Inflation

Switzerland moves closer to adopting CBDC: Could the UK be next? And why does it matter?

Karl 27th Jun 2023 No Comments

Reading Time: 5 minutes

The global shift towards Central Bank Digital Currencies (CBDCs) moved a step closer this week following an announcement by the Swiss central bank that it will soon begin a digital currency pilot using real money.

So what are the worries surrounding CBDCs? And how likely is it that a CBDC will replace cold, hard cash here in the UK?

To learn the answers to these questions, and more, keep on reading. Alternatively, click on a link below to jump straight to a specific section.

What is a Central Bank Digital Currency? (CBDC)

Central Bank Digital Currency (CBDC) is digital ‘fiat’ currency.

The pounds and pence in our pocket are an example of fiat currency. While these coins have no intrinsic or fixed value, and aren’t backed by any tangible asset, we just take for granted that they’re worth what they say they’re worth.

This is essentially how the whole global monetary system works, and it’s been that way since the introduction of fiat currency in the 11th century.

The move towards CBDC is essentially an attempt by central banks around the world to digitalise the fiat currency system. While this might not sound like a big deal, it most certainty is!

The reason why central banks around the world are keen to move us towards CBDCs is because they’re terrified about decentralised cryptocurrencies, such as Bitcoin, which have the potential to take the global monetary system out of the hands of governments. This is one of the reasons why some states, such as China and Egypt, have already banned crypto payments in their territories.

What are the worries surrounding CBDCs?

While CBDCs utilise some of the technologies used by cryptocurrency to facilitate transactions, it’s important to understand that there are huge differences between CDBCs and crypto. Once you get your head around these differences, you’ll see why many are concerned about the possibility of the world moving towards digital fiat currency.

First of all, unlike most cryptocurrencies, CBDCs are not decentralised. This is because the central banks control the supply of CBDC – the clue is in the name: Central Bank Digital Currency!

What this means is that central banks can print more fiat money into existence. This is not the case with many cryptocurrencies, such as Bitcoin, where supply is finite.

When central banks print money, it’s a essentially a regulated form of theft. To learn why, read our explainer about the evils of quantitative easing.

Now you may be thinking that quantitative easing already takes place with traditional fiat currency. This is true of course, but there are also other dangers associated with having a central bank controlling digital currencies.

For example, we’ve seen how the UK’s very own Bank of England has tried to tackle inflation by raising interest rates. If, in future, it has total control of every coin in our digital wallet, then it might wish to charge interest directly on the money we hold in our digital wallets, rather than go through the traditional route of hiking the base rate.

Similarly, should CBDCs become the norm, then it would be possible for government’s to attach an expiry date to our money – potentially useful if the state wanted to encourage spending to alleviate a struggling economy. While this might be a good thing for the health of the economy, it would essentially coerce the population into having to spend their capital quickly.

Likewise, CBDCs may also make it possible for central banks to control what we spend our money on. For example, if you haven’t been a good citizen, then the bank could, in theory, limit your spending to basic goods and prevent you from buying non-essential items. This ‘social credit system’ is already being developed in China, so it’s hardly science fiction.

In addition to this potential loss of control, CBDCs will also make it possible for governments to monitor our transactions and spending habits, making it easier to tax us at source.

CBDCs may also replace cash, which is the only way, besides cryptocurrency, that we can continue to spend our money anonymously.

What is happening with CBDCs around the world?

Despite all the fears, it is worth considering the fact that no countries have yet formally introduced CBDCs for everyday use. While Switzerland’s central bank has announced that it will soon trial CBDCs, traditional Swiss Francs are still a ‘thing’ (for now at least).

Expert in the industry do, however, suggest that China and India are the most likely regions to adopt CBDCs in the near future, with Hong Kong and Singapore other hot candidates given their advanced interest in CBDC technology.

While many fear CBDCs will eventually replace cash there is, thankfully, some pushback already. Slovakia recently announced it will amend its constitution to protect cash as a form of payment amid fears of a ‘digital euro’, and it’s possible other countries could follow suit.

Will CBDCs launch in the UK?

The UK is very much on the CBDC bandwagon. The Bank of England already has a webpage focused on the “Digital Pound” which has also been laughably referred to as “Britcoin” by Rishi Sunak when he was chancellor. This is of course a word-play on ‘Bitcoin,’ despite CBDCs going against everything that Bitcoin, and many other cryptocurrencies, stand for.

The Bank of England has already published a consultation on its proposed CBDC, and the bank says it plans to move onto the “design phase” for a digital pound over the next two to three years.

Should the UK press ahead and adopt the digital pound, the Bank of England says that the earliest date that it can be implemented will be in the second half of the decade.

Interestingly, the Bank of England explicitly states that the digital pound won’t replace cash – but let’s be honest here, does anyone really believe this?

If you want to learn more about this topic, MoneyMagpie CEO Jasmine Birtles, recently took part in a podcast discussing the potential shift towards CBDC. Click here to watch it.

And while we’re at it… do you want learn about investing? If so, why not sign up for our fortnightly MoneyMagpie Investing Newsletter? It’s free and you can unsubscribe at any time.

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