Bank of England deputy governor for monetary policy Ben Broadbent argued in a speech today that bitcoin is unlikely to obtain widespread adoption – but that central bank-issued digital currencies could have a big impact on the global financial system.
The deputy governor dismissed the possibility that digital currencies such as bitcoin could become widely used as a payment mechanism or a unit of account, stating:
Broadbent used his speech to discuss the potential characteristics of a future central bank-issued digital currency, as well as the impact this issuance could have on the commercial banking system.
While highlighting some of the benefits of a central bank-issued digital currency, he notably remarked that those banks could see a degree of impairment if adoption took hold.
He also discussed the application of distributed ledgers to the financial system, stating that "decentralised virtual clearinghouse and asset register[s]" may be a better way of describing the technology.
Impact on banks
Broadbent suggested that people who previously kept their funds in a commercial bank might be more immune from a bank run if that money is kept under the auspices of a central bank instead.
"Currently, retail deposits are backed mainly by illiquid loans, assets that can't be sold on open markets; if we all tried simultaneously to close our accounts, banks wouldn’t have the liquid resources to meet the demand," he said. "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'."
This shift, however, would have consequences for commercial banks. Namely, their ability to lend money or support their operations without relying on potentially unstable capital markets.
"On the other hand, taking deposits away from banks could impair their ability to make the loans in the first place," he said, adding:
What will drive this scenario, he said, is the features of a central bank-issued digital currency.
Broadbent suggested that, if it shares characteristics with a bank account or enables the generation of interest, deposit holders may take their funds elsewhere, particularly during times of economic stress.
As noted by Broadbent, the Bank of England is in the midst of a comprehensive research effort focused on the technology.
He closed his speech with a call to action for possible contributors, noting how digital currencies factor significantly into the central bank's research priorities for the year ahead.
It was earlier this year that the Bank of England indicated that it was looking at the technology for possible applications in settlement.
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