Digital currency is the future. The quicker we develop an e-pound, the better

One of the many ways in which China is leapfrogging the West is in its development of a state-backed digital currency. The Communist authorities have announced that an electronic yuan will be in circulation in time for the 2022 Beijing Winter Olympics. They expect it to lower transaction costs and boost growth, while making fraud and tax evasion harder.

The creation of digital money is uncontroversial – indeed, inescapable. Just as we moved from barter to metal, and from metal to paper, so we are now moving from paper to little pulses of electricity. That move, though, is haphazard and improvised. Numerous digital platforms have been developed since the 1980s, but all of them are based around the idea of a physical currency issued by the state. In consequence, they can be expensive, slow to reconcile transactions, energyhungry and lacking in interoperability.

Since 2009 we have also seen the issuing of cryptocurrencies: online units of value verified by blockchain. But the whole point of cryptocurrencies – Bitcoin is the oldest and best known – is to be decentralised and anonymous. A Central Bank Digital Currency (CBDC), by contrast, is legal tender: you can pay your taxes in it, it can be scaled up or down to almost any size of transaction (including proportions of less than one penny) and it is not subject to the extreme volatility that afflicts cryptocurrencies.

It is also far more environmentally friendly. We think of online activity as aethereal, insubstantial, numinous – hence our image of “the cloud”. In fact, digital transactions depend on vast warehouses filled with steel-framed machines. In 2020 cryptocurrencies consumed more energy than Argentina or the Netherlands. By contrast, a CBDC leaves only the lightest carbon footprint.

The question is not whether CBDCs are coming: everyone can see that they are. Nor is it who will get there first. We already know the answer to that – China. The question is whether any other country will act quickly enough to offer the world a rival model, one more rooted in the traditions of personal freedom, private property and privacy.

Britain is beautifully placed to be that country. Washington and Brussels are lumbering towards a digital dollar and euro, but both are beset by bureaucracy. Britain, with the world’s greatest financial centre, a unique concentration of fintech expertise and a common law system that might have been specifically designed to encourage innovation in this area, can more quickly develop a CBDC on open, liberal principles, thereby avoiding dependency on the Chinese system and offering the rest of the world an alternative.

Back in February, I wrote on this page about the launch of CityUnited, an alliance of entrepreneurs in the financial services sector who want to take advantage of our post-EU regulatory autonomy. It is striking that the group has identified the development of a digital pound as an immediate priority for the City’s continued health, a way to ensure that London carries on leading the world in setting regulatory standards from outside of the EU.

The Bank of England and the Treasury are already exploring the idea. If they want to be in time to reap the benefits, though, they cannot hang around. We learned last year that letting officialdom advance at its own pace is no substitute for empowering private sector operators – Kate Bingham, the vaccine procurement queen, being the supreme example. Hence CityUnited’s plan for an urgent pilot scheme focused on the wholesale sector, to be followed by a more general rollout which will bring wider benefits to consumers.

We paid a high negotiating price for regulatory autonomy. Having done so, it would be crazy not to use it. Here is something we can do at no cost to the EU. Let’s get cracking.