degree of counterparty, such as stablecoins like Tether, they would not be a currency – there is a difference between legal tender and a currency. Being issued by a central bank, or other authorised issuer, is significant with the credit risk resting with the BoE. 

It's the end of cash as we know it 

Cash will continue to be available and the BoE has, repeatedly, stated that the digital pound would operate alongside physical cash. If cash was to end it seems unlikely that a digital pound would be its death knell. However, cash use is declining and the consultation paper states that card payments continue to increase, as have online retail sales. However, less than a decade ago, cash payments made up 55% of transactions. By 2021 this has fallen to 15%.

Money is evolutionary. What we consider to be money now wasn’t 100 years ago (no plastic cards back then) and it will certainly change in the next 100 years. Is this the next step? Will spending on Web3 become just as easy as using a bank card? Only time will tell. 

Won’t someone think about the planet?

Discussions on CBDCs often also include comments about energy use, which is linked to the use of energy for Bitcoin. However, as highlighted above, the energy concerns of blockchain are not relevant to a CBDC, as the underlying technology would not be using a permissionless blockchain (which is, deliberately, an energy-intensive technology). 

What could this mean for tax and accounting?

A digital pound will be issued by a central bank and, in many ways, is the same as the money in your bank account (commercial money). Therefore, from that perspective, existing legislation should accommodate a CBDC (unless any provision is specifically in relation to physical cash) without too much concern.

While no standard exists for accounting purposes, it is hard to see how IAS 7 would not apply as a digital pound as it would be readily exchangeable for goods or services and also legal tender. Certainly, IAS 38, as generally used for cryptoassets, appears to be less applicable as it applies to non-monetary assets. 

However, none of this dismisses the huge challenge in terms of how (if it is introduced) any digital pound will be implemented. For example, while it is noted that the government wants to ensure privacy and will not “program” the money, it remains unclear what, if any, safeguards will be put in place to ensure that and prevent others from doing the same where the government may indirectly benefit. For example, in theory, it could be programmed by other bodies to control our spending, such as on climate-friendly activity, or to report on spending on unhealthy products to your life-insurance provider. However, before we worry too much, there is still a distance to travel.

Replies (30)

Please login or register to join the discussion.

avatar
By Hugo Fair
15th Feb 2023 18:10

On the plus side, this article doesn't stray into the usual realms of fantasy by attempting to claim spurious benefits that will arrive on the coat-tails of this approach.
On the other hand, it is surprising that NO benefit is even posited?

Thanks (3)
Replying to Hugo Fair:
avatar
By Hugo Fair
15th Feb 2023 18:16

Oh, one other thing ...

"However, less than a decade ago, cash payments made up 55% of transactions. By 2021 this has fallen to 15%."
It would be nice to know the source of this data - if only to see what caveats were no doubt published alongside the figures (such as, I imagine, that this relates to reported UK transactions but not the original source of them - and not to the host of more or less unreported transactions, not all of which are illicit).

Thanks (4)
Replying to Hugo Fair:
boxfile
By spilly
15th Feb 2023 22:51

Our retailer clients have all said that their cash take has increased over the last 6 months. They mostly feel it is down to people on reduced budgets finding it easier to manage when using physical cash.
One has responded by asking employees if they want all or part of their wages in cash - saves on the high bank charges for cash deposits apparently.

Thanks (6)
Replying to Hugo Fair:
avatar
By listerramjet
16th Feb 2023 09:55

a debit or credit card transaction is no more than cash by a different name! We saw a decade or so ago that the banking system is not secure in the way that cash is, and for that reason alone it is hard to see the demise of cash.

Thanks (0)
Replying to Hugo Fair:
avatar
By listerramjet
16th Feb 2023 09:56

Can you think of one? Personally I can't. But there is an old saying. If you can't work out who the mark is, its you!

Thanks (2)
Replying to listerramjet:
avatar
By Hugo Fair
16th Feb 2023 11:15

Due to the wonders of how this site's software places comments within a thread, I'm not sure what aspect you're questioning there.

But if it's a reference to my "the host of more or less unreported transactions, not all of which are illicit" ... then a simple example would be cash payments taken by someone as part of a 'side-hustle' hobby where total income is below the threshold.

Thanks (1)
the sea otter
By memyself-eye
15th Feb 2023 18:12

Surely the only issue is why does anyone thing 'Crypto' has any value at all?

Beats me, and I invest in gold.......

Thanks (3)
Replying to memyself-eye:
avatar
By Hugo Fair
15th Feb 2023 18:23

I'm waiting to see who's the bright spark that first claims cryptocurrency is a 'wasting asset' for CGT purposes!

Thanks (2)
Replying to memyself-eye:
avatar
By listerramjet
16th Feb 2023 09:53

money does not have any intrinsic value, but then I guess you know that

Thanks (0)
Routemaster image
By tom123
16th Feb 2023 07:32

Around 20 years ago I worked for a company that made the armoured cash vehicles for companies like G4S.

That company still exists, but is making a fraction of the vehicles it used to.

Thanks (3)
avatar
By JustAnotherUser
16th Feb 2023 08:32

CDBC is simply to do with competition, technology and control. The exact opposite of Bitcoin.

I see a future where such items as benefits are issued on the governments locked and private blockchain, where its total issuance can be created whenever they need, and smart contracts are used to govern where issued tokens can be spent.

Imagine a world where Mrs Smith gets her universal credit via the CDBC, smart contracts can dictate when and where it is spent, or simple know where it is spent and who with....

Companies will lobby and likely bribe to be included in smart contracts.... "use your CDBC credits
here for 5% discount" will be plastered on the side of Tesco's as they secured the contract with the government and Asda did not...

Cant buy cigarettes using CDBC, limits on alcohol, I can see Jacob Rees Dog lauding that "dole dossers can no longer use their dole money to buy 70 inch plasmas or drugs as the CDBC wont allow it"

CDBC's will be a currency, a very dystopian one, they will restrict the poor and benefit the wealthy....for this reason it will happen.

Thanks (8)
Replying to JustAnotherUser:
avatar
By listerramjet
16th Feb 2023 09:51

difficult to see any reason why Mrs Smith should not continue to receive her welfare via a bank account. I don't see anyone suggesting otherwise.

Thanks (1)
Replying to listerramjet:
avatar
By JustAnotherUser
16th Feb 2023 10:02

of course you don't, they're not going to tell you the truth about the CDBC intentions are they?

What the BoE says...

"The digital pound would be a new type of money issued by the Bank of England for everyone to use for day-to-day spending. You would be able to use it in-store or online to make payments. " .... like we today with the current pound?

"The digital pound would be denominated in sterling and its value would be stable, just like banknotes. £10 in digital pounds would always have the same value as a £10 banknote." .... still seeing nothing new here....

"it would not replace cash" .... keep going...

"The digital pound would not be a cryptocurrency or cryptoasset" .... glad we cleared that up.....

Example use cases they give.... buy a coffee... pay a bill..... erm????

and heres the golden egg..... " There are also new forms of money on the horizon. Some of these could pose risks to the UK’s financial stability. ".........

...We think the digital pound could help us maintain trust in money and protect our financial system, while also improving payments by increasing efficiency and enabling innovation...... key point here is "innovation" they can do stuf with a CDBC that they cannot do right now, but fail to mention these things.

We already have a CDBC, which also has a physical aspect.

Thanks (2)
Replying to JustAnotherUser:
By Nick Graves
16th Feb 2023 12:30

Indeed - and whereas Bitcoin is limited to 21 million coins, Britcoin will be fiat/magic money tree theory on steroids.

They won't even need to go through the charade of selling bonds to primary dealers before the BoE monetises them - it's so fiat it's Stellantis...

Since neo-Keynesians hate plebs saving for capital formation & investment, they could even have an expiry date like other coupons tend to.

Other micro-management of your finances would be possible, as you describe.

Credit cards became popular because there was an obvious advantage or two to them - they were never compulsory.

They wonder why the take-up of proto-CBDCs has been so lacklustre - authoritarians just don't get it.

The advantage paper promissory notes (or even real money) has is that you can still spend it when the power or internet systems collapse. Which seems increasingly inevitable.

Indeed, Martin Armstrong has an interesting collection of scrip issued by retailers, stock markets, etc for use when previous monetary systems have failed - going back to Roman times!

TL:DR; we neither need nor want your stinkin' CBDCs!

Thanks (1)
Replying to JustAnotherUser:
avatar
By listerramjet
16th Feb 2023 09:52

Jacob Rees Mogg is currently a back bench MP and the language you put in his mouth is not how he normally speaks. Why so partisan?

Thanks (1)
Replying to listerramjet:
avatar
By JustAnotherUser
16th Feb 2023 10:15

Apologies to Mr Mogg, was simply the first politicians name who came to mind, I shall leave a letter at his desk.

Thanks (0)
Should Be Working ... not playing with the car
By should_be_working
16th Feb 2023 09:48

Apart from the technical insight, the article doesn't really touch on the 'why', though to be fair he doesn't claim to. Nevertheless, he does carefully acknowledge the real reason for many governments' enthusiasm for CBDCs in the final paragraph.

"... is noted that the government wants to ensure privacy and will not “program” the money..."
" ... it could be programmed by other bodies to control our spending, such as on climate-friendly activity, or to report on spending on unhealthy products to your life-insurance provider."

"However, before we worry too much, there is still a distance to travel."

A little naïve if I can say so. One usually decides where one is going before even setting out.

Thanks (2)
avatar
By listerramjet
16th Feb 2023 09:48

The technological differences are interesting but somewhat arcane. In practice the idea of a closed system is perhaps a double edged sword. But you have to ask what benefits this offers users over traditional bank accounts. You also have to ask why government thinks it should get involved in such a system. Particularly as the one significant characteristic of crypto is that it is not backed by governments.
But it also offers an intriguing tax question. At present HMRC has the (flawed) view that crypto currency gains should be taxed, and indeed it seeks to do so. But you seem to be suggesting that this "official" enterprise will be treated as cash, and thus presumably any gains not subject to tax.

Thanks (1)
By Kentwillumsen
16th Feb 2023 10:27

I had a think about this; so let me mention a few things for you guys to think about:
CBDC cannot track individual items within a purchase for now.
CBDC is a single point of failure even if a disaster recovery plan exists, and is therefore vulnerable to local technical issues; internet and connection issues; disasters; cyber attacks and much more.
CBDC can expand money supply (generate more cash reserve) with helicopter money or positive interests.
CBDC can reduce money supply (take money away from you) with haircut/bail-in/expiration or negative interests.
CBDC can track summary transactions just like debit and credit card transactions can do today.
CBDC can easily monitor money flows and therefore identify fraud or tax avoidance.
CBDC card transactions could bypass clearing companies like Visa and Mastercard; lowering or removing card transaction costs (end of card clearing companies?).
CBDC transfers could bypass retail banks completely (end of private banks?).
CBDC transactions could be taxed (like Tobin tax) centrally using simple to complex rules (percent/fee/time based/usage based).
CBDC balances could be taxed centrally (like wealth tax) using simple to complex rules (percent/time based/usage based).
CBDC balances could be controlled like capped to an amount; be time limited; or more complex rules applied like FIFO/LIFO rules (if you don’t spend certain money with a certain time you lose it).
CBDC could enforce Universal credit; benefits; and pensions to be paid directly into a CBDC account.

Thanks (2)
avatar
By moneymanager
16th Feb 2023 10:47

"A" central bank digital currency "issued b y the BoE, is a mere fig leaf to the DIRECT and ultimately only account, by retail customers, with the BIS, don;t take my word for it, the CEO augustin Carstens is in video saying exactly that.

I have previously been taken to task here for referring to his statment that CBDCs will enable the bank to see "where this expression of the central bank's liablity is being used" as a mere reference to the correct accounting position. In directly answering the point above as to CBDCs not being programmed, well, perhaps not those badged by the BoE, but Carstens has actually said the precise reverse of that and quite clearly that in turn means that that from the BIS's perspective your money has become THEIR money which they will graciously allow you to use, or perhaps not, at the most granular and personal level from carrots, to travel, an heating, we have already seen the ability of government to order the payments systems (e.g. PayPal) to shut down perfectly legal accounts in Canada and in many other cases, those same systems have taken the action themselves.

As to cash use, going down, well the now admitted pointless enforced lockdown measures were designed to change behaviours and in the most damaging of ways formed a background for this assertion, cash use is exploding not only here but in many places across the globe, too many people clearly smell a rat.

Is this article a paid for advertisment?

Thanks (3)
avatar
By unclejoe
16th Feb 2023 11:22

Dion, you set out to dispel some myths, but to my mind you have not dispelled any. Perhaps you could write an article that answers a few questions. What exactly is a digital currency? It seems to me that in essence this is a nationalisation of the banking system. While "money" that we use today is a series of digital (i.e account transactions) through a distributed banking system, with digital currency we only need one bank - the Bank of England. That would make retail banks irrelevant, although I am sure they would exist, at least in the short term, if only to act as middle man to hide the true nature of the CBDC. No doubt the bank of England would argue that as a corporate body this would not be nationalisation. The BoE states on its website that it is independent of government. Is that not the most monstrous porky-pie - being 100% owned by the government in what possible sense is it independent?

What are the advantages of CBDC to the man/woman or business in the street? I can see that the system may be more efficient, if it eliminates the costs of intermediary banking system. And I can see that it could be a great benefit in combatting financial crime, including evasion of taxes. Although the current tools the government has are not used effectively - the FCA, for example, is about as effective in this regard as a chocolate teapot. And what happens when something goes wrong, as it inevitably will? At least is, say, TSB gets a glitch we only have part of the system screwed up. As HMRC digital project shows, government technology projects are not always successful.

The chilling part, to me, is in your last paragraph. I think we might paraphrase to governments position as this: We are developing a financial system, using your money, as taxpayers, which will be better than we have at present. We can't really tell you what the benefits will be, but trust us there will be benefits. Yes, it could enable much greater government control over your lives, but trust us, we are not going to use it for that purpose.

Given that governments lie to us all the time why should we trust this? One last question: Isn't the Chinese Social Credit system in essence a CBDC?

Thanks (2)
avatar
By AndrewV12
16th Feb 2023 11:25

Good article i have never heard of Britcoin, neither has the spell checker on this site.

The spell checker recognises Bitcoin though.

Thanks (1)
Replying to AndrewV12:
avatar
By RogerMT
16th Feb 2023 12:08

I bet the spellchecker is mucho confused over CBDC/CDBC. The poor thing will go into meltdown! :)

Thanks (4)
the sea otter
By memyself-eye
16th Feb 2023 12:51

the spellchecker has no intrinsic value - unlike the tenner in my wallet which will have value at my local pub.

Thanks (1)
avatar
By Richard Grant
16th Feb 2023 18:14

This misses one of the selling points that some economists get excited about, the fact that the central bank has total control on what it is spent on. By central bank you can read government because they are one and the same. If they want to get the economy moving they will apply negatives rates, they can put time limits on funds so it's a case of spend it or lose it, parachute money is another fantasy they want to try. Sunak's "eat out to help out" was a crude test.
It's an expensive exercise in state control with zero benefit for the population after all wasn't a BoE talking head saying last week that people would not be allowed to hoard it. Let that sink in.

Thanks (0)
RLI
By lionofludesch
17th Feb 2023 07:37

If my mate is going to the coffee shop and I say, "get me one while you're there, I'll give you the money", how do I do that? Does my mate need a terminal?

What happens when there's a cable theft and all the phones in the town are down?

Thanks (0)
Replying to lionofludesch:
avatar
By JustAnotherUser
17th Feb 2023 08:18

in crypto terms, transferring funds is a few clicks away on a mobile device. if you had a wallet address of "lionofludesch.eth" I could send you any amount, just as (or faster) than it would to open my banking app, log in, select you, type the amount and send.

You can do this with anyone, anywhere with an address.

This is 1 benefit of crypto, try to send your hypothetical friend in Uganda £100 using fiat and traditional banking vs sending him the equivalent in any crypto...

In Uganda he needs a phone (older ones are fine) and internet, no bank needed, no remittance, instant.

in technology terms, if "all the phones in the town are down" that would create just as many issues for other services reliant on them, not just coffee shops.

Thanks (0)
Replying to JustAnotherUser:
RLI
By lionofludesch
17th Feb 2023 09:06

It's happened three times to me. Shops just used low tech, much maligned bits of metal and paper and carried on. Take away that option and they'd have to close losing trade.

Cash is your safety net. Don't be too keen to dump it.

Thanks (0)
Replying to lionofludesch:
avatar
By JustAnotherUser
17th Feb 2023 09:12

its an evolving world, yes, even in the UK this still happens.
My local shops card machine is always broken, guess what, I dont shop there I go to the next corner shop that's just as local.

You know what's not local, a cash machine, that's about a mile away at the nearest Tesco. What else is local, two local bank branches, both closed and both with the cash machines removed.

There is a cash machine at the local shop, it charges £2.50 to withdraw £10....

Zero reason for bad technology when network uptime is so high.

"More than one in four cash machines are charging people to withdraw their money at a time when banks are saving millions by closing branches, according to the consumer group Which?"

Thanks (0)
avatar
By Arbitrary
17th Feb 2023 16:34

What on earth is the point (beneficial purpose and to whom) of this digital pound? In what way is it useful? The article does not explain. As another writer has pointed out, control is the likeliest reason and this will be most unlikely to be a benefit to anyone but large organisations. On that basis it sounds a crap idea.

Thanks (1)