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Bank of England Dep. Governor: Digital Currency Puts Banks at Risk; Bitcoin Won’t Replace USD, GBP

Last Updated March 4, 2021 4:47 PM
Samburaj Das
Last Updated March 4, 2021 4:47 PM

The Bank of England’s deputy governor for monetary policy, Ben Broadbent believes that the issuance of digital currency by central banks will put commercial banking’s business model and practices at risk. He also stated that digital currencies (bitcoin etc.) are unlikely to replace established fiat currencies.

Bank of England (BoE) deputy governor Ben Broadbent has claimed that switching over to digital currencies or a digital version of the sterling pound will have a negative impact on banks. In his opinion, a digital version of sterling could “impair” commercial banks’ ability to make loans.

The Bank of England is one of the more prominent examples of a central bank exploring the possibility of issuing its own digital currency after keeping a close eye on the most popular digital currency of them all, bitcoin. In a nod to this, the deputy governor also revealed that officials have a “lot more thinking to do” on the very subject.

A distributed ledger technology solution will also help curb the central bank’s expenses with some $54 billion spent a year on clearing and settlement processes. The BoE is also in a consultation process to use bitcoin’s blockchain technology to revamp its 500 billion-pounds-a-day payment system.

Broadbent was speaking at the London School of Economics today, in a speech. As reported by Bloomberg , he stated:

Some suggest that central banks will have to issue their own digital currency – that is, to supply central ban money more widely, via some generalized distributed ledger – to meet a ‘competitive threat’ from private-sector rivals.

In stating the above, Broadbent quickly questioned such a move by central banks, raising the question of such an endeavor’s effect on commercial banks.

I suspect a more important issue for central banks considering such a move will be what it might mean for the funding of banks and the supply of credit.

Central Banks’ Digital Currency

The governor and policymaker suggested that the central bank-issued digital currencies – while widening the number of savers that can hold money with central banks – would hurt commercial banks’ ability to lend.

“If bank lending became scarcer, or more expensive, it’s likely that investment and economic activity would suffer,” Broadbent stated.

Taking deposits away from banks could impair their ability to make the loans in the first place. Banks would be more reliant on wholesale markets, a source of funding that didn’t prove particularly stable during their crisis, and could reduce their lending.

The overall effect of central bank-issued digital currencies on the economy would depend on their design and their advent as a mainstream form of money in the economy, Broadbent added. More notably, how they compare and compete with the main form of money in the economy – commercial bank deposits.

Broadbent also stated that deposits could become safer by embracing blockchain technology and the issuance of digital currency by the central bank. As reported by Reuters , the deputy governor stated:

Currently, retail deposits are backed mainly by liquid loans, assets that can’t be sold on open markets…the central bank, by contrast, holds only liquid assets on its balance sheet. The central bank can’t run out of cash and therefore can’t suffer a ‘run’.

‘Bitcoin Won’t Replace Established Currencies’

Broadbent also spoke about the advent and popularity of digital currencies. According to him, established fiat currencies such as the US dollar, pound or euro will be the preferred choice among the masses, even at a time of doubt, over digital currencies.

Almost always, these currency substitutions occur only once the existing currency has become deeply compromised. Even then, the thing people naturally reach for is an existing, trusted currency – often the US dollar – rather than some entirely new unit of account.

 Featured image from Shutterstock.