To get the digital currency we need, we need to get the digital identity we need.

The Economic Affairs Committee of the House of Lords of the British Parliament recently published its report on a British central bank digital currency (CBDC). The report, which was titled “Central Bank Digital Currencies: A Solution in Search of a Problem?“, broadly concludes that there is no “compelling case” for a UK retail CBDC. Or, as I said in my testimony before the committee, “we don’t have what you might call a burning platform”.

The fact that there is no burning platform, however, does not mean that we should ignore the subject. The Committee said it recognizes that consumer preferences, changing technology and “the choices of other countries” may alter their views in the future. Therefore, given that it will take forever to sort through requests from different stakeholders and investigate international architectures and developments, the Bank of England and the joint Treasury task force should continue their preparations for some future CBDCs. Retail.

This means that in practice we have time to think through the issues and make sure that when we have a public CBDC and/or a variety of private digital currencies, as is frankly inevitable, they will work to the benefit of all stakeholders. . And for various reasons, this is more difficult to achieve than it seems at first glance.

Retail CBDC

If we focus on a retail CBDC, as the Committee has done, there is one particular aspect of such an initiative that I think should propel us forward. I agree with the Committee that there is no immediate requirement, but I believe that work must nevertheless proceed with a certain urgency: not because of what consumers want or what other countries, but because I think the need for some kind of “Britcoin” is mainly to offer new products and services rather than compete with debit cards or PayPal.

In my testimony to the Committee, I said that was the best reason to introduce a CBDC and I fully agree with the view of the Atlantic Council that a CBDC could help to level the playing field game for new market entrants. In my view this is a central part of the calculation of whether to introduce a UK CBDC and is far more important to UK plc than the introduction of a new way of paying in the supermarket.

Fortunately, I am not the only one from this point of view. Professor Eswar Prasad, Senior Professor of Trade Policy and Professor of Economics at Cornell University in New York, told the Committee that the UK has an efficient payments system and that there is no strong case for consumers in favor of a UK CBDC, but he also said that “one could always make the user case in terms of CBDCs catalyzing further innovation”.

Exactly. This innovation program is very important and, in the UK, it is in line with the new five-year strategic plan (ie until 2027) defined by the Payment Systems Regulator (PSR) of the United Kingdom. In addition to ensuring consumer access and protection, one of the priorities set out in the plan is “promote innovation and competitionin payments. This is a reasonable timeline and in line with the CBDC’s agenda, as the Bank of England has already stated that the introduction of the retail CBDC will be some time beyond 2025 (and the Federal Reserve is exercising similar caution).

All things considered, 2025 looks optimistic to me, but let’s get the CBDC ball rolling and prioritize a digital currency that’s best for society as a whole, not one that’s best for bankers or best for crypto speculators. or best for IT outsourcing companies.

Resilience

While I think a CBDC is needed primarily for innovation, there are of course other reasons for wanting a digital currency. The sovereignty, sustainability and resilience of critical national infrastructure, for example. So I told the Committee (as did the Bank of England) that a CBDC could help increase the overall resilience of the payment system, which is why a CBDC should be built as a system parallel to the system existing payment.

Note that there is no implication that this parallel system should necessarily be built by the central bank, or, indeed, the banks. I had the opportunity to reflect further on this subject during the presentation of the report of the Royal United Services Institute (RUSI) Committee. The findings of the report were presented by Lord King of Lothbury (a former Governor of the Bank of England).

(Lord King wrote in his book “The end of alchemythat “money and banking are peculiar historical institutions that developed before modern capitalism and owe much to the technology of an earlier era”.)

I found the most interesting discussion around the report concerned the private/public interface. Lord King said in essence that there was no need for the Bank of England to develop its own digital currency and that an alternative could be to simply effectively regulate private digital currency.

Given that the UK Treasury recently announced that legislation will be introduced to bring stablecoins into the UK payments framework, that’s certainly practical and I have a lot of sympathy for that view, but I’m afraid I don’t finally be convinced. It is not at all clear to me that private actors would implement digital currencies to maximize net welfare or achieve the broader social goals of public infrastructure.

As the Executive Director of the Bank of Japan stated in a recent speech, “it would be difficult for stablecoin issuers to profit solely from simple digital payment services…they would have to look for alternative sources of revenue, such as than advertising and/or data services.” Thus, there is a danger that competing private stablecoins may not be the best solution for society as a whole.

Back to Digital ID

Finally, one of the most important and least discussed points in the Lord’s report had nothing to do with payments or money. The report notes that witnesses told the Committee that “a CBDC should be attached to a digital identification system as the only reliable means of ensuring that payments comply with the law.”

These witnesses (including myself, by the way) were absolutely correct in pointing out that a proper digital identity infrastructure is a precursor to a functioning CBDC. Indeed, Bank of England Governor Andrew Bailey himself told the Committee that a digital ID would be needed but the question was whether it would be unique to a platform or “broader in terms of of identity”.

Determining how a digital ID will work and its relationship to the CBDC is an obvious priority (and not just in the UK). However, the Bank of England’s working paper only mentioned the possibility of digital ID in passing and the Department for Digital, Culture, Media and Sport’s recent consultation on digital ID doesn’t mention CBDCs at all, so it looks like there’s a connection that needs to be made somewhere above my pay grade to get things going.

This connection is essential. We need to get the identity side of the equation right before we continue with the money side of the equation. As I told the Lords Committee at the start of my testimony, “I am a very strong supporter of retail digital currency, but I am acutely aware of the potential for a colossal privacy disaster”.

It will take some time to get the proper privacy and security platforms in place, so it seems to me that the timelines listed above are further tightened. It will take time to assess the requirements of a digital currency, to align the introduction of digital currency with broader strategies and. more importantly, setting up the required digital identity infrastructure.