Automatic taxation risk if ‘Britcoin’ gets the green light

When Mark Zuckerberg unveiled plans for a global currency four years ago, alarm bells began ringing in central banks and state treasuries around the world.

The prospect of a powerful multinational like Facebook promoting a digital alternative to pounds, dollars and euros was a threat to both economic and political sovereignty. It had to be taken seriously.

Libra, as Facebook’s project was called, ultimately fizzled out as Zuckerberg became distracted with a new bet on virtual worlds rather than currencies.

Yet fears that digital money could threaten national currencies lingered. Central banks including the Bank of England sprung into action, stepping up work on their own digital currencies.

This week, the Bank of England and the Treasury said that a digital pound – unofficially but widely dubbed “Britcoin” - could be in use by the end of the decade.

While stressing that the project is still in the exploratory phase, officials are nonetheless pressing ahead with laying the groundwork for a potential launch.

Both Chancellor Jeremy Hunt and Bank Governor Andrew Bailey have thrown their weight behind the project, suggesting it would “promote innovation, choice and efficiency in domestic payments”.

However critics of Britcoin are concerned that it could become a costly “bridge to nowhere”, solving a problem that doesn’t exist.

Former Bank Governor Lord Mervyn King said last week there are “no problems to which a CBDC [central bank digital currency] is the only, or even the most obvious, answer”.

Central banks around the world are considering introducing digital currencies, but Britain’s plans are further ahead than most.

If launched, a digital pound would mark an alternative to coins and notes, although the Bank was at pains to point out that it would not replace them. However, it could hasten the arrival of a cashless society as digital payments become more widespread.

For many observers, the project has invited more questions than answers.

Civil liberties campaigners have warned that it would represent a route to greater state surveillance and control.

Commercial banks have expressed concern about the risks involved. And even the Bank itself has warned of possible unintended consequences unless executed perfectly.

A digital pound would, despite the name, function more like a payment system than a separate currency. We would be able to use cards, online banking and money transfer apps to spend digital pounds to individuals and businesses in the same way we do today. Digital pounds would not bear interest, and would be equivalent in value to printed money.

The Bank of England, which already settles some large transactions between financial firms, would operate the infrastructure and management, giving it oversight of who holds what and where money is moving.

For many observers, the appeal of this project is questionable. Most people have little trouble making digital payments through existing bank transfer systems or card networks, such as Visa and Mastercard, today.

Sir Jon Cunliffe, a deputy governor at the Bank, says a digital currency could unlock new functions of money that we cannot do today.

“Programmable money, for example, could enable the development of smart contracts which carry out specific actions based on pre-defined actions and conditions,” he said in a speech on Tuesday. Imagine telling your money to send itself to your landlord when the rent is due, for example.

Yet the House of Lords’ Economic Affairs Committee, a group including former governor Lord King, has warned that central bank digital currencies, as they are known, present “a lot of risk for very little reward”.

“I think we need to be very clear what problem we're trying to solve,” says Lord Bridges, the committee’s chair. “I think that the Bank and the Government is right to be exploring this. But we must have full accountability and scrutiny.”

Lord Bridges is considering tabling an amendment to financial services legislation that would require parliament to approve the creation of a digital pound, rather than letting the Government and Bank of England press ahead themselves.

Privacy advocates have warned that a digital pound would amount to a powerful surveillance apparatus.

“There’s an extraordinary centralization of power that comes with a centralised digital currency,” says Silkie Carlo of the campaign group Big Brother Watch. “There is the potential to monitor all spending and transactions at a central level, and a clear temptation for the surveillance to spill over into control as well.”

She says that smart contract technology, which allows software to carry out transactions, could lead to automatic taxation or money being requisitioned to pay fines through a government-run digital wallet. More power would shift from the individual to the state.

Ministers have insisted that the digital pound would be secure and private, with access to spending data only available to law enforcement in limited circumstances.

However, Danny Kruger, a Conservative MP on the Treasury Select Committee, argues that the simple fact of creating the technology would leave it open to abuse in the wrong hands.

“We are talking about a technology that will replace cash, that will give the authorities the power to oversee individuals’ transactions,” he says.

The Bank and Treasury argue that a stable economy requires reliable money, something that cannot be left in the future to tech giants, foreign digital currencies, or worse, to decentralised cryptocurrencies like Bitcoin.

“It’s very important that we come forward with potentially a digital pound precisely to avoid this space being colonised solely by, for example, private large tech companies,” Andrew Griffith, the Economic Secretary to the Treasury, told MPs on Tuesday.

Such concerns may be overblown. Facebook’s Libra, subsequently renamed Diem, failed to launch, let alone replace fiat currency. Bitcoin has attracted many speculators but is of little use for day-to-day payments. Sceptics have argued that even if a private currency took off, regulating it would be easier and cheaper than competing with it.

The Bank itself has warned of possible serious risks associated with a digital pound. In a consultation paper, the Bank outlined a number of potential problems that the digital pound could create. It warned that mass withdrawals from bank accounts to digital pound wallets could amount to bank runs, suggesting that transfers should be limited to between £10,000 and £20,000.

It said making it easier to move cash in and out of accounts could affect banks’ assets, affecting lending and making it harder for the Bank of England to cut interest rates to stimulate growth in a crisis.

“There’s real risk in that, it can be managed but it has to be very carefully carried out,” Matt Hammerstein, the chief executive of Barclays UK, told the Treasury Select Committee.

The Bank and Treasury insist that individuals would have the option to use cash if they are concerned about things like this. The digital pound would sit alongside, rather than replace, cash.

Yet pounds and coins are dwindling regardless, falling from 55pc to 15pc of transactions in the last decade. The fact that this has happened without a Bank-issued digital alternative is bound to lead to questions about why one is needed and whether its introduction could simply hasten the decline of cash.

Finally, developing the digital pound is unlikely to be cheap. While The Treasury has not said how much it will cost, it has described it as “major national infrastructure [that] would require significant investment”.

The Bank spent £202m last year on “policy functions”, up from £179m in 2021. It highlighted “research into the case for a UK central bank digital currency” as one of the reasons for the jump.

The Treasury would most likely be involved in funding the project if it went beyond research. At a time when the Government is constantly reminding us that there is little room for tax cuts or giveaways, developing a digital currency may be a tough sell to both voters and the Tory Party.

Rishi Sunak has already been criticised for an overly friendly attitude towards flashy financial technology like cryptocurrencies and NFTs. The Bank of England will have to prove the digital pound has more substance.