Digital currencies: Are we with Hobbes or Locke?

CBDC design is not merely a dull question of payments technology

Dr Andrew Lilico is Executive Director and Principal of Europe Economics

Let’s think about currencies, bank account money, digital currencies and cryptocurrencies, and their implications for whether it is possible genuinely to own money. In particular I shall argue that certain versions of a central bank digital currency (CBDC) risk profoundly changing the relationship between the individual and the state.

Let’s begin by distinguishing between two positions on the moral status of property: the “Hobbesian” and “Lockean” views. For the Hobbesian, in a stateless wilderness we can possess things but nothing can truly be mine. Without a state there is, in Hobbes’s famous phrase, “no Propriety, no Dominion, no Mine and Thine distinct”. Property rights exist only when the state declares and enforces my entitlement to possess something and exclude you from it. For the Lockean, by contrast, property is fundamentally a moral concept, conceptually prior to the state. The state typically enforces property claims rather than creates them.

A Lockean can accept some property rights are created by states. Consider a 20-year licence to control part of the radio spectrum. Such an entitlement is inherently jurisdictional: it requires an authority to prohibit others within a territory from using that spectrum. Yet Lockean ownership need not be physical. I could enter into a covenant with you in the wilderness, thus giving you moral claims upon me.

Money is particularly interesting because, although most property is not money, realising and exchanging its value usually requires money. I may genuinely own my bakery and you your sock factory, but ordinarily I sell my bakery for money before buying your factory. If the form of money we have means every practicable exchange must pass through money over which the state has individual discretionary control (which as we shall see may be the situation with a CBDC), the state has acquired a choke point over otherwise independent property rights. As it were, Hobbesian money can dilute the practical moral status of Lockean property.

Classical money creates no such problem. I can own silver coins or banknotes. I can also own the claim represented by a bank deposit. An ordinary deposit is not a bailment: deposited money becomes the bank’s and the bank owes me a corresponding debt. My property is the claim against the bank. The state could confiscate my coins or cancel my bank claim, but it would remain meaningful to say the coins were morally mine or that the bank morally owed me the money.

Now imagine a CBDC consisting simply of a central register assigning balances to individuals. The state disapproves of me and cancels my £100.

Photo by Sue Winston on Unsplash

Has it confiscated or destroyed my property? That depends on what the CBDC is. If my £100 is an independently existing bearer asset, perhaps it has. But suppose my holding consists in nothing more than the authoritative system currently assigning me an entitlement to £100. Once that assignment disappears, there may be no independently existing £100 of which I can say: “That remains morally mine, whatever the state says.” It is more like cancelling my spectrum licence early. That might be immoral, but the underlying “property” existed only through the state’s assignment.

In a state with only this form of digital currency there would ultimately be no escape from the state’s assignment of monetary possession and control rights.

But CBDCs need not necessarily work that way. Consider two ends of a spectrum.

A maximally Hobbesian CBDC might involve:

• central ledger + named accounts + centrally authorised transfers + programmable spending restrictions + individual balance cancellation + no offline possession.

“I have £100” then means something like: “The sovereign’s system currently accords me £100 of permitted expenditure.”

At the other end might be digital cash:

• bearer tokens + self-custody + peer-to-peer transfer + offline finality + no individual revocation + no issuer programmability.

“I have £100” now means something much closer to: “I possess these digital banknotes.”

Current UK thinking is something of a hybrid. The proposed digital pound would remain a direct Bank of England liability with the Bank operating a core ledger — a distinctly Hobbesian element. But the Bank and Government have committed that neither would programme people’s money or control their spending, while experiments have investigated device-held offline value — something rather more Lockean.

Perhaps a genuinely Lockean CBDC would therefore resemble cryptographically implemented bearer cash: a central-bank-created digital cryptocurrency, or “CBDCc”. The sovereign would perform something analogous to minting: create the money and put it into circulation, after which people could own it without the sovereign continuously assigning their entitlements.

There are tricky technical questions we won’t explore here, but the central point is that CBDC design is not merely a dull question of payments technology. Whether the state recognises our ownership of money or instead continuously constitutes our entitlement to use it could profoundly alter the relationship between property, individual and state.