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.
In a talk at the London School of Economics, Broadbent focused specifically on the evolving relationship between digital currencies and central banks, a topic that Bank of England staffers have broached in the past.
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:
“The main point here is that the important innovation in bitcoin isn’t the alternative unit of account – it seems very unlikely that, to any significant extent, we’ll ever be paying for things in bitcoins, rather than pounds, dollars or euros – but its settlement technology, the so-called ‘distributed ledger’.”
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:
“Banks would be more reliant on wholesale markets, a source of funding that didn’t prove particularly stable during the crisis, and could reduce their lending to the real economy as a result.”
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.
Research continues
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.
The Bank of England has published past research on the topic, remarking at the time that digital currencies could reshape the payments space and, in the event of broader adoption, impair the ability of central banks to conduct monetary policy.
Bank of England image via Shutterstock