The Bank of England has issued a May 2018 staff working paper, which suggests that the adoption of central bank digital currencies (CBDCs) could pose a competition threat to commercial banks.
Currently, the conventional – and profitable – business model of commercial banks relies on a plentiful and cheap supply of retail deposits, i.e. the storage of individuals’ and corporations’ cash holdings in their current and savings accounts. This underpins commercial banks’ net interest margin (NIM) profitability, but the paper warns that this situation could come under threat with CBDCs.
The paper engages with the “radical idea” that the public could be given the option to store their money at the central bank in the form of central bank digital currencies. As well as “perceiving” this to be a “safer storage facility,” consumers would moreover be able to continue to make payments and transfers seamlessly, using private operators of ‘digital wallet’ and transaction verification services. The paper adds a note that:
“With respect to the availability of overdraft facilities, it wouldn’t be unimaginable that the private operators could also provide lines of credit bundled with payment functionalities.”
The paper argues that such a scenario – involving universal disintermediated access to the central bank’s balance sheet, alongside preserved payment functionalities – could have critical consequences for the commercial banking sector.
Both individual and corporate depositors would have a potential substitute for the traditional deposit account services being offered by commercial banks, so that “banks may be subject to an outflow of retail deposits, in particular in a scenario of financial stress.”
The paper refers to a March report by the Bank of International Settlements (BIS) that similarly suggested that “in times of financial stress, domestic (retail) investors are likely to consider CBDC attractive relative to bank deposits, with many possible side effects… for financial stability.”
Earlier this month, the Bank of England released a staff working paper laying out various risk and financial stability analyses for CBDCs. As CryptoNewspeople reported, the paper notably found that, after a first approximation, there was no reason to believe that introducing a CBDC would have an adverse effect on private credit or on total liquidity provision to the economy.
Two days ago, the Governor of the Bank of England Mark Carney told an audience at the Riksbank Anniversary conference that he was open-minded about the prospect of a central bank digital currency, while stressing that any CBDC adoption would not happen soon. Carney has however leveled sharp criticisms at cryptocurrencies such as Bitcoin.