‘At stake is the structure of finance itself’: City bankers raise concerns over potential impact of Britcoin
City bankers have raised concerns about the possible consequences that introducing the digital pound, known as ‘Britcoin’, could have on the country’s banking sector.
“At stake is not just the type of token we use to pay for things but the structure of finance itself,” Huw van Steenis, vice chair at Oliver Wyman, told City A.M.
“Do not underestimate the potential financial stability and monetary policy impacts,” he warned.
Foremost among the concerns in the banking sector were worries that a digital pound could reduce the level of deposits at commercial banks, having knock-on effects for lending in the wider economy.
Modelling by the Bank of England suggests that up to 20 per cent of commercial bank deposits could move out of bank accounts into digital pound wallets if a new central bank digital currency, or CBDC, was adopted.
This would have a material impact on the funding of retail banks as deposits are the cheapest form of funding. In order to mitigate concerns that banks will lose access to lots of cash, the Bank has proposed a temporary limit on holdings of between £10,000 and £20,000.
Bank official Jon Cunliffe said previously that this limit struck the right balance between ensuring wide usage and managing potential risks.
But several sources said this was too high.
One senior banker told City A.M. that the European Central Bank’s proposed limit of €3,000 “is much more sensible as far as we’re concerned.”
They added that the Bank’s limit “could have a dramatic, detrimental impact to the world of commercial banking”.
Another bank executive told City A.M. that the limit was far too high, saying “there is a very significant risk to the banking sector”.
In order to replace the funds, which would previously have been in commercial bank accounts, banks would have to secure more wholesale funding.
“Wholesale funding is hugely volatile and much more expensive… this will increase the cost of funds to the bank and ultimately consumers will pay the price,” the executive said.
The comments come as the Bank of England’s consultation on the digital pound comes to an end on Friday.
The International Regulatory Strategy Group (IRSG), a joint venture of TheCity UK and Canada Corporation, has flagged similar concerns to the consultation.
“Retail CBDC could disintermediate the banking sector causing a loss of credit creation which will in turn lead to increased costs and reduced availability of credit to consumers and businesses,” the IRSG said in its response.
Many argued that these risks were too big when the potential benefits were either fairly small or unclear.
Van Steenis said “if this is just upgrading payment systems, improving security or reducing cost then that’s fine. But this is a much more fundamental change”.
The IRSG said “while issuance of a digital pound may deliver the objectives mentioned in the consultation paper there are clear alternatives that could achieve those objectives while attracting lower levels of risks”.
Despite the concerns about how the Bank of England should implement a digital pound, most sources agreed that it was wise to explore the potential need for a CBDC.
One banker said “programmable payments are very interesting. It could dramatically reduce the risk of APP fraud”. As an example, programmable payments could enable consumers to pay for online orders only once the product had arrived.
Debates around the digital pound will likely continue for months, if not years, with a final decision on the need for a CBDC not expected until 2025. The Bank’s consultation period has already been extended once to cope with the influx of responses.
On the political side, the government has already guaranteed that there will be a vote before it is introduced to ensure proper scrutiny.
As van Steenis said, “money is too important to be left just to central bankers.”
The Bank of England declined to comment.