The introduction of a central bank digital currency (CBDC) could remove a fifth of deposits from the banking system, according to a Bank of England official.
The comments were made during a live broadcast on November 23 at a meeting of the Committee on Economic Affairs, with Bank of England Governor Andrew Bailey.
The comments come as the Bank of England is considering setting up a CBDC. This move would essentially create a digital book – a token issued by the Bank of England and backed by its currency reserves.
This would allow households and businesses to hold electronic accounts, make payments and transfers faster, and reduce transaction costs.
“It’s pretty hard to predict how innovators will take the money and actually use the money in the future. But we are starting to see programmable money being used in the crypto world. And I would expect we would see a similar revolution in the functionality of technology-driven money, ”said Deputy Governor for Financial Stability Jon Cunliffe.
He warned that the rise of online banking, along with the popularity of debit and credit cards, means physical money is losing popularity.
This is because a digital book aims to maintain the security of cash while being as flexible as digital payment methods.
“We modeled a very conservative assumption that basically 20% of deposits based in the banking system could exit the banking system and be transferred into the central bank’s digital currency,” Cunliffe added.
He also noted that “banks would have to adapt” otherwise they could potentially lose a source of income.
The UK has explored the possibility of establishing a CBDC in recent years. The Digital Pound Foundation was established in October to promote the creation of virtual currency as part of a digital currency ecosystem.
In his comments, Governor Bailey questioned the use of stablecoins as an alternative digital currency. They are essentially cryptocurrencies, but rather than having their value determined by the open market, they are pegged to existing assets, such as the pound sterling.
However, they retain some volatility and are not directly controlled by a central authority.
“They’re called stable coins, but I put the word ‘stable’ in quotes,” Bailey noted.
Currently, no country in the world has established a CBDC. An announcement by the Brazilian Central Bank recently revealed that the country plans to launch a pilot of its own CBDC in 2022, while also aiming to launch the final version of the currency in 2024.
HM Treasury has previously announced that it will launch a consultation to assess the case of a CBDC next year. The bank will work with key stakeholders to develop the technical specifications for the so-called Britcoin.
As such, with CBDCs only in their infancy, there is still a lot of work to be done to understand the potential issues and challenges with digital currencies, both from a technological and regulatory perspective.
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