Digital Money

10 November 2022

Digital Money

The next step?

by A Banker

I write this as a classic late adopter. Five years ago, I happily paid for almost everything in cash. I counted out change for my Pret a Manger lunch each day, aiming to minimise the weight of my pocket. I knew no other way. 

But, like everyone else, the way I use money has been transformed in the last few years. I have graduated from contactless cards to using my phone as my credit card. I never carry cash, or even a physical card. My phone autofills my credit card number, making online purchases simple, and making my physical card even more obsolete. Being inseparable from my mobile phone means that using it as my wallet involves no inconvenience at all. A new age of ease and lighter pockets has arrived in double quick time.

But, while everyone focuses on what has changed and its implications (closing bank branches, digital exclusion etc), we are paying too little attention to what has not changed, and is about to change.

Because, although how we interact with money has changed a lot, the behind-the-scenes of money has not changed at all. Whether I use ApplePay, or a credit card, or a cheque, or cash from an ATM, what we call “money” has not changed. For most of us, our “money” is a bank account, which means a computer that holds a number next to each of our names, saying how much the bank owes us (or, indeed, how much we owe the bank). This number changes every time we are paid or buy something. 

We consider this to be money (even though we cannot see or touch it) because we trust the bank’s computer not to make a mistake and wipe out all records of our bank account. And because every shop accepts as payment, in lieu of real money, an adjustment to the computer number to make their account balance bigger and mine, sadly, smaller. 

This system works well (a constant stream of Amazon deliveries to my house attests to this). But it is, frankly, a bit old and ramshackle for the new technologies now being used. Our shiny new digital payments world is all built on thirty year old computer systems and a tedious and expensive system of bank-to-bank reconciliations and adjustments. It’s not even clear, indeed, what the banks do that’s so special that they get custody of all of our money. This is about to change.

New technologies (the famous “blockchain” and “distributed ledgers”) mean we can create a simpler and safer way of recording who owns what. We don’t need dozens of banks, each with different systems, painstakingly recording every payment and moving money from bank to bank to reflect this. In fact, it is now very easy for one ledger (essentially, a big spreadsheet) to record who owns every piece of money in the country (or the world) and to allow those people to transfer this to anyone else instantaneously, using the same technology (mobile payments and credit cards) that we already use. Ordinary individuals don’t need to do anything differently, but the cost savings would be enormous, and the scope for bank errors massively reduced. And the things that are most annoying (cross border payments, paying for things abroad, complicated account numbers, transferring from one bank to another) would suddenly work much better.

Win-win then? Well, maybe. But what will this silent, back office revolution lead to? If people have direct access to their money and can transfer it themselves, who needs banks? And if we don’t have banks, who will we go to for a loan? One person’s deposit is another person’s mortgage. We cannot change one half of the equation and expect the other half to stay the same. 

Who should own this key ledger? The Bank of England seems natural, as it oversees money today anyway. It is already looking at creating such a ledger, often called a “Central Bank Digital Currency”. A fully digital Pound Sterling sounds great. But does the Bank of England want the responsibility of dealing with millions of individual customers? Probably not. Even a perfect computer programme will have problems when it comes into contact with imperfect users. And the Bank of England does not want to deal with thousands of complaints every year. But is that better than having someone else controlling the money of the country? Almost certainly, as the Bank would still have to step in if something went wrong. If you are going to be responsible in the downside case, you’re probably better off running things from the outset. But what would it do if it did control all this money? Will it also start to lend money and give mortgages? Very doubtful. Surely we do not want one government entity to control all of the lending in the whole country? But with no banks, who else will do it? 

Why do we even think on such a narrow, national basis? Why have a British ledger, when we could have a single global ledger, finally making egregious bureau de change fees a thing of the past? Bitcoin has shown that this can work, at least at small scale. But do we trust our whole system of money to a single, uncontrolled, unaccountable, immutable computer programme? What if it has a design flaw? A weakness to fraud? A complete meltdown? Governments almost never outsource control of their own money, because the implications if something goes wrong are so serious. I’d be very surprised if they started now. 

Touching my phone to pay for my Sainsbury’s shop is a small act of convenience for me. But it is just the visible part of a technological revolution that touches all parts of our lives (my deferred streaming of a rugby game last night shows another, while the computer directions to lunch today will be a third). We have all noticed this change in our use of money, but really, it has been superficial. We use the same money (our bank accounts) in a different way. The next phase may be invisible. We may not even notice it happening, as we touch the same mobile phones to the same supermarket checkout counters. But it could involve a complete change in what money is and how much control governments have over our economy. A true revolution. 

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