Digital Pound: Innovation or Invasion of Privacy? Let's Debate the Future of Money

https://www.bankofengland.co.uk/the-digital-pound

https://bigbrotherwatch.org.uk/campaigns/no-spycoin/

https://www.thebanker.com/Digital-pound-future-clearer-under-a-Labour-government-1720079075

With Labour's recent landslide victory, the topic of a digital currency is likely to gain significant traction. Their manifesto hinted at a strong inclination towards introducing a digital pound, which marks a significant shift in the financial landscape of the UK. The Bank of England and the Treasury have been in the design phase for some time, but Labour's victory could accelerate the push towards implementing a central bank digital currency (CBDC).

The discussion around introducing digital currencies, particularly the proposed digital pound, presents a complex balance between technological advancement and the preservation of individual privacy. Digital currencies offer significant benefits, such as increased convenience and efficiency in transactions, as well as making criminal activities like money laundering more challenging. However, these advantages have considerable risks, particularly concerning privacy and governmental control.

One of the primary concerns is that digital currencies could lead to unprecedented levels of state surveillance. Unlike physical cash, which allows for anonymous transactions, digital currencies would enable authorities to monitor, record, and scrutinise every transaction under anti-money laundering and counter-terrorist financing laws. This shift towards greater oversight could significantly erode personal privacy as financial activities become more transparent to state and private entities.

Moreover, the programmability of digital currencies introduces the potential for controlling how, where, or when money can be spent. While this could be beneficial in preventing fraud or promoting responsible spending, it also opens the door to abuse, where financial behaviours could be manipulated or restricted beyond current regulatory norms.

Examples from other countries, such as Uruguay's e-Peso and Sweden's e-Krona, highlight these challenges. In Uruguay, the e-Peso allowed for some pseudonymity, but transactions could still be traced when necessary. Similarly, Sweden’s e-Krona, although designed to retain some cash-like functions, acknowledged that it wouldn’t offer the same level of privacy as physical cash. These cases demonstrate the inherent difficulties in maintaining privacy within a digital currency framework.

There is the risk of private companies exploiting the vast amounts of data generated by digital currencies for targeted marketing or other commercial purposes. This could further erode financial privacy, as individuals might be incentivised or coerced into sharing their financial data in exchange for certain services.

As the UK moves towards introducing a digital pound, it is important to consider these privacy concerns carefully. While digital currencies could bring about significant benefits, these must be weighed against the potential for increased surveillance and loss of individual freedoms. The decision to implement a digital currency represents a critical juncture for society, where the protection of privacy and autonomy must be a central consideration.

Reply 1

Quady

The pound is already digital.
Very few transactions are done with cash these days.

Reply 2

Rincewind_Bored

Original post by Quady

The pound is already digital.
Very few transactions are done with cash these days.

Incorrect.

Reply 3

Quady

Original post by Rincewind_Bored

Incorrect.

You wish to evidence that cash has greater transaction volumes than these digital transactions of sterling?

https://www.bankofengland.co.uk/payment-and-settlement/payment-and-settlement-statistics

Reply 4

Rincewind_Bored

Original post by Quady

You wish to evidence that cash has greater transaction volumes than these digital transactions of sterling?
https://www.bankofengland.co.uk/payment-and-settlement/payment-and-settlement-statistics

You are confusing digital transactions and the difference between FIAT and Digital currency.

Reply 5

Rincewind_Bored

Original post by Quady

You wish to evidence that cash has greater transaction volumes than these digital transactions of sterling?
https://www.bankofengland.co.uk/payment-and-settlement/payment-and-settlement-statistics

I suppose it would be fairer to give you a long-form explanation rather than a throwaway sentence without explanation.

The distinction between digital transactions using fiat currency and a fully digital currency, such as a Central Bank Digital Currency (CBDC) like the proposed digital pound, is subtle yet crucial. Understanding this difference is key to grasping why the latter could significantly impact privacy and personal freedom.

At present, when we talk about "digital transactions," we’re generally referring to the use of fiat currency in electronic form—whether that’s through bank transfers, credit card payments, or online transactions. These transactions, while digital, are fundamentally backed by physical cash. You still have the option to withdraw cash from an ATM, use it for purchases, or keep it as a store of value outside the banking system. This cash provides a layer of anonymity and privacy; once you have withdrawn it, your transactions aren’t automatically tracked or recorded by financial institutions.

In contrast, a digital currency like the proposed digital pound represents a fundamental shift. With a digital currency issued and controlled directly by the central bank, the entire economy could move away from physical cash. In this scenario, every transaction you make—no matter how small—would be recorded in a centralised ledger. This doesn’t just mean increased convenience; it means that the option to conduct anonymous transactions using cash would be effectively removed.

When we lose the option to use cash, we lose a significant amount of privacy. Every financial move becomes traceable, making it easier for authorities—and potentially private companies—to monitor, record, and analyse our behaviour. While this could help in cracking down on illegal activities like money laundering, it also opens the door to a level of surveillance that most of us have never experienced.

The key difference here is control. With fiat currency, even if you conduct most transactions digitally, you still have the freedom to use cash when you prefer privacy or simply want to avoid leaving a digital footprint. With a digital currency, that choice is taken away. Every penny you spend would be documented, removing the last vestiges of financial privacy and further eroding personal freedom.

In essence, a digital pound could streamline and modernise financial systems but at the cost of eliminating the privacy that cash currently affords. The implications of this are profound, as they touch on our ability to maintain autonomy in a world where every transaction is monitored and recorded.

Reply 6

Rincewind_Bored

It might also be an idea to explain a bit about the positives and negatives of Digital Currency Vs traditional FIAT currency. I learned about all this in my MBA but I appreciate it isn't common knowledge.

The estimated cost to maintain fiat currency, such as the pound sterling, can be broken down into several components. These include the production of physical money (banknotes and coins), distribution, security, and management of the money supply, as well as anti-counterfeiting measures.

Production Costs: The cost of producing banknotes and coins varies based on the materials used, the volume produced, and security features. For example, the cost to produce a single banknote in the UK can range from around 5p to 10p, depending on the denomination and the security features involved. Coins are generally cheaper to produce per unit, but their production still involves significant costs, especially for higher-value coins.

Distribution and Management: The Bank of England, along with commercial banks and other entities, incurs costs related to the distribution and management of cash. This includes transportation, storage, and ensuring that ATMs and bank branches are stocked with sufficient cash.

Security and Anti-Counterfeiting: Maintaining the integrity of the currency includes substantial investment in security features to prevent counterfeiting. The Bank of England regularly updates the design of notes to incorporate new technologies that make them more difficult to counterfeit. Additionally, there are ongoing costs associated with detecting and removing counterfeit currency from circulation.

Handling and Processing: Businesses, banks, and financial institutions bear costs related to handling, processing, and securing cash. This includes the infrastructure needed to count, transport, and secure cash, as well as the time and labour involved.

While it's challenging to pinpoint an exact figure for the overall cost, estimates suggest that the total cost of maintaining a cash-based system can be substantial. Studies have estimated that the overall cost of cash handling and maintenance can be equivalent to 0.5% to 1.5% of GDP in various economies, depending on the level of cash usage and the efficiency of the cash management systems in place.

For the UK, this could translate to billions of pounds annually, considering the various expenses involved in maintaining the pound sterling as a fiat currency. This figure highlights why there is ongoing debate about the future of cash and the potential cost savings associated with moving towards a digital currency system.

Here are some concrete citations for studies and reports that discuss the cost of cash handling and maintenance:

McKinsey & Company:

McKinsey & Company. (2013). The Future of Cash: An Economic Perspective. McKinsey Global Payments Report.

This report explores the economic implications of cash usage and its associated costs. While specific figures can vary, McKinsey has frequently cited the high costs of cash handling in various industries and economies.

MasterCard Advisors and Tufts University:

Humphrey, D., Pulley, L., & Vesala, J. (1996). Cash, paper, and electronic payments: A cross-country analysis. Journal of Money, Credit and Banking, 28(4), 914-939. doi:10.2307/2077933

This study by Tufts University and MasterCard Advisors discusses the cost implications of different payment methods, including cash, and provides an analysis of cash costs in the U.S. economy.

European Central Bank (ECB):

Schmiedel, H., Kostova, G., & Ruttenberg, W. (2012). The Social and Private Costs of Retail Payment Instruments: A European Perspective. European Central Bank, Occasional Paper No. 137.

This ECB paper examines the social and private costs associated with various payment instruments, including cash, in the Eurozone, and estimates the costs of cash handling in relation to GDP.

10.

Riksbank (Central Bank of Sweden):

11.

Segendorf, B., & Jansson, T. (2012). The Cost of Consumer Payments in Sweden. Sveriges Riksbank, Working Paper Series, No. 262.

12.

This paper from the Riksbank investigates the cost of cash handling in Sweden and provides estimates of its impact on the Swedish economy.

13.

Bank for International Settlements (BIS):

14.

Bech, M., Faruqui, U., Ougaard, F., & Picillo, C. (2018). Payments are a-changin’ but cash still rules. BIS Quarterly Review, March 2018.

15.

The BIS report discusses the ongoing changes in payment systems globally and highlights the economic costs associated with cash, providing a comparative analysis across different countries.

And so onto the comparison between traditional FIAT currency and the proposed digital Pound. When comparing the costs of maintaining a fiat currency like the pound sterling to a potential digital pound, several factors make the digital currency appear fiscally attractive:

1. Production and Distribution Costs:

•

Fiat Currency: As mentioned earlier, the production of physical banknotes and coins incurs significant costs. This includes the material costs, security features, and the logistics of distributing cash across the country, as well as maintaining ATMs and bank branches.

•

Digital Pound: The production and distribution costs are significantly lower for a digital currency. Since there are no physical banknotes or coins to produce, the primary costs are associated with maintaining digital infrastructure, such as servers, cybersecurity, and the development and maintenance of digital wallets and payment systems.

2. Security and Anti-Counterfeiting:

•

Fiat Currency: Protecting fiat currency from counterfeiting requires continuous investment in new security features and regular updates to banknotes. There are also ongoing costs for law enforcement to combat counterfeiting.

•

Digital Pound: While cybersecurity is a major concern, the cost structure is different. Digital currencies require robust cybersecurity measures to prevent hacking, fraud, and other cyber threats. However, these costs can be spread across a centralized system, potentially reducing the per-unit cost of security compared to updating and replacing physical currency.

3. Handling and Processing Costs:

•

Fiat Currency: The handling, processing, and transporting of cash involve significant costs for businesses, banks, and the government. This includes counting, securing, and moving cash, as well as dealing with cash-related inefficiencies.

•

Digital Pound: Digital transactions eliminate the need for physical handling and transportation of money. The costs are mainly related to digital transaction processing, which is generally cheaper and faster. With advancements in technology, the cost per transaction for digital payments is decreasing over time.

4. Environmental Impact:

•

Fiat Currency: The production, distribution, and disposal of physical currency have environmental impacts, including the carbon footprint associated with manufacturing and transporting money.

•

Digital Pound: While digital currencies require energy to power servers and maintain networks, the overall environmental impact is generally lower than that of producing and managing physical cash. Moreover, as renewable energy sources become more prevalent, the environmental cost of digital currencies could decrease further.

5. Efficiency and Economic Impact:

•

Fiat Currency: Physical cash transactions are slower and less efficient, potentially slowing down economic activity. Cash also facilitates the shadow economy, which can reduce tax revenues.

•

Digital Pound: A digital pound could enhance the efficiency of the economy by speeding up transactions and making them more traceable. This could increase tax revenues by reducing the size of the shadow economy and improving compliance. Additionally, the programmability of digital currency could allow for more precise monetary policy implementation, such as targeted stimulus payments or negative interest rates.

6. Fiscal Attractiveness:

•

Cost Savings: By reducing the need for physical currency production, distribution, and security, a digital pound could result in substantial cost savings. The ongoing maintenance of digital infrastructure, while not negligible, is likely to be more cost-effective in the long run.

•

Revenue Generation: The introduction of a digital pound could also open up new revenue streams, such as fees for certain types of transactions or services associated with digital wallets. Moreover, better control and visibility over transactions could improve tax collection efficiency.

Transitioning to a digital pound presents a fiscally attractive proposition. While there are upfront costs associated with developing and implementing the necessary digital infrastructure, the long-term savings in production, distribution, security, and handling of currency could outweigh these initial expenses. Additionally, the potential to increase tax revenues and reduce the shadow economy further enhances the fiscal appeal of a digital currency. Therefore, from a purely financial standpoint, a digital pound offers significant advantages over the traditional fiat currency system. However, all of this comes with a reduction in citizens' financial privacy.

Reply 7

Quady

Original post by Rincewind_Bored

You are confusing digital transactions and the difference between FIAT and Digital currency.

You are confusing digital transactions with the difference between a public and private ledger.

Note fiat is a word not an acronym and fiat currency can use blockchain technology to run on a public ledger.

Reply 8

Rincewind_Bored

Original post by Quady

You are confusing digital transactions with the difference between a public and private ledger.
Note fiat is a word not an acronym and fiat currency can use blockchain technology to run on a public ledger.

You are confusing digital transactions with the difference between a public and private ledger.

Hmm, maybe. I had always thought digital transactions were entirely traceable. The guys I know who employ tax evasion tactics still engage in digital transactions, it's true... but they go to all sorts of steps to hide it, and a lot of cash transactions are used to obstinate their movements. (I wish I were financially well off enough to engage in this sort of thing.)

Note fiat is a word not an acronym

To be fair, I did think it was an acronym, duly noted. Guilty as charged sir, touché!

fiat currency can use blockchain technology to run on a public ledger.

Well, it can, but that's not the current situation of any fiat currency in the world as far as I know. Maybe that's changed, it's been a few years since I was looking into this, and I'm happy to be corrected.

I'm not sure the point in evoking the topic of blockchain, I appreciate it was a buzzword when digital cryptocurrencies were all the rage but largely, it's just a database system where the control point is dynamic. I can't image that being something central banks or Governments would see as advantageous. It was seen as a positive for cryptocurrency due to the way it run.

Again, I'm all ears if I've got this wrong and open to be enlightened.

Reply 9

Quady

Original post by Rincewind_Bored

You are confusing digital transactions with the difference between a public and private ledger.
Hmm, maybe. I had always thought digital transactions were entirely traceable. The guys I know who employ tax evasion tactics still engage in digital transactions, it's true... but they go to all sorts of steps to hide it, and a lot of cash transactions are used to obstinate their movements. (I wish I were financially well off enough to engage in this sort of thing.)
Note fiat is a word not an acronym
To be fair, I did think it was an acronym, duly noted. Guilty as charged sir, touché!
fiat currency can use blockchain technology to run on a public ledger.
Well, it can, but that's not the current situation of any fiat currency in the world as far as I know. Maybe that's changed, it's been a few years since I was looking into this, and I'm happy to be corrected.
I'm not sure the point in evoking the topic of blockchain, I appreciate it was a buzzword when digital cryptocurrencies were all the rage but largely, it's just a database system where the control point is dynamic. I can't image that being something central banks or Governments would see as advantageous. It was seen as a positive for cryptocurrency due to the way it run.
Again, I'm all ears if I've got this wrong and open to be enlightened.

You comments merely support my original point.

'I had always thought digital transactions were entirely traceable' - yes, transactions on CREST, BACS, CHAPS ect are entirely traceable.

'I'm not sure the point in evoking the topic of blockchain, I appreciate it was a buzzword when digital cryptocurrencies were all the rage but largely, it's just a database system where the control point is dynamic.' - correct, it's one technology which you can use as the infrastructure for a digital currency.

Governments could withdraw paper money and strengthen ID controls without changing the existing digital payment systems. So what's the difference if you take blockchain/public ledger out of the equation?

(edited 1 month ago)

Reply 10

Rincewind_Bored

Original post by Quady

You comments merely support my original point.
'I had always thought digital transactions were entirely traceable' - yes, transactions on CREST, BACS, CHAPS ect are entirely traceable.
'I'm not sure the point in evoking the topic of blockchain, I appreciate it was a buzzword when digital cryptocurrencies were all the rage but largely, it's just a database system where the control point is dynamic.' - correct, it's one technology which you can use as the infrastructure for a digital currency.
Governments could withdraw paper money and strengthen ID controls without changing the existing digital payment systems. So what's the difference if you take blockchain/public ledger out of the equation?

Well, if that's the case I don't see how my comments do "merely" support your original point.

My point was digital transactions can be traced. By definition, a digital currency will always be digital transactions and therefore will always be traced. Fiat currency can still be used in cash transactions and therefore allows for the possibility of transactions that cannot be traced. Therefore, as I originally said, the replacement of fiat currency with a digital pound makes every single transaction traceable and therefore erodes the current privacy afforded to us by fiat currency.

Yes a lot of our transactions today are digital anyway, but we still have the option of using cash where we want.

And your point about blockchain still doesn't make sense to me. You've named a technology which almost certainly wont be used with digital currency. The Bank of England, I am certain, will want full centralised control of the currency and won't want to use a decentralised system like Blockchain. So, I'm really unclear on what your point is here honestly.

Governments could withdraw paper money and strengthen ID controls without changing the existing digital payment systems. So what's the difference if you take blockchain/public ledger out of the equation?

In this thread, we are discussing the proposal to introduce a digital currency in the UK and the likely effects it will have on us as a society and as citizens.

So, I'm not really sure what the point of this statement is.

Reply 11

Rincewind_Bored

Original post by Quady

You wish to evidence that cash has greater transaction volumes than these digital transactions of sterling?
https://www.bankofengland.co.uk/payment-and-settlement/payment-and-settlement-statistics

I suppose I should address this again after reading through this thread again because I didn't really reply to it well enough I think.

When I said "Incorrect," I was referring to your first claim that the pound is already digital. This is clearly not the case.

I never claimed anywhere that the majority of transactions in pound sterling were in cash rather than digital. That was you attempting to make a strawman argument.

Many cash transactions are in either small purchases, the hospitality industry (I still refuse to tip on card because I don't feel hospitality staff should get taxed on their tips and insist on giving their tips in cash), tax avoidance, and the Shadow Economy.

(edited 1 month ago)

Reply 12

Quady

Original post by Rincewind_Bored

Well, if that's the case I don't see how my comments do "merely" support your original point.
My point was digital transactions can be traced. By definition, a digital currency will always be digital transactions and therefore will always be traced. Fiat currency can still be used in cash transactions and therefore allows for the possibility of transactions that cannot be traced. Therefore, as I originally said, the replacement of fiat currency with a digital pound makes every single transaction traceable and therefore erodes the current privacy afforded to us by fiat currency.
Yes a lot of our transactions today are digital anyway, but we still have the option of using cash where we want.
And your point about blockchain still doesn't make sense to me. You've named a technology which almost certainly wont be used with digital currency. The Bank of England, I am certain, will want full centralised control of the currency and won't want to use a decentralised system like Blockchain. So, I'm really unclear on what your point is here honestly.
Governments could withdraw paper money and strengthen ID controls without changing the existing digital payment systems. So what's the difference if you take blockchain/public ledger out of the equation?
In this thread, we are discussing the proposal to introduce a digital currency in the UK and the likely effects it will have on us as a society and as citizens.
So, I'm not really sure what the point of this statement is.

Your logic is nuts/based on an internal logic which doesnt hold up to the real world.

Digital transactions can only be traced if the governance is setup to support tracing.

Equally valid statements include:

•

'Analogue transactions can be traced.' (if logs are taken and retained)

•

'Digital transactions cannot be traced.' (if the logs aren't retained or are anomonised)

Traceable to what though - person?
Surely that's only as good as the clerical record keeping?

Cool, let's rule out blockchain as the ledger type then, I'm more than happy to agree on that and won't mention it again then. What type of ledger are you expecting then, double-entry?

The point about withdrawing paper money was to point out that is all it would take to have stirling as a digital currency.

Reply 13

Quady

Original post by Rincewind_Bored

I suppose I should address this again after reading through this thread again because I didn't really reply to it well enough I think.
When I said "Incorrect," I was referring to your first claim that the pound is already digital. This is clearly not the case.
I never claimed anywhere that the majority of transactions in pound sterling were in cash rather than digital. That was you attempting to make a strawman argument.
Many cash transactions are in either small purchases, the hospitality industry (I still refuse to tip on card because I don't feel hospitality staff should get taxed on their tips and insist on giving their tips in cash), tax avoidance, and the Shadow Economy.

I'm confused.

Are you saying cash isn't used much in terms of stirling transaction volumes?

If so you're saying stirling is almost a digital currency already.