Digital currency goes mainstream

Bitcoin is the best known of them today, but the internet has spawned a whole range of digital currencies. Up to now they have been the province of enthusiasts, but central banks are beginning to debate the merits of issuing their own digital money. China have been studying the online currencies and recently announced that they intend to launch their own.

Money theorists have been predicting that digital currency is the next logical step for money. We don’t really need the deposits and banks and transfers of money from one place to another, and we certainly don’t need the physical notes and coins. Digital currency, adopted widely, could open up some much more straightforward ways of trading with each other, and it could break some long held power structures along the way.

There are several reasons why central banks might want to consider a digital currency. From the bank’s perspective, it opens up some new options for monetary policy. They would have versatile new way of lowering interest rates. If they wanted to stimulate the economy, they could deploy ‘helicopter money’ – distributing a share of newly minted digital cash to every citizen, ready to spend into circulation.

Benefits to business include the ability to deal with each other directly through the central bank, cutting out the banking sector as a middle man. This would cut costs from transaction fees and foster innovation in payment systems.

This innovation would provide some competition for the banks, as new entrants would be able to come in offering payment services. The power of the large banks would be reduced, tackling the ‘too big to fail’ factor and helping to make a more stable economy.

Digital cash could create a more inclusive economy too, making payment services available to those without a bank account. It may in time prove to be a leapfrog technology for some of the world’s poorest. We’ve seen something similar in Kenya, were many people are now using financial services through their mobile phone without ever having access to traditional banking. A digital currency backed by the central bank would be a natural step in such a context.

Before we get too excited though, there’s another side to this whole debate. As the banks would lose some of their power, that power would transfer to the central bank instead. How comfortable we might feel about that is a matter of personal politics, and also how devolved your central bank is. For some, digital currency is another form of state control, the opposite of what the ‘anarchic’ online currencies such as Bitcoin are trying to do.

Central banks are saying they would like to experiment with digital currency, but there is also talk of abolishing paper currency altogether. The Bank of England’s chief economist, Andy Haldane, talked about it in a speech last year. This would stop all kinds of petty tax dodging (while doing nothing for the larger scale varieties) and make it harder for criminals (though there are always alternatives). But it would also close down some important freedoms that we have enjoyed for thousands of years.

Perhaps the most powerful reason why a central bank might want an entirely digital currency is that it would be able to lower interest rates below zero. (I won’t go into the technical details, but Google ‘zero lower bound’ for why you can’t already do this) People tend to save more during a recession, which makes things worse. If you could push interest rates below zero, people would be encouraged to go out and spend it instead. Depending on your perspective, this is either the holy grail of economic stimulus tools, or enforced consumerism.

Like any new technology then, national digital currency can be used and abused. It can offer greater financial freedom and inclusion, or it can be a tool of control and oppression. So the age of digital currency should be greeted with a measure of caution and plenty of citizen scrutiny. In fact, I suspect it will accelerate the change towards a broader ‘ecosystem of currencies’, where we will use different forms of money for different aspects of our lives.

And it’s not the end point of currency. Fundamentally, we don’t need the government to create and control money. It can be simpler than that, and the real revolution in how we understand and use money won’t involve the central banks at all.

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7 Comments on “Digital currency goes mainstream”

  1. DevonChap February 3, 2016 at 2:08 pm #

    Currencies run on trust. The public have to trust the central banks and politicians not to abuse it. Inflation in parts comes from expectations, if a government has history of expanding the money supply and tolerating inflation then the public will not trust that prices won’t rise (UK in 1970s).

    An abolition of cash would risk that trust. It makes it easier for a government to run an expansionary policy (e.g. Peoples’ QE) or alternatively high negative interest rates. If people experienced those directly (rather than one or two step removed as at present) the it might cause concern people to act, moving out into gold or other currencies including crypto ones like Bitcoin. It is noticeable that while the Positive Money report talks about money flowing into Sterling from troubled foreign currencies, it doesn’t deal with the risk that Sterling might be what people are fleeing from.

    A wide eco-system of competing currencies would put a limit on how much governments could use extraordinary financial policy, but I fear that just makes exchange controls more likely, to the great harm of everyone.

    Nitpicking: Tax avoidance isn’t illegal so this wouldn’t stop it. Petty tax EVASION in the UK far exceeds corporate tax evasion and avoidance in value, even on Tax Research UK’s fancifully inflated figures.

    • DevonChap February 3, 2016 at 8:03 pm #

      See you have edited out the erroneous reference to tax avoidance. Smooth.

      • Jeremy Williams February 3, 2016 at 8:21 pm #

        I’ve taken your correction on board and changed it to a generic ‘tax dodging’. I’ve had a look for figures on the cost of cash in hand versus wider avoidance (yes, avoidance) and I can’t find any. Predictably, nobody knows – but I remember reading that cash in hand was in the region of £2-8 billion. Post a link if you have numbers.

        • DevonChap February 3, 2016 at 9:34 pm #

          According to the HRMC 2015 tax gap £6.2 billion of tax is missed in the ‘hidden economy’ which is where cash in hand sits.
          https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/470540/HMRC-measuring-tax-gaps-2015-1.pdf

          Richard Murphy of Tax Justice UK estimates the ‘shadow economy’ to miss £47.7 billion tax.

          http://www.taxresearch.org.uk/Documents/PCSTaxGap2014Full.PDF

          According to the HMRC in their definition of avoidance, avoiding tax in a way Parliament never intended, avoidance is £2.7 billion in total.

          Your original comment that large corporate tax avoidance was more important than ‘petty’ tax avoidance shows why I am so hot on correcting the false impressions NHO campaigns put around. What is high profile isn’t always what is actually important.

          • Jeremy Williams February 4, 2016 at 10:44 am #

            You may be right. I’ve seen those figures, and others again. I’m struggling to find anything specific, which kind of makes the point. What does parliament mean by what it didn’t intend? Is registering your business in Ireland something they intend? I don’t know, and since HMRC and Richard Murphy clearly don’t know either, I doubt I’ll get to the bottom of it. Best to remove the comparison.

            As for the relative significance, which is worse – one person skipping a million in tax, or a million people skipping a pound? And if the person dodging the million gets in the papers for it, doesn’t it legitimise the more petty kind?

            Not sure there’s a right or wrong answer to those sorts of questions, but you’re right to point out that I should be more careful with my language.

          • DevonChap February 4, 2016 at 12:10 pm #

            I think you should really read Maya Forstater’s blog.

            https://hiyamaya.wordpress.com/

            She looks at these tax stories in depth but from a sustainable development perspective. She has debunked many of the supposed “tax dodging” by multinationals.

            Perhaps then you’ll see why I get annoyed by many NGOs campaigns.

  2. Sarah Montgomery February 12, 2016 at 4:06 pm #

    Sent from my iPad

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