CAI0018
Written evidence submitted by Portdex Ltd
We need to be very careful about definitions to ensure that we are all talking about the same thing. Crypto-assets in the form of crypto-currencies will not replace traditional currency. Their volatility, lack of regulation and retail outlets as well as poor reputation makes crypto-currency an unlikely replacement for traditional currencies. If consumers cannot trust or spend them easily they remain a niche activity.
When referring to a digital currency as either a Stablecoin which is backed by an asset or a digital form of the Pound, it is clear that digital currencies will replace traditional currencies to some extent but they will also replace other payment methods as well. Portdex suggests that the question is looked at not simply as an alternative for cash but as another payment method that sits alongside the others, only one of which is traditional currency. The question therefore is how this will effect all existing methods of payments?
We know that 52% of payments made in 2020 were made by cards. Cash is still the second most used payment method in the UK, with £6.1 billion worth of transactions recorded. Portdex believes that with the decline in the availability of cashpoints and no cost access to cash for consumers, some traditional cash-based transactions are likely to move to digital currency. These include donations to charities, payments for domestic services or Outdoor Events.
There are models here in the UK which, although small scale, can be looked at. Most Universities operate a cashless payment scheme that has replaced digital currency. These are not crypto-assets, more akin to a CBDC scheme without the sanction of the Central Bank. They are regulated though by the rules governing deposits and show us how cash can be turned digital in the right environment. The thinking goes back even further to the early 1990s with Mondex. I am not sure what role if any the Bank of England played in the thinking behind and the development of this scheme but it must qualify as a digital currency.
Portdex believes that the main opportunities for a Bank of England Digital Currency are:
a) Cost savings to both the BoE and commercial banks in the distribution, counting, sorting and issuance of paper and metal money;
b) Greater knowledge of spending patterns and usage of cash;
c) Ability to target “helicopter” money (Universal Credit, unemployment benefit payments etc) to individuals cutting the current costs of delivery.
d) Through sensible regulation opening up a new market for commercial organisations to develop apps and services based on digital currencies
We see the main risks as:
a) The Bank of England sets up a model which does not work for the market;
b) Individual’s privacy is compromised through traceability of transactions;
c) Fraud creeps into the system due to lack of safeguards at the outset of a digital currency system.
Digital currencies have huge benefits in terms of social inclusion as they allow those without traditional bank accounts and credit facilities to buy goods and services online. The so-called unbanked in the UK, numbering around 1.3m could use digital currency to take advantage of discounts and cheaper pricing offered to those who shop online.
Given that this is a new field for the Government, regulators and indeed the market, it is not possible to make a sound judgement about the ability of the Government or regulators to grasp the opportunities presented by crypto-assets. Moreover, the risks are not well-understood which makes it even more difficult to pass judgement. The Government and regulators should welcome initiatives such as Stephen McPartland’s foundation of an APPG specially to look at Digital Currencies.
This question alone could consume the whole response.
The main opportunities are:
1) Price reductions due to lower transaction fees (assuming that merchants pass these on)
2) Ability to enter the digital payments market for those who do not have a bank account
3) More choice for consumers for digital payments
With NFTs we can envisage a use for NFTs as tokens supporting contracts. For instance free lancers could issue an NFT as part of an engagement process before starting work on a project as a guarantee of payment. This could also be used for property deals to bind both parties into the transaction and to create a level of trust at the start of the process.
In regards to using NFTs to purchase digital artworks, “caveat emptor” should be the watchwords. Portdex is not sure that this market is a lasting one. Whilst NFTs allow individuals to purchase artworks, or at least copies of them, which they could not otherwise, this is too early to be judged as to whether it is a passing fad or a growing trend. In this context NFTs could potentially be a red herring and we recommend that the enquiry focuses on the broader aspects of NFTs.
The risks are:
a) Unregulated stable coins create a boom and bust market with individuals losing their money and therefore confidence in the market.
b) Individuals need to be confident in the technology and how it works otherwise they will not use it. Lack of confidence could make for a false start or a niche product used only by a few consumers.
c) Retailers will need to take stable coins or digital currency just as they do other forms of payment transactions, without this there will be no market.
The main opportunities are:
1) Savings against the cost of printing, distributing, sorting and counting actual money
2) Bringing the unbanked into the mainstream economy
3) Creation of a whole new industries with concomitant jobs, revenue in taxes and economic growth using NFTs in particular as “tools of the trade” to generate contracts and stimulate business.
NFTs have allowed the art market to create a new class of good. In some ways this can be likened to an artist producing prints of his work on a limited and numbered basis which happens in the actual world. NFTs can, perhaps, be seen as an extension of this model.
The risks are:
a) Without regulation, this market become a Wild West with many disappointed consumers
b) Vested interests conspire to kill the market
c) Large overseas players use their already huge existing market power to corner the market and kill off challengers.
The main opportunities are:
1) For the private sector:
2) For the public sector:
The main risks are:
1) Lack of regulation will allow “cowboys” to flourish and lead to financial loses and fraud.
2) A lack of identity scheme to ensure that the recipient is who they say they are which leads to fraud.
3) Lack of redress for faulty transactions which leads to a lack of confidence in the system overall.
Distributed ledger technology can certainly be applied to the financial services sector to make it more efficient, resilient and reliable. Where DLT really comes into its own in terms of process improvement is applying it to transactions that have multiple bodies involved in the processing which inevitably delays the processing of the transaction. This can be speeded up without compromising the integrity of the transaction. Moreover, cross-border payments are another area which Portdex believes can benefit from the application of DLT.
One would also expect a reduction in transaction costs, although whether this passed onto the consumer or kept by financial services sector is a mute point.
We would recommend further, more in-depth investigation of this question.
To a business outside of the Government, the answer must be not much and sporadic. Whilst clearly the Bank of England has led on this and is doing good work, it is not widely apparent that other parts of the Government are nor if there is a co-ordinated attempt to encourage change across the Government as a whole. Portdex realises that the structure of Government is siloed which means that cross-departmental initiatives are almost impossible to realise across the whole structure. This makes extending any initiative to associated bodies impossible. It would require a wholesale change in the structure of the UK Government for it to deal with crypto-assets centrally.
We welcomed John Glen’s speech at the Innovate Finance Global Summit back in April. However, the resignation of the Chancellor and Mr Glen brings into question whether or not the incoming Government will have the same priorities? We welcome the setting up of the Centre for Finance, Innovation and Technology (CFIT). It would be good to see transparency in its workings and findings and engagement with industry.
The use of digital currency will help Government processes in terms of tax collecting as taxation can be performed at source. The Government could, if a digital currency is so designed, keep much closer tabs on VAT and collect a per transaction basis.
For the UK market built-in privacy will be essential for consumer acceptance. We think that if consumers think that a CBDC is being used as a tool to monitor them it will drastically effect take-up. The Government should not use a CBDC as a way of monitoring individual’s spending habits.
So saying, the Government will be able to look at spending trends and take in general information on spending habits, particularly where cash is being paid out for a specific purpose. We can envisage mechanisms by which a pay-out, loan or grant can only be used in a certain way to support the purpose of the issuance of the money in the first place.
Portdex is not an investigator of frauds / crimes nor a consumer representation organisation. We have no direct experience of money laundering.
Yes, judging by the number of businesses being set up in this space, there is a willingness on the market’s side to invest. For consumers investing in crypto-currencies and NFTs the risks are widely known and reported. As CBDCs are still not tradeable, we look forward to a regulatory environment that will allow businesses and consumers to flourish.
Yes, if consumers do not trust this market and it is not resilient it will fail. From a consumer viewpoint there needs to be a system for redress that works to stop the cowboys and fraudsters. Start-ups need to know the environment in which they are working and this regulation needs to be in place quickly so that businesses can be built. Retrospective changes are costly and hinder the growth of businesses.
Firstly, avoid the Chinese model. A CBDC should not be a tool for use by HMG to snoop on ordinary citizens.
Secondly, the UK might look into the past and review Mondex and why this failed. It might also want to look at systems that convert actual cash into digital cash and the environments in which these functions, especially Universities.
Thirdly, whilst there is no other country with a tried and test approach which can be reviewed, the UK will need to make sure that it does not fall behind other countries in terms of regulations and become a honey pot for fraudsters etc.
Whilst cryptocurrencies are notorious for high energy usage, Portdex is unable to comment on the environmental and resource intensity of other crypto assets. We consider it likely that they will be more akin to mobile apps and PC-based applications though.
September 2022