Bank of England (BoE) Deputy Governor Ben Broadbent has warned about the risks to commercial banks of digital currencies.
In a speech at the London School of Economics (LSE), he said that while distributed ledger technology and digital currency could potentially make deposits safer, he also said that they could be an obstacle in the way of banks making the loans in the first place.
While he said that digital currencies are unlikely to become alternative units of account, he warned that "if bank lending became scarcer, or more expensive, it’s likely that investment and economic activity would suffer".
"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," he said.
Broadbent also said that distributed ledger technology will alter the role currently played by central banks to commercial banks – that of a trusted third party.
"Acting as a trusted third party is precisely what a central bank does," said Broadbent to the LSE. "It performs that role only for one particular asset, central bank money (i.e. reserve deposits held largely by commercial banks at the central bank). But the function goes right to the heart of what central banks do and how they came about."
The BoE is going to consult on updating its payment system, which has a value of around £500bn a day. This could involve using distributed ledger technology, the blockchain that underpins digital currencies like Bitcoin.
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Broadbent laid out a view put forward by many in finance that it’s neither the "digital" nor the "currency" aspect of bitcoin that matters," but is the "a ‘decentralised virtual clearinghouse and asset register’" that is significant.
"In principle, this technology could be applied to many things, not just the exchange and registering of financial assets," he said.
Broadbent said that "what a distributed ledger would seek to replace, in the case of securities exchange, isn’t just a single "third-party centralised clearer", but a complicated system with lots of institutional layers". These layers include those tasked with looking after securities and collecting dividends, brokers, and the exchanges and clearing houses where orders are placed.
On central bank digital currencies the deputy govenor said that "compared with securities settlement, that process simply has fewer middlemen for a distributed ledger to replace."
He also said that is would make the process of non-bank institutions to have access to some of the Bank of England’s regular facilities: "a distributed ledger would make it that process easier, opening up the balance sheet to a wider variety of financial firms."
"If so, our accounts would no longer be a claim on commercial banks but, like banknotes, the liability of the central bank," he added.
Broadbent said that he thought it was unlikely that digital currencies would supersede current units of account such as Sterling or the Dollar.
"In the United States, at a rough guess, there may have been as much as $5bn worth of such transactions last year2. But in a country where annual consumer spending is twelve and a half trillion dollars, that’s a negligible proportion of the total," he said.
