BANK of England (BOE) deputy governor Jon Cunliffe said a new digital version of the pound could help protect consumers in the event of a failure in the banking system, adding to arguments in favour of a project make a form of cash usable online.
The official said that consumers are already living “in an era of instantaneous bank runs” where depositors can move money quickly to another institution if they’re worried about the solvency of the bank where they keep deposits.
And while a so-called central bank digital currency, or CBDC, may “intensify” a run on a bank, as it would allow customers to move their money even more quickly, it would also give them a “safe place” to store value, he said.
“Actually a CBDC has financial stability benefits because it provides another payment system in terms of resilience, but it also means that if we ever have to deal with failed banks again, there is another asset that people can go into,” Cunliffe told lawmakers on Parliament’s Treasury Committee on Tuesday (Feb 28).
The BOE and Treasury are exploring whether to launch a digital pound, which has been dubbed “Britcoin” and evolved from cryptocurrency and the need to make a cash-like instrument that can be used for Internet transactions. Unlike cryptoassets, the digital pound would be backed by the central bank and government. It could be a reality by 2030 if the government gives the greenn light sometime in the middle of the decade.
Cunliffe said that one of the reasons the government had to bail out banks including Northern Rock and Royal Bank of Scotland in the 2008 financial crisis was because “60 per cent of people’s money” was locked up in commercial bank deposits that depends on the stability of the banks that hold the money.
While allowing them to move their money even faster than currently possible and into a CBDC could present “risks about damage to the banking system,” Cunliffe said the best way to deal with this would be to make sure a lender was wound down properly through the BOE’s resolution framework rather than restricting consumers’ access to a safe asset.
“It’s an interesting question about whether the best way to deal with (a run on a bank) is to say we’re going to take away the safe place so that you can’t go there, or whether there’s a better way to deal with resolving the problems in the institution itself, which is what the resolution framework is designed to do,” Cunliffe said.
The BOE doesn’t yet have the technical skills to be able to create the cryptocurrency-style product, Cunliffe admitted, and would have to partner with private-sector firms if it decided to proceed.
The prospect of launching a digital currency has proved controversial. A House of Lords Committee concluded it could see no “convincing case” for Britcoin.
Cunliffe himself said it’s hard to pinpoint problems which a digital currency could solve, but said the idea of launching Britcoin was more about preparing the UK’s payments system for a future where cash is not as usable in day-to-day transactions.
The BOE would be “complacent” to assume that new technologies won’t develop, he added. Big Tech firms like Google and Amazon.com are likely to “find ways to integrate the payment operation much more deeply into digital platforms and digital operations” whether the BOE moves ahead or not.
In those cases, Cunliffe added, it would be beneficial for consumers to have a state-backed digital currency which could act as a go-between for other private online platforms.
Cunliffe also provided more detail on how a digital currency could help normal bank account holders.
Money could be “programmed” so sums would automatically go towards paying a subscription, or for budgeting purposes, he said.
While this is already possible with many online banking tools, Cunliffe said “programmable money” would be better than “blunt” tools like standing orders and direct debit, or layers of technology which currently existing to allow account holders to set up savings pots.
He compared Britcoin to the Apple Inc.’s iPhone, noting that when the smartphone launched it had little functionality that other mobile phones didn’t already offer. But now, he said, the App Store offered things users would not have been able to dream of before its launch.
“If there is not a CBDC it doesn’t mean these technologies go away,” Cunliffe said.
But Cunliffe was keen to explain that a regulated Britcoin would be well removed from the “wild west” of cryptocurrencies.
Lawmakers also grilled Cunliffe on whether Britcoin would worsen financial exclusion, for members of society who did not have the means or the ability to access the Internet.
The BOE would try to develop a card similar to a debit card, Cunliffe said, which would allow Britons to use a digital currency without needing a smartphone or access to the Internet.
Increasing digitalisation may lead to even less cash usage, Cunliffe added, which may worry those who rely on notes and coins.
But Cunliffe said this was due to cash no longer being “fully functional”.