Introducing 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 stream on the 23rd of November during a meeting of the Economic Affairs Committee, featuring Bank of England Governor Andrew Bailey.
Comments come as the Bank of England is considering the creation of a CBDC. The move would essentially create a digital Pound – a token issued by the Bank of England and backed by its monetary reserves.
It would allow households and businesses to hold electronic accounts, making payments and transfers faster and reducing transaction costs.
“It’s quite difficult to predict how innovators will take money and actually use money going forward. 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 money driven by technology,” 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 that physical cash is losing popularity.
In effect, a digital Pound aims to maintain the security of cash while being as flexible as digital payment methods.
“We’ve modelled a very prudent assumption, which is that basically 20% of deposits based in the banking system could move out of the banking system and into central bank digital money,” Cunliffe added.
He also noted that “banks would need to adapt,” or else they could potentially lose a revenue stream.
The UK has been exploring the possibility of creating a CBDC in recent years. The Digital Pound Foundation was created in October to promote the creation of a virtual currency as part of a digital money ecosystem.
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In comments, Governor Bailey cast doubt on the use of stablecoins as an alternative digital currency. These are essentially cryptocurrencies, but rather than having their value determined by the free market, they are pegged to existing assets, such as the Pound.
However, they maintain a degree of volatility, and are not directly controlled by a central authority.
“They’re called stablecoins, but I put the word ‘stable’ in inverted commas,” Bailey noted.
At present, no country in the world has introduced a CBDC. An announcement made by the Brazilian Central Bank recently revealed that the country is planning to launch a pilot of its own CBDC in 2022, while aiming to launch the final version of the currency in 2024.
HM Treasury previously announced that it would launch a consultation to assess the case for 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 still in their infancy, there is a great deal of work needed to understand potential issues and challenges around digital currencies, both from a technological and a regulatory perspective.
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