Central bank eyes digital currency

A large-scale shift to digital currencies could risk undermining Britain’s banks, potentially forcing regulators to limit the scale or speed of any move, the Bank of England has warned.

If a central bank-issued digital currency or a private sector “stable coin” tied to sterling proved popular with households, they could take money out of commercial banks and move it into the new digital currency.

As a result, those lenders may have to find ways to cope without so many customer deposits.

“Commercial banks have never faced a large-scale, system-wide displacement of the deposits they create,” the Bank of England said.

Officials are looking at setting up a central bank digital currency (CBDC) whereby individuals could gain access to sterling in the form of central bank reserves, a currency only currently available to banks.

This could be used directly by individuals as a digital form of the banknotes issued by the Bank of England, instead of the commercial bank money that households typically hold in their current accounts.

But privately created “stablecoins” are another option that could fulfil a similar purpose in letting people make digital transactions.

“The prospect of stablecoins as a means of payment and the emerging propositions of CBDC have generated a host of issues that central banks, governments, and society as a whole, need to carefully consider and address. It is essential that we ask the difficult and pertinent questions when it comes to the future of these new forms of digital money,” Bank Governor Andrew Bailey said.

The bank is watching closely for any risk of this threatening financial stability or customers’ ability to access credit and the payments system.

It is not thought to have an interest in taking action to preserve the banking system in its current form purely for the sake of the incumbent financiers, if customers find new digital currencies more convenient, safer or cheaper than the current system.

The bank modelled a situation in which households and businesses move a large chunk of uninsured deposits into a new stablecoin, on the basis that this could be perceived to be a safer option, amounting to roughly one-fifth of bank deposits.

Sir Jon Cunliffe, one of Mr Bailey’s deputies, said there could be a range of benefits from a digital currency, including reducing costs compared with the fees charged to use credit cards, but also potentially “programming” the digital money to control how it is used. — Telegraph Group Ltd