PETER HINDLE – WRITTEN EVIDENCE (CDC0005)
CENTRAL BANK DIGITAL CURRENCIES INQUIRY
- I have been observing the Crypto Asset Space for around six years, obsessively for the last four. Over that time it has changed enormously from ICO’s to DEFI and Stable Coins. One thing that has not faulted in this time is the prospect of change and the good it can bring to society; don’t be afraid of change.
What are the main issues driving CBs to explore CBDC’s?
- Competition from both private companies and international governments has become far too big to ignore, encompassing the range from the secretive billion dollar stable coins, multinational media platforms and right to the Chinese digital Yen that is spread across 140 million citizens. The Chinese Blockchain Service Network (BSN) has now launched in four other countries. Technology is changing the way money moves. This is something that has not changed for over fifty years. The current system is simply not keeping up with the times. We can, and should do better. We can send a picture in seconds and receive instant confirmation that the recipient has received it, but with money, somehow we may never get to know when it is received. Life is changing rapidly and we need a payments system that can not only cope with future payments, but also thrust the financial world into the fourth industrial revolution. Ignoring innovation and technology can never be a good thing to do.
What are the main benefits and risks of a CBDC?
- At this stage the main risk is not going ahead with CBDC’s resulting in allowing the space to grow untethered. GBP stable coins, of which two have already failed, three currently exist with two more launching soon all with great marketing and access to the international decentralised exchanges. For these reasons and the problem of digital counterfeit versions of the GBP offering no KYC or AML within their transactions, it is resulting in the circumvention of normal banking rules. Offering the user no CB backing (FSCS) or relationship with the customer, stable coins could lead to a fragmented monetary system, eroding a jurisdiction’s monetary sovereignty, all based on unscrupulous companies with the opaque backing that Madoff and Ponzi would be proud of. The current state of the stable coin market presents systemic risk on the scales that could make Evergrande look like the pin that hit the dot com hot air balloon. These risks grow small but can hit $20 billion growth within a six month time frame once spread across exchanges (VASPS). To think that a GBP version stable coin would not garner such growth in such a short period of time would be naïve as this is something that anyone, anywhere could do within a matter of months, thereby opening a real prospect of multibillion pound Wildcat banks that circumnavigate the global systems to dodge regulations. Economic history often repeats itself and the financial scams that were once confined to the history books, are now running a mock in the crypto space. These are basic financial lessons however many British people are still losing out.
- The benefits of CBDC’s are immense across multiple areas ranging from fee free transactions to un-stealable cash, lending, insurance, mortgages, wealth management, lowering financial barriers by lowering fees, and trading markets. Digital Ledger Technology can bring trustless accountability to everyone with a mobile phone and make it easily available with instant real time settlement backed by the CB. SME’s often pay the most for processing fees and bringing in CBDC’s would level the playing field for all, resulting in giving this sector an economic boost giving benefit to those that need it the most as the COVID-19 pandemic has ravaged a lot of SME’s.
- The prospect of saving on transactions within the international remittance market on an individual basis brings pounds to the pockets of those in need of it the most; however, the most saving will be had by the wholesale markets. These savings would dwarf those seen before and this has the potential to release billions that are in prefunded accounts on archaic systems. Launching wholesale CBDC’s will literally pay back for the upgrade in a very short space of time and this must be managed to prevent bank runs. It has been predicted that just 30% of the UK’s GDP in CBDCs could result in £190bn gain for the British economy.
- A surprising number of CBs have come out against Swift whilst making announcements on CBDC’s. To date 110 CB’s have some form of involvement in CBDCs from research to launch. Britain could be left behind whilst other countries thrive in a new economic era. British citizens could face ever rising costs for an obsolete un-functional system and potentially be cut off from the rest of the world due to internationally required banking standards.
- There will be banks that refuse to change, and there will be banks that need to innovate or fail to survive, however, the overall banking sector will become stronger and more resilient as a result and it will be ready for the next fifty years and our future generations. The banking sector is not irreplaceable it is a service sector for the people. It should function as the foundation to our society not as a burden to so many. It is the best and only presentable chance we have of breaking the economic cycles that have plagued our history.
- A CBDC has the ability to increase inclusivity, bringing in the many currently un-banked and this alone would bring new economic activity from new markets. Government payments would be transformed and streamlined with less possibility of costly human errors whilst replacing outdated and expensive systems. The savings from the Department for Work and Pensions alone could be staggering.
- Another huge benefit of a CBDC is traceable money. Whether you are the victim of a robbery in the street or a company that falls victim to cybercriminals attacking with ransomware, given that a good standard of KYC is met, any funds reaching an account from illegal gains could be withdrawn and the account blocked, all the while identifying the culprit/s. However, criminal investigations of CBDC holders would still be needed to allow users some access for basic means.
Could the proposed benefits of a CBDC be achieved through improvements to the existing payments system?
- Simply NO. Whilst intermediary banks have control of Nostro accounts, the costs will forever mount. This is a barrier to a level playing field for all and is not inclusive. As the financial sector is the most regulated in the world, it has no common standards which creates unnecessary delays, lost payments and at a high cost. The true cost, both in monetary terms and environmental terms is unknown. The current system is so fragmented and costly. Hacks and outages are becoming commonplace and we deserve a resilient future. Any CBDC would have to not only interoperate with the current system but exceed any future needs.
How should the Bank of England and HM Treasury address concerns over privacy and traceability of payments when exploring CBDC design?
- We already have a system in place to investigate financial crimes. Warrants and court orders are clear in law today and this should not change. KYC is generally not necessary for small funds but it is for larger amounts of cash and this again should not change. Given the abilities of technology available in today’s society, it opens up the possibility of only giving the necessary information required for each certain transaction, thus ultimately increasing retail privacy. It is a safer version of cash that is as transact-able as cash.
- Transactions should be anonymised unless a court order is in place, however, statistical data should be available to be extracted otherwise it would be like blinding the world’s fastest race horse for a hurdles race.
- A public forum focusing on retail CBDC should be started whilst a wholesale CBDC can be launched to start saving on wholesale banking fees. Trust has to be earned within the system. Choices should not be forced and fiat cash should always be available to all.
What effect might a CBDC have on the financial sector?
- A CBDC will propel the Bank of England into the driving seat instead of being a passenger at the rear of the train giving real time information on money, its travel and velocity. The FX markets will have real time micro second updates giving the modern day Soros no chance. The cost and time efficiencies will be felt across all sectors not just limited to finance. Whilst offering traceable payments and giving anonymous instant AML/KYC security, it will bring new accountability across all sectors, raising the prospects of automated taxation, lowering corruption and giving less opportunity for money laundering and fraud. This as a result opens the way forward to a new conducive environment for collaborations to grow new ecosystems. A CBDC would leave hackers with nowhere to hide their ill-gotten gains.
What effect might a CBDC have on competition and innovation in the payments and fintech sectors?
- A CBDC with an internationally agreed interoperability layer will give clear guidelines showing the way forward for innovators, developers and the money markets. It will streamline and offer a simple payments system that works effectively, filter the bad actors whilst also funnelling and concentrating development on new and emerging technologies. CBDC’s are just the start, the revolution is what comes after.
How might a CBDC affect monetary policy?
- A digital programmable pound could be instantly flexible whilst at the same time promote a conducive and compelling business environment. British individuals will be able to receive help instantly no matter their location. It will lower the carbon emissions of the CBs and the wider economy immensely. The CB would still be the bank of issue. It would be the controller of credit, the lender of last resort, clearing house and liquidity provider all whilst having greater control and no longer having to wait for financial reports to be released. The CB will have the ability to autonomise clearing and liquidity whilst increasing security. Often CB policy can be a political tool that changes, CBDCs would cement these banking policies.
How might a CBDC change the Bank of England’s role and responsibilities?
- The CB will have 100% access to data in real time wherever the GBP is. With this data brings responsibilities that the people should debate as to who has access to for the purposes of research, crime prevention and fraud movements. This can be done via a multiple person signing ceremony therefore increasing security, lowering fraud and increasing accountability.
How should HM Treasury and the Bank of England engage with the public on the research and development of a CBDC?
- A hybrid retail and wholesale CBDC gives different options. It could run wholesale only and this would give time for the banks to build on trust before a retail CBDC is launched. It has often been said that there are no experiments in economics; however, this technology has been around for almost ten years, sandboxed and proven to work under peer reviews.
How might CBDC’s affect the economic foreign policies or geopolitical influence of different countries and economic areas? Are there implications for the effectiveness of economic sanctions?
- With CBDC’s foreign economic policies can agree a common set of standards for payments and how money travels. Sanctions would only work if enforced by liquidity providers. A set of blocked addresses entered to an API would prevent currency transmission at the same time as being able to highlight where attempts were made. CBs may no longer need to hold foreign currencies. To date there are two CBs that have launched, twenty six jurisdictions piloting CBDC’s, six CBs that have launched proof of concepts, eight CBs that have done advanced research and development into CBDC’s, thirty CBs that have been in the exploratory stages for the last year and a further twelve CBs that have explored a CBDC. Sixty five CBs have communicated publicly about their work on CBDC’s. The IMF have reported one hundred and ten CBs conducting some form of research into CBDC’s.
- Countries with dual currencies may need to decide on single currencies whilst economically weaker countries could join others to give a greater more robust economy leading to a wider more stable financial future.
- This technology has changed hugely in such a short space of time however not all Crypto Assets are the same and few countries have taken them up as currencies. While UK banks are required to control their exposure to the crypto markets, the same cannot be said for banks and CBs world over.
- Proof of Work which covers Bitcoin and Ethereum, is vulnerable to attack. It requires vast sums of computational hardware and huge amounts of power. It uses 700kw and generates 300g of e-waste for every single transaction. To put it another way it is like using 75 gallons of petrol for a single transaction. Given the UK is forecasted to see sixty million card transactions per day by 2026, the wastage would be immense.
- The silicon microchip ASIC application specifically integrated circuit equipment quickly becomes out of date and non-profitable to use. Most of the equipment ends up in land fill with only and estimated 17% actually being recycled. Most of this is done in the west where large scale miners see high energy prices so avidly avoid. On a grand scale any dictator can easily gain the upper hand and overcome the system.
- It is becoming, if not already, a mob run ever hungry resource that is power driven. It is an environmental disaster. As manufacturers struggle to get microchips for a wide range of goods from toasters to cars, British consumers will face ever rising electricity prices in this double hit against sustainability.
- The Basel committee has given Bitcoin a risk weight of 1250%. With most digital ransoms being demanded in Bitcoin, miners invariably increase energy prices for those residents around them who are already seeing huge increases in today’s energy markets. These miners are growing so large on speculative assets they are now purchasing coal fired power stations. Theoretically there is not enough electrical power made in the world that could support world wide scale adoption. A CBDC based on this technology would not be securely stable or have the ability to transact enough transactions for CBDC’s. Wherever energy is used, it should never be squandered away while others struggle to be able to afford to put their heating on in winter. The pay offs for miners encourage the bad behaviour involved in the technology and it is a huge step back into mankind’s economic history and it only serves to embrace a race to the bottom mentality whilst using up as many resources as possible; whoever wastes the most electricity can effectively earn the most. We must value our environment and economy over the enrichment of those with the cheapest energy sources.
- Proof of Stake fulfils all the requirements of a centralised Ponzi. It only enables the elite to enrich themselves by using extortionate fees for users. This model is not suited to a CBDC. It is still open to network attacks if given enough resources as it is centralised thus giving cybercriminals easy options for attack.
- Fee redemption models, where interest is gained on others transaction fees suit all of the parameters for Ponzi schemes. These models are currently rising quickly with some gaining over 2.5 million users in a few months. These users are all being told by great marketing teams and internet stars to “hold until the moon” and when this time does come around, new entrants will dry up leaving interest dry resulting in mass sell offs if the developers allow their customers to do so.
- Proof of Concept, or Digital Ledger Technology, model can have some of the lowest fee’s and has two main varieties, private and public. A combination of this model could be used for CBDC’s and fulfil all the characteristics of money. It can effectively function as money both at home, on international markets and in your pocket. This is the only technology that is capable of performing without an internet connection due to its deterministic approach adding to its resiliency. Digital Ledger Technology can scale to meet and exceed future generations whilst not requiring specialist hardware to run. It can offer the lowest energy performance and offers no rewards for doing so other than its participants seeing a good orderly functioning economic system which only encourages good behaviour. Digital Ledger Technology can offer air-gapping which is a function that again adds to its resiliency by continuing to be functional whilst being off line in the event of a future crisis. It can be spread across multiple cloud networks and banking institutions adding to the security, resiliency and scalability of transactions.
- The decision of the technology used should be based on the lowest fees, lowest transaction time, scalability, zero failure rate, its vulnerability to attack, its volatility, time honoured, peer reviewed, accepted by all religious faiths, and be sustainable both in terms of the network operated and equipment needed. It needs to be net carbon neutral with a wide ecosystem that gives interoperability across all current systems with different user’s technology whilst fitting in with all current banking laws and regulations.
- The COVID-19 pandemic has changed our payments landscape whereby coastal regions tending to accept cash only while cities are tending to be cashless only. This is a real divide and limitations on payment methods often results in the loss of sales. Loss of any sales is damaging to all businesses. A CBDC would offer a payment means outside of this therefore increasing businesses resiliency whilst offering payment choices to both customers and business operators alike as it would be free to use. The savings on card processing fees could save jobs and indeed businesses. During the pandemic we saw how the current system can create its own difficulties with authorising payments and the required paperwork for government issuances of support to its people. We need a system that can deal with times of international stress as well as be simple enough to send support to those in need. This can only be achieved with an internationally agreed mCBDC settlement layer that does not require trust to be used.
- Big tech stable coins may soon go live and pose challenges for financial stability with so called data network activities feedback loops. With this data they can move rapidly enabled by inadequate regulation and compounded by regulatory arbitrage. This combination can exacerbate kill zones for small innovations and SME’s representing a threat to payment systems. It concentrates power in the hands of a few large players with historically low standards of regulation thus eroding monetary sovereignty leading to foreign currencies backing our GBP. A paradigm shift in the money markets going quickly from “too small to care” to “too big to ignore” in a short space of time and most probably skipping an invisible dividing line, makes large scale players more susceptible to hacks and outages. This could also result in a lack of data governance leading to a fragmented monetary system based on big tech profits and not social good. Private money has always gone wrong in whatever form it has taken.
12 October 2021