The Bank of England (BoE) is looking into the creation of a digital pound that could be used for in-person or online purchases, acting as an alternative for (but not a replacement of) cash.
The Digital Pound
The central bank digital currency (CBDC) or ‘digital pound’, would use some of the same technologies as cryptocurrency. However, it would be different in nature as it would have a central regulator (BoE) and its value would be denominated in pound sterling, rather than being entirely demand and supply driven.
From the above graph, taken from page 9 of said paper, we can see the decline of cash use in recent years, combined with an increase in card purchases.
Therefore, introducing digital money could be a way to take into account these consumer trends.
Perhaps here we can link the impact of Covid-19. During the height of the pandemic, we saw many businesses unwilling to accept cash payments due to it being less sanitary. Perhaps this has now stimulated a change in consumer purchasing wherein we are now less likely to resort to cash because we saw the ease of which we could live without it.
BoE has stated, “while we ensure continued access to cash, we also have to recognise that it cannot be used in digital transactions.” The proposed digital pound is not intended to replace cash, but rather to act as an alternative when cash cannot be used, or when consumers do not wish to use it.
Critcism
Moody’s Investors Service have argued that CBDCs would disrupt traditional banks. This in turn could lead to closure of branches and job losses as a result, due to the shift in the power structure of financial institutions.
Lord Forsyth of Drumlean, Chair of this Committee, stated, “We took evidence from a variety of witnesses and none of them were able to give us a compelling reason for why the UK needed a central bank digital currency. The concept seems to present a lot of risk for very little reward. We concluded that the idea was a solution in search of a problem.”
The ICAEW also stated that, “the shift in banking practices away from consumers holding money in cash form or as commercial bank deposits carries potentially seismic risks from a financial stability and monetary policy perspective.” However, BoE aims to address the risk to financial stability by setting deposit limits of £10-£20k in order to reduce money flows from commercial banks.
As you can see, the digital pound is certainly not an uncontested idea, as many have concerns about its potential repercussions. Perhaps one of the largest concerns from the public is about potential breaches of privacy…
Privacy
In response to these privacy concerns, BoE states that the digital pound would be “subject to rigorous standards of privacy and data protection.” They have proposed a platform model wherein Payment Interface Providers would identify and verify users but then anonymise this personal data before sharing information with the Bank. Therefore, neither BoE nor the Government would have access to users’ personal data, except for in exceptional circumstances whereby law enforcement agencies would be legally entitled to. This proposed system would therefore work similarly to current digital payments and bank accounts.
The digital pound is currently a consideration rather than an actuality. BoE is continuing to look into whether progression will take place in order to build and launch the digital pound.
by Red Star Wealth
New rules from the FCA mean first-time crypto investors will have to be offered a ‘cooling-off’ period, ‘refer a friend’ bonuses will be banned, and advertisements must have clear risk warnings.
New FCA Rules
As of 8th October 2023, those marketing cryptoassets to UK consumers will be obliged to offer a 24-hour cooling-off period. This means that new crypto investors will have to wait 24 hours before they can complete their transaction- if they change their mind, they can get their money back.
Sheldon Mills, Executive Director, Consumers and Competition at the FCA, has said:
“It is up to people to decide whether they buy crypto. But research shows many regret making a hasty decision. Our rules give people the time and the right risk warnings to make an informed choice”
Under these new measures introduced in October, ‘refer a friend’ bonuses will also be banned, and those advertising crypto will have to include clear risk warnings and ensure their adverts are clear, fair, and not misleading.
FSCS Consumer Research: Attitudes Towards Investing in Cryptocurrencies
According to FSCS research:
91% of consumers with savings or investments say they’ve heard of cryptocurrencies, yet only 11% have a good understanding of how they work… to find out more about what cryptocurrency is and how it all works, we have a blog just for you
80% of those with experience or open to investing cite reasons that can be grouped as being ‘swayed by the hype’ as a motivation to invest. In fact, 35% of all current, former or potential investors say friends and families encouraged them to invest… therefore, it’s significant that the FCA are banning these refer a friend bonuses, as some will invest in crypto just because those they know are trying to get them to
52% with experience or open to investing agree that they see crypto ads everywhere… given that these ads are so rampant, it’s more important than ever to ensure that any false or misleading advertising is cut out
23% would consider getting into debt to buy cryptocurrencies, increasing to 34% among under 25s and 29% of those with household incomes of less than £15,000… it could even be argued that part of the reason why people in debt are willing to buy cryptocurrencies is because it is advertised as a way to ‘get rich quick’. It can be easy to be misled into believing that crypto could be a way to get out of debt, but unfortunately, for many, it actually does the opposite due to its risky and unregulated nature
by Red Star Wealth
Cryptocurrency is a very high-risk investment due to its volatile nature. Some people make their millions and some lose every penny they have invested. The crypto market has just suffered another shock this month following the collapse of FTX…
What is cryptocurrency?
Cryptocurrency is any form of currency that exists virtually, using cryptography to secure its transactions. Cryptocurrency exists entirely within the digital sphere… it is not tangible.
In November 2021, the Bitcoin price was at an all-time high of $69,000 whilst just a year on, it has fallen to under $17,000.
Ether, the cryptocurrency of the Ethereum network, which is the second most popular cryptocurrency after Bitcoin, has followed a similar trend.
Ether also reached new heights in November last year, pricing at $4,800, whilst it has now fallen to under $1,200.
Why the Crash?
Crypto prices massively fluctuate and can drop in an instant in response to major crypto events like coins or exchanges crashing.
The crash in cryptocurrencies this month has been triggered by the latter, with the sudden collapse of FTX.
What is FTX?
FTX was a crypto-exchange company based in the Bahamas which allowed people and companies to trade currencies virtually.
The $32 billion company is now bankrupt.
Mismanagement
Sam Bankman-Fried resigned as CEO of the company on 11th November, being replaced with John Ray III who has previous experience at other companies of helping investors gain back losses.
John Ray III said that FTX had faced “unprecedented and complete failure of corporate controls”, with a lack of regulatory oversight and sufficient record keeping. The company failed to keep proper records or security controls for the digital assets it held on behalf of its customers and turned to software to hide their misuse of customer funds.
He also said that a “substantial portion” of assets held by FTX may be missing or stolen and that corporate funds had been used to buy homes in the Bahamas as well as other things for employees.
There are also reports that Bankman-Fried may have used FTX consumer deposits for trading on his crypto hedge fund, Alameda Research.
FTX is currently being investigated by the US Department of Justice, the Securities and Exchange Commission, and police in the Bahamas.
Binance’s Cold Feet about Acquiring FTX
FTX was originally set to be acquired by its rival, Binance. However, after looking at FTX’s books, Binance announced its withdrawal from the deal earlier this month.
I guess we will have to keep an eye out to see whether more information unravels about FTX’s conduct during these investigations…
by Red Star Wealth
If you feel like you haven’t quite been able to wrap your head around the enigma that is cryptocurrency, this blog is the one for you
What is Cryptocurrency?
Cryptocurrency is any form of currency that exists virtually, using cryptography to secure its transactions.
Rather than using ‘real’ money in the ‘real’ world, cryptocurrency exists entirely within the digital sphere… it is not tangible.
What is cryptography?
Whilst its name makes it seem complicated, cryptography is just a way of encrypting transactions to keep them secure
An Inversion of Traditional Banking
Cryptocurrencies are entirely self-governing, with most being supported by a technology called a blockchain. Every transaction made is automatically logged onto a database referred to as the Blockchain. This Blockchain acts as a kind of digital accounts book, shared amongst numerous computer systems.
This is very different to traditional banking systems which favour a single ledger that only a central authority can access. In short, with traditional banks, you can’t always see what they’re getting up to!
The complete transparency of cryptocurrency is deliberate, made in reaction to the 2008 Financial Crisis.
The Financial Crisis in a Nutshell
Banks and other lenders recycled enormous levels of debt into subprime financial products that were far too complicated for most people to understand. Very few people had access to the books, as access is of course restricted to a central authority.
When the products defaulted, the world economy was hugely affected, which led to massive amounts of money being given to banks to bail them out for the same problems they had caused.
People using cryptocurrencies make direct online payments to one another, cutting out the middle-man of banks and traditional financial agencies.
Now the complicated bit… how does it work?
Today, there are thousands of different cryptocurrencies being traded, so let’s just stick with one. We will use Bitcoin as an example, as this was the first modern cryptocurrency.
Source: https://coinmarketcap.com/all/views/all/, showing the number of cryptocurrencies (20,876) at time of writing
Every ten minutes or so, bitcoin transactions are batched into a block, which is then added to the blockchain we discussed earlier.
Adding the new blocks into this shared ledger is called mining, which is the way that new bitcoin are released into its virtual system.
Whoever wins the competition of solving the cryptographic problem can then add the new transactions block to the larger blockchain. They are also rewarded by gaining new bitcoin.
What’s the Catch?
This all sounds good, right? Avoid the banks and take matters into your own hands! But you may want to rethink that, as cryptocurrency is incredibly volatile. It is entirely driven by demand and supply, with no outside regulation from institutions like the Financial Conduct Authority, meaning it has huge fluctuations.
The reason you might have heard stories where people have made their millions off Bitcoin, is because the rewards of cryptocurrencies can be incredibly high. Those who make their millions do so by trading currencies as the rates rise and fall in order to take advantage of the peaks and troughs of the market.
As Isaac Newton said, every action has an equal and opposite reaction. Therefore, the chance of high reward also brings the chance of high losses. In fact, Bitcoin is down more than 50% this year, and is worth just 70% of its highest recorded price. These are not fluctuations to be taken lightly.
Read the Guardian’s interview of former primary school teacher, Duncan, who has faced losses worth £36,000 from investing in cryptocurrencies. If you still want to invest in cryptocurrency after this read, it might be a good idea to avoid putting all your life savings into it at least.
So, that’s cryptocurrency all summed up… if you prefer handling ‘real’ money, you might want to check out this blog discussing whether cold, hard cash helps us budget!
