Press Room
Time to bust the digital currency myths – Dion Seymour
Crypto & Digital Assets Technical Director, Dion Seymour, discusses key distinctions between cryptoassets like Bitcoin and a proposed ‘digital pound’, and dispels common myths about the latter, in AccountingWEB.
Dion’s article was published in AccountingWEB, 15 February 2023, and can be found here.
Following on from Tom Herbert’s article asking What’s the value of a digital pound? I would add there is still a lot of misunderstanding around central bank digital currency (CDBC). While I am not going to go into detail on the pros and cons of a digital pound, I will try to dispel some myths.
Just to note, however, that the development of a digital pound, or “Britcoin”, has been discussed across government departments with the UK not being alone. A review of CBDC Tracker shows that, while few CBDCs have been launched (the Bahamas were first), there is significant activity across the globe at differing stages of development.
Let’s dive into some myths.
What’s crypto got to do with it?
CBDCs are invariably compared to cryptoassets (cryptocurrency). To a casual observer they may appear similar, but a CBDC is not a cryptoasset. A key difference is that distributed ledger technology (DLT), like blockchain, is required in order for a digital currency to be a cryptoasset by many of the current definitions.
The topic of blockchain is often thrown into CDBC discussions. Unlike cryptoassets, a CBDC does not have to use any form of DLT and a closed system could be used as is the case for financial transactions. Also, not all distributed ledgers are open to the public in the way that Bitcoin’s blockchain is open to all. Versions of DLT exist that are private and require permission to join, and see transactions. For a CBDC it is more likely that these approaches would be used.
Most importantly, unlike cryptoassets, a digital pound will be backed by the Bank of England (BoE). Even for cryptoassets that have some degree of counterparty, such as stablecoins like Tether, they would not be a currency – there is a difference between legal tender and a currency. Being issued by a central bank, or other authorised issuer, is significant with the credit risk resting with the BoE.
It’s the end of cash as we know it
Cash will continue to be available and the BoE has, repeatedly, stated that the digital pound would operate alongside physical cash. If cash was to end it seems unlikely that a digital pound would be its death knell. However, cash use is declining and the consultation paper states that card payments continue to increase, as have online retail sales. However, less than a decade ago, cash payments made up 55% of transactions. By 2021 this has fallen to 15%.
Money is evolutionary. What we consider to be money now wasn’t 100 years ago (no plastic cards back then) and it will certainly change in the next 100 years. Is this the next step? Will spending on Web3 become just as easy as using a bank card? Only time will tell.
Won’t someone think about the planet?
Discussions on CBDCs often also include comments about energy use, which is linked to the use of energy for Bitcoin. However, as highlighted above, the energy concerns of blockchain are not relevant to a CBDC, as the underlying technology would not be using a permissionless blockchain (which is, deliberately, an energy-intensive technology).
What could this mean for tax and accounting?
A digital pound will be issued by a central bank and, in many ways, is the same as the money in your bank account (commercial money). Therefore, from that perspective, existing legislation should accommodate a CBDC (unless any provision is specifically in relation to physical cash) without too much concern.
While no standard exists for accounting purposes, it is hard to see how IAS 7 would not apply as a digital pound as it would be readily exchangeable for goods or services and also legal tender. Certainly, IAS 38, as generally used for cryptoassets, appears to be less applicable as it applies to non-monetary assets.
However, none of this dismisses the huge challenge in terms of how (if it is introduced) any digital pound will be implemented. For example, while it is noted that the government wants to ensure privacy and will not “program” the money, it remains unclear what, if any, safeguards will be put in place to ensure that and prevent others from doing the same where the government may indirectly benefit. For example, in theory, it could be programmed by other bodies to control our spending, such as on climate-friendly activity, or to report on spending on unhealthy products to your life-insurance provider. However, before we worry too much, there is still a distance to travel.
Email: Dion Seymour