Not everything is bad, but everything is dangerous

Predicting the future of Central Bank Digital Currencies

‘My point is not that everything is bad, but that everything is danger­ous, which is not exactly the same as bad. If everything is dangerous, then we always have something to do. So my position leads not to apa­thy but to a hyper- and pessimistic activism. I think that the ethico-political choice we have to make every day is to determine which is the main danger.’

-Michel Foucault

The Bank of England is, quietly, on manoeuvres. ‘While it is too early to take a decision on whether to introduce the digital pound [its name for the UK’s CBDC],’ it keeps saying, ‘[i]t’s likely that [it] will be needed in the future.’ Therefore, although at the moment ‘no firm decision has been taken’, the Bank is going to press ahead and ‘step up [its] development work’ and come up with a ‘comprehensive architecture’ in anticipation of the digital pound’s introduction.

This is what British political commentators like to call ‘pitch-rolling’. Public bodies, forgetting that the electorate lives and breathes, think that there exist in society people who are actually fooled by phrases like ‘no firm decision has been taken’, and that talking in this way will soften people up for an eventual announcement. Those of us who live in the real world, meanwhile, know perfectly well what is really going on: the digital pound will soon be upon us, whichever party happens to be in government at the time, because those in charge clearly like the idea. So best get used to it.

I think we can all agree, however, that it is best to get used to it not through thoughtless speculation or knee-jerk emotional response, but by getting to grips with what the digital pound will eventually look like, why the Bank of England is so keen on the notion, and what the ‘main dangers’, as Foucault would put it, of CBDCs are. Doing so, I will here argue, allows us to see the entire project not as a conspiracy, but as the product of a drive to govern, which is entirely characteristic of the apparatus of the modern State, and which is indeed its core feature.

And this, in turn, will allow us to understand something important about modern government. (And here, I should make clear that I mean ‘government’ throughout this piece in the sense of the entire executive arm of the State, rather than the government in Parliament alone.) It is not that we are ruled by conniving sociopaths or closet authoritarians (for the most part; there was Matt Hancock). Rather, our problem is that those who purport to govern us are imbued with a particular kind of mindset, which functions discursively to construct the population as weak, corrupt and vulnerable, and government as necessary and benevolent.

I have elsewhere described this as the mentality of Machiavelli’s prince (see here) or Xenophon’s tyrant (see here), but it is of course really an ineluctable element in the psychological makeup of anybody who climbs the greasy pole to a position of power and influence in a modern society. To govern in modernity, one must convince oneself, and the people who one rules, that one’s government is good and necessary. And the best way to do that is to think of the people, and describe them, as fundamentally incapable of governing themselves, and therefore requiring of a class of ‘princes’ to do it on their behalf. In the end, is the sociology of modern politics anything more complicated than this?

This is what we must have in mind, then, when reading the literature which the Bank of England produces on the digital pound (and in this piece I will draw chiefly on two recent papers it circulated: The Digital Pound: A New Form of Money for Households and Businesses? [hereafter referred to as ‘DP’] and Enabling Innovation Through a Digital Pound [hereafter referred to as ‘EI’]). The Bank is indeed revealed in that literature to be at all times seeking to justify itself and its ongoing existence - and, by implication, the ongoing existence of the positions that the people working there currently occupy. And this serves up to us two important insights: the first concerning motives, and the second concerning future prospects.

Let us begin with the motives, then. Why is the Bank of England so interested in developing a digital pound, and why are central banks across the world so keen on the idea?

To be clear, it is not that these people simply think that having a digital pound would be a nice idea or a fascinating experiment. It is that they think there is a ‘need’ (EI, part 1). That word appears again and again throughout the literature. And its use is highly instructive. For all the talk of a CBDC boosting ‘innovation’ and promoting ‘efficiency’ (and there is an awful lot of such talk), it is only when discussing ‘needs’ that one feels as though the Bank of England’s pulse is beginning to race. It isn’t the potential innovations that digital currency offer which get these people out of bed in the morning, in other words; what gets them going, rather, is a sense of threat. Put very bluntly, they are afraid of losing control of what they call, conjuring up vague allusions to patriotism that are normally totally alien to members of Britain’s professional managerial class, ‘monetary and financial sovereignty’ (DP, p. 28).

The idea here is as follows: central bank money, meaning retail central bank money, (i.e., cash), and wholesale central bank money (i.e., deposit accounts which commercial banks hold with the Bank of England), functions as the ‘anchor of monetary and financial stability’ within the UK economy (DP, p. 25). In essence, it is considered by the Bank to be very important that all forms of money are valued equally and are interchangeable (so that £10 in a commercial bank acccount is the same value as a £10 banknote and £10 in another commercial bank account), because this means that people can trust and have confidence in the currency. It keeps things stable. And this is bolstered of course by the fact that having everybody using the same form of money makes it easier for government to regulate and Parliament to legislate with respect to financial regulation.

But this stability is threatened by two things: lower cash use, and the emergence of ‘some’ new forms of private digital money (such as cryptocurrencies and stablecoins) (DP, p. 27). If people use cash less, and if people use private digital money more, then the theory goes that there is a risk of fragmentation of the financial system, with people using different types of money issued by different providers, which are not readily interchangeable or can only be used behind ‘walled gardens’. This will undermine uniformity and trust. But it will also, if it becomes very widespread, affect the Bank of England’s ability to maintain price stability (i.e., to hold down inflation) through monetary policy. Raising or lowering interest rates won’t have as big an effect as desired, in other words, if a large portion of the population is transacting chiefly in, say, Bitcoin. And, it goes without saying, it will also make it much tougher for regulators.

The picture that emerges, then, is clear enough. The Bank of England likes having control (or, perhaps one should say, imagining it has control) over monetary policy. And it likes ‘robust regulation and supervision’, which it describes (along with retail central bank money and wholesale central bank money) as the ‘third pillar’ of the monetary system that helps deliver stability for the economy (DP, p. 25). The current regulatory regime, you see, ‘ensures that, if a bank failed, it would do so in an orderly way’, and also puts in place ‘prudential requirements’ that ‘support public confidence’ that deposits will be redeemed one-to-one in cash. Government likes, remember, to govern. And it likes presenting the practice of government itself as essential. Without the Bank of England (and, more widely, without the UK’s complex system of financial regulations) we would have instability, we would lose monetary sovereignty, and we might also - heaven forefend! - ‘compromise…the UK authorities’ ability to effectively regulate systemic financial institutions and payment systems’ (DP, p. 28).

In summary, then, as is always the case, government is necessary, and without it all would be lost - and this is because you, the general public, are conceptually akin to children, incapable of managing your own affairs, and in need of us to do it for you. If we don’t act, there is a risk you will exercise your own volition and do crazy and damaging things, like paying for things in Bitcoin or using closed payment systems for private digital currencies such as Facebucks (or whatever), and thereby undermining sovereignty and destroying economic stability. And so we need to ‘pre-emptively reduce the chance of widespread adoption of non-sterling digital money in the UK’ (DP, p. 102) by issuing a digital pound. Simple.

The anxiety, then, and the resultant ‘need’, all come from the neuroses of the Bank of England, and policymakers more generally with respect to the prospect of losing control, and hence of the capacity to govern or at least portray themselves as doing so. It probably goes without saying that this is nothing really to do with what is necessary for us. It is much more about what is necessary for them.

And it is also the drive to govern, of course, which tells us what shape the digital pound will take once it is created. And here, most of what you need to know is presented in the form of a simple diagram (from EI, part 2):

This is the basic overview of how the digital pound is intended to operate. Note its two most significant features. The first is that, as a CBDC, the digital pound will not have a distributed ledger. The ledger is held by the Bank, which would provide the entire ‘payment functionality’ (I don’t know when it was that the perfectly good word ‘function’ became replaced in the English language by ‘functionality’; perhaps one of my readers can shed light on this). This means that the Bank retains ultimate control over any and all payments - and that your access to your digital pounds will therefore be in the end contingent on the Bank permitting it. Government, remember, likes and needs to govern, and it therefore likes the idea that it retains control of the ledger.

There does not have to be any sinister motive here, and I am convinced that there is not. But the absence of such a motive does not really matter anyway - what is important is who has final control, and it will not be the ‘user’, the notional ‘owner’ of the money. In this regard, of course, it is significant throughout that the preferred term for somebody making payments in digital pounds is a ‘user’, implying that the currency itself is to be understood as a service - which can by implication be withdrawn - rather than money as such. (It may be worth drawing your attention to what I had to say recently about the future of property rights.)

The second, more important feature, is the intermediary. The Bank has a ‘platform model’ (DP, p. 12), meaning that it will not interface directly with ‘users’. Rather, there will be a network of ‘private sector companies’ who will offer ‘pass-through wallets’ to ‘users’, and which may be ‘integrated into their other services’ (ibid.). The idea here is that to ‘safeguard privacy’ all interactions on the part of ‘users’ takes place through the wallet; the wallet then communicates instructions between the user and core ledger to actually make a transaction take place.

What is significant about these intermediaries - Payment Interface Providers or PIPs - (which I think, at least initially, will almost certainly be existing banks and perhaps social media and gaming companies) is that they will be, as you can see, ‘authorised and regulated’. You will immediately I think see where this is going, but to spell things out, while it is true that the neither the Bank of England nor the UK government would have access to personal data on this model, and while it is true that they would therefore have no means of interfering with individual transactions, it is most certainly the UK government that is going to be (indirectly, through a ‘PIP Regulator’ or somesuch that it will set up) doing the authorisation and regulation of the PIPs.

And you can bet dollars to donuts that this will be done at least partly on the basis that the PIPs will themselves vet transactions and manage accounts of ‘users’ in light of overarching regulatory goals - whatever those might mean. And this prediction is not based in paranoia, but simply in the knowledge that this is how financial regulation already takes place. It may be that those overarching regulatory goals are minimal (the need to maintain ‘orderly markets’ or somesuch); it may be that they are much bigger and more pervasive than that. The point is not to pre-empt things, then, at the level of detail, but merely to make clear that the PIPs will almost certainly not have the function merely of providing wallets on entirely neutral terms, and that authorisation will involve agreeing to behave in light of certain regulatory objectives - whatever those might be. (This is of course not to mention whatever ESG goals, climate change commitments and so on will creep into the PIPs at the corporate governance level.)

The advantages over cash are, then, as clear as day. The pesky thing about cash is that it isn’t regulated. If you want to buy something in cash, you just hand it over to the person who is selling the thing, and that is that. This covers the transaction in a layer of kryptonite as far as government is concerned: it can’t control who ends up owning the money, and it can’t control whether the transaction takes place. The digital pound, and the way it is being set up, offers no clear advantage to the ‘user’, but, again, that isn’t the point. The advantages are obvious to those doing the governing, and that is ultimately what motivates the entire project for reasons which by now will be well understood.

It is not, then, that the creation of the digital pound, or indeed any other CBDC, is motivated by a North Korea-style desire to take complete control over economic life. (Although there are certain hair-raising passages in DP in particular, indicating that ‘at least initially’ personal holdings would be limited somewhere between £10,000-£20,000; see p. 80). What is going on is much more diffuse than that. It is rather that the people who are in charge are imbued with a certain ‘princely’ way of looking at society and the economy, and their own role with regard to those things. Basically, this means imagining society as comprising an undifferentiated mass of rather thick, uneducated, irrational people, who can’t really be trusted to run their own lives, and who get up to all kinds of mischief (whether deliberately or not) if left to their own devices. And it means imagining the task of the clever people in government to sort things out on the behalf of this hoi polloi, vulnerable and corrrupt, along with imagining the economy (like the law, culture, the media, and so on) basically as a system which government owns, and deploys and manipulates in order to achieve its objectives. To this mindset, there is absolutely nothing wrong with the notion that it should actually effectively own people’s money and allow them to ‘use’ it on sufferance - because, after all, why wouldn’t one seek to do this with regard to a population one essentially sees as not all that far removed from a flock of slightly unruly sheep?

What this also means is that the direction of travel is obvious. The Bank constantly insists, in a ‘the lady doth protest too much’ sort of a way, that it will ‘continue to make cash available as long as people want to use it’. I don’t need to highlight the operational clause in that sentence. The war on cash will go on, and we will find fewer and fewer opportunities to use it. Eventually it will die; the digital pound will replace it. And I think it obvious, based on the logic as I have laid it out here, that in the fullness of time - once the advantages that CBDCs offer to government become clearer - commercial bank money will come under threat as well. And the idea of a property-owning, independent, yeomanry-style middle-class, and of a working-class which aspires to that status, will in the end disappear accordingly. This will not be the result of a conspiracy; it is simply the consequence of modern government when left to do what it inevitably seeks to do when it does not encounter push-back.

This then is the ‘main danger’ that we confront, and being clear-sighted about it helps us to engage in an informed way in what Foucault called ‘pessimistic activism’. The head of steam that is developing behind the digital pound, as with all CBDCs around the world, will, for reasons that I have described, not abate. And the danger is that it will have the ultimate results that I have sketched out. What is the pessimistic activist therefore to do? My suggestion is to think hard about ways to grow, and keep, your wealth in a broad range of asset classes that will provide some bulwark against future developments in the world of money. There’s no conspiracy - but everything is dangerous.