Stablecoins and CBDCs– Bordering on the Mundane

Both of the author’s parents came from County Fermanagh – a land-locked, water-logged area of stunning natural beauty in the North West of Ireland.

Fermanagh is one of the 6 counties of Northern Ireland, a ‘country’ that is part of the United Kingdom (UK).?It is also one of the 32 counties of the geographic mass that is the island of Ireland and is one of the 9 counties of the historic province of Ulster (some of those Ulster counties being in the separate country of Eire, i.e., Southern Ireland).

Northern Ireland (NI) is a multi-coloured, three-dimensional Venn diagram of geography, economy, culture, politics and religion and, post-Brexit , remains a chimera of unknown future.

Stablecoins

Since 1929, banks in Northern Ireland[1] have been allowed to print and circulate their own ‘money’, in the form of banknotes[2] .

The banknotes shown at the top of the page are examples of some notes circulating in NI, and, today, are issued by three private banks[3] : Ulster Bank, Danske Bank and Bank of Ireland.?Confusingly, only one of these issuing banks are headquartered in the UK.

So, how does that work??

When issuing banknotes in NI, these banks will deposit an equivalent amount of Great British Pounds (GBP) with the Bank of England, which issues GBP banknotes. To confuse matters, these banknotes are classed as ‘legal currency’, but they are technically NOT ‘legal tender’ , i.e., there is no obligation on a merchant to accept these banknotes for payment but IF they do, acceptance ‘extinguishes’ the debt.

This means that, when someone, say from Northern Ireland, visits London, on the ’mainland’, they know that merchants will almost certainly not accept NI’s ‘funny money’. So, typically they will go to a local bank branch and change the notes at the counter – NI pound for GB pound, one for one, no fees, no foreign exchange charges!

So, in modern parlance, NI’s currency is a private bank-issued ‘stablecoin’, convertible (and backed) one for one by GBP. ??

[In truth, it could be argued that its stablecoin currency may be one of the few examples of any real stability in Northern Ireland.]

However, the reverse is not true, as GBP notes are accepted throughout Northern Ireland and do not need to be converted.?Note, however, if a GBP banknote is proffered for goods or services in NI, change may be given in NI banknotes, which, if not spent in NI, will have to be converted to GBP, when a visitor returns to the mainland.

So, why do these stablecoins still exist?

Notes and coins make up only 4% of currency used in the UK, and the other 96% is held in electronic bank accounts. In 2022, total Notes in Circulation (NIC) in the UK totaled some ￡80 billion in value and NIC in Northern Ireland some ￡2.6 billion with another ￡4.9 billion issued by Scottish banks.

This means that NI banknotes comprise only some 0.10% of all currency by value in circulation in the UK.

Surely, it would make sense to end this historical (and expensive) anomaly and replace NI ‘stablecoins’ by standard UK currency? But, of course, Northern Ireland is replete with dangerous historical anomalies and this one is probably small enough to park for now?

Borderlands

But Fermanagh is more than merely a user of a type of stablecoin, albeit one adorned by the picture of one of the true greats of world soccer - George Best[4] - it is a ‘border economy[5] ’.

Fermanagh is at the very western end of Northern Ireland with most of its county border touching four counties in Eire and only one county in Northern Ireland (Tyrone).?Its closest neighbour then is not only Cavan in Eire but the economic behemoth that is the European Union (EU).

As the great Irish writer Colm Toibin wrote[6] “drawing the line of a border in red on a map is child's play: putting a hermetic seal on a country is not” and this is as true in economics as in politics.

Around the world, such as on the Canada/USA and Italy/Swiss borders, merchants accept currency from ‘across the border’ because they recognised fairly quickly that accepting a second, even third, currency increases gross sales for only a little extra hassle.

Enniskillen (‘Inis Ceithleann’ or 'Ceithlenn's island') is the county town of Fermanagh and its ancient castle sits atop of the bridge that connects the two arms of the massive Lough Erne, and is in a strategic position straddling major roads running East/West and North/South.?Because of its position, Enniskillen is a natural trading hub and has been for centuries amid changes in political borders.?It is also a tourist hub not least because of the natural beauty of the countryside for 100 miles in every direction.

On any day, especially in Summer, car parks in Enniskillen are filled with cars, caravans and tourist buses from all over UK, Ireland and Europe and all of the major UK retail companies have stores in this little corner of Northern Ireland. Enniskillen is a small city in the guise of a large town.

So, with so many tourists and shoppers from counties all around Fermanagh and countries in Europe, one would expect there to be long queues, snaking along Enniskillen’s hilly, picturesque Main Street, waiting to change currency at the town’s banks and bureau de change.

But not a bit of it, too much to do and see, to spend time queuing!

Most stores in the town and on the major roads in and out, have signs that display today’s currency rate of the Pound to the Euro. So, locals and tourists can shop and pay in GBP or Euro, if paying cash. However, thanks to technology, today, one does not need to pay cash, people can use debit and credit cards (which will be billed in the ‘home’ currency) and, importantly, if connected to one of the large ATM networks, such as LINK or Cirrus, can withdraw local money from local ATMs, 24*7

Of course, there are costs to changing money between currencies but that is trade-off between convenience and costs with costs being a relatively minor consideration when prices for goods in large supermarkets tend to be cheaper than in small shops ‘across the border’.?It is a complex calculation that people get used to, relatively quickly.

But it is not only tourists who operate in a world of multiple currencies.

Firms in Fermanagh have customers and suppliers from both sides of the border and must take in and give out in both currencies.?Furthermore, many people work on one side of the border but live on the other, juggling currencies for costs and income on both sides.

For longer term work arrangements, this invariably means maintaining accounts in both currencies, and, for example some UK banks, such as Barclays, permit UK customers to also hold a Euro denominated account.?In recent years, some UK 'neo-banks', such as Revolut and Starling, have made holding such accounts much easier.

There is nothing especially new in this; people are extremely adaptable, and will invariably find ways to work around problems, such as having to deal in multiple currencies. And, of course, merchants will change their pricing to cover different types of costs, provided it is worth their effort!

Why is this important?

When (If?) Central Bank Digital Currencies (CBDCs) or Stablecoins are being implemented one of the key questions will be “Will consumers accept two separate currencies, or currency forms, for their day-to-day business?’

This is a non-trivial question as spending a lot of time and money with immense disruption to existing systems will only be worthwhile if consumers will actually accept the changes entailed in implementing a CBDC or a Stablecoin.

Now one could take this problem to central bank/university economists who will develop models that depending on gross assumptions will prove conclusively that border economies cannot work in the real world, or, alternatively, central banks could do some studies in Behavioural Finance on different CBDC designs out on the Borderlands!

[1] This is similar to its near neighbour, Scotland, where three banks, all headquartered locally are permitted to issue notes, with full asset backing with the Bank of England. Banknotes are also issued by the governments of the Isle of Man and Jersey and Channel Islands.

[2] GBP coins are minted centrally by the Royal Mint and sometimes are engraved with symbols from Northern Ireland and Scotland but circulate throughout the UK.

[3] In June 2022, First Trust Bank stopped issuing new banknotes, but will continue to exchange existing notes at branches until 2024.

[4] As an example of currency as a ‘store of value’, the George Best ‘Fiver’, can today be bought on eBay for over 8 times its printed value,

[5] Sometimes called a ‘frontier’ economy

[6] See Colm Toibin (2010), “Bad Blood: A Walk Along the Irish Border” Picador