Should this task force lead to an eventual adoption of a digital pound, wider adoption of cryptocurrencies among a broader range of investors will almost certainly follow. Once the Government begins to issue money digitally, a whole new pool of traditional investors, including HNWs and institutions, will naturally adapt their view of digital assets and increasingly consider cryptos as a viable form of money. Eventually, Government-level endorsement will filter through to wider society, making people more receptive to the concept of cryptocurrencies like bitcoin.
And in the longer-term, if the Government starts to issue a digitalised version of its currency, it won’t be long until cash completely disappears. In the meantime, what are some of the complexities – as well as potential benefits – of the UK adopting a CBDC from the findings of this new task force?
Does a ‘britcoin’ leave a future for cryptos?
One of the foundational characteristics of cryptocurrencies is that they’re decentralised. With transactions recorded and anonymised on the blockchain, they operate outside of the control of a central authority. It is reasonable to hold the view that any government-backed coin nullifies this premise – and may even centralise cryptos out of existence. But the truth is that a CBDC and a cryptocurrency could co-exist; and very comfortably so.
Decentralised cryptocurrencies and CBDCs serve two completely different purposes. Bitcoin, for example, will maintain its decentralised status, while a UK CBDC would enable the Government to assess macro-economic situations in real-time.
As things currently stand, a typical corporation would pay its taxes approximately 18 months after a transaction, with additional time spent on the filing process. Therefore, there is a lag time between then and when any adjustments to fiscal or monetary policy are implemented in response to the state of the economy. A CBDC backed by blockchain technology will give governments oversight of economic activity as it happens and enable a real-time response. For example, government data on the extent to which the Covid-19 pandemic has impacted businesses was collected through surveys – several months after any initial hit. However, with digital cash, governments can have hourly supervision and provide relief almost immediately. In essence, while the Government is not looking to replicate the role of a cryptocurrency, the technology that underpins them is of great value to them – as well as to wider society.
An institutional and high-net-worth investor perspective
As of late, institutional and high net-worth investor involvement in the crypto space has dominated headlines, with reputable organisations like PayPal integrating crypto services into their offerings and individuals like Elon Musk consistently endorsing bitcoin publicly. This increasingly positive reception of cryptos by traditional players has potentially played a part in bitcoin’s growth of more than 300% in 2020 alone.
However, despite this recent spike in interest, the reality is that institutions have long been involved in crypto markets. In light of this, it’s also worth exploring what impact the adoption of a CBDC may have on institutions, too.
While the BoE may spearhead the initiative to introduce a digital currency, it may be difficult for them to issue it directly to the wider public. As commercial banks across the country are major stakeholders for the BoE, we expect a CBDC task force to outline a diligent process where these banks are the intermediaries tasked with issuing a digital currency to retail customers. As a result, these institutions will have access to advanced blockchain technology, opening doors for them to apply semi-automated capabilities to banking to create a faster and more enhanced experience for them and their end-customers.
Similarly to institutions, HNW investors will likely see the Government’s endorsement of digital money as a sign of maturity from the wider digital asset space, leading to even wider adoption of cryptocurrencies.
Increased adoption from both HNW investors and institutions creates a positive cycle for the industry, with wider adoption considered another indication of market maturity. This invites sophisticated regulatory initiatives and frameworks, which is evidence of a stable market. And such stability inspires increased adoption from HNW investors and institutions, with a government-backed digital currency fuelling this ongoing cycle.