We intend that the digital pound would have the same (or stronger) privacy protections as bank accounts, debit cards or cheques which are now used for 85% of transactions in the economy. Individuals’ personal details and transaction records would be known only to their private sector wallet provider in the same way they are for bank account providers today (and subject to the same privacy protections). But individuals’ details and records would not be known by the Government or the Bank of England. In this way, the digital pound would provide privacy while also protecting against fraud and financial crime. The digital pound would not be an anonymous bearer instrument like cash, but physical cash would remain available to those who wanted to use it. Neither the Government nor the Bank would program a digital pound or restrict how it was spent. Instead, the Bank would provide the infrastructure and minimum functionality for the private sector to provide programmability features for users. Those features would require user consent. As with banknotes and many current accounts, no interest would be paid on a digital pound. Its purpose would be as a means of transaction - to make and receive payments - rather than as a savings product. Nor do we see the digital pound as a monetary policy instrument and as such it would, like cash, have neither positive nor negative remuneration.
For example, the firm might notice that the yield on corporate bonds relative to Treasury yields was higher than the range observed in recent years. If Long-Term Capital believed the former relationship would reassert itself, it would buy corporate bonds and sell short Treasury bonds. If the spread narrowed as expected, the firm would profit. If, however, the spread continued to widen, the firm would incur losses. This basic strategy and many complex variations was followed across many interest rate products in the US and many overseas markets as well. The firm was active both in traditional securities markets, and perhaps more importantly, in derivative product markets such as futures, swaps, and options. Anticipating that some positions would move in their favor and some would move against them, the firm relied on diversification across a large number of product and geographic markets. Long-Term Capital proved quite successful at this strategy, generating returns in excess of 40 percent in 1995 and 1996, though somewhat less in 1997. Perhaps their success went to their heads. Long-Term Capital took on larger and larger positions. They also leveraged their investments at higher levels, returning capital to their investors but not, apparently, reducing risks. We now also know that they took on significant positions in equity markets, through both swap and options contracts. The reputations of the Long-Term Capital partners, as traders and economists, and their initial success, appear to have contributed to so many counterparties’ willingness to deal with them.