The rise of digital currencies could lead to a flood of withdrawals from high-street banks, risking financial stability and the wider economy, the Bank of England has warned.
Threadneedle Street said that stablecoins – a new form of digital asset usually pegged to the value of a traditional currency – would need to be regulated in the same way as payments handled by banks if they became widely available.
Stablecoins are similar to bitcoin, the most prominent digital currency, but do not suffer extreme price movements because they are designed to move in lockstep with government-backed currencies, such as the pound or euro, or commodities such as gold, which are less volatile.
While these new forms of money can be issued by private companies, they could also be issued by a central bank such as the Bank of England. Most UK households and businesses already use central bank money in the form of cash, and private money in the form of bank deposits.
The move from the Bank comes as Diem, the digital currency project backed by Facebook, previously known as Libra, plans to offer a stablecoin linked to the pound. It also plans stablecoins linked to the dollar and euro, as well as a coin pegged to a basket of different currencies.
Publishing a research paper assessing the impact from widespread adoption of new currencies, the Bank warned that large numbers of consumers moving their deposits away from current and savings accounts, and into digital assets, could undermine the stability of high-street banks.
Setting out a scenario where a fifth of UK households and businesses moved their deposits into digital money, it said this could drive up the costs for high-street banks because they would lose a key source of funding. This would in turn affect the cost and availability of borrowing.
The Bank said widespread use of private stablecoins could affect its ability to set interest rates, a key tool used by the central bank to manage inflation and the conditions for economic growth. It said the overall impact on lending and credit provision would probably be “relatively modest”, but there was a large degree of uncertainty.
The Bank is exploring whether to launch a central bank digital currency, dubbed by the chancellor, Rishi Sunak, as “Britcoin”. However, it said it had not made a decision about whether to proceed, but was looking into the risks and opportunities of doing so.
Andrew Bailey, the Bank’s governor, said the prospect of stablecoins and central bank digital currencies needed to be carefully considered by central banks, governments and society as a whole. “It is essential that we ask the difficult and pertinent questions when it comes to the future of these new forms of digital money.”
Some economists argue that the central bank creating a digital currency would serve as a quasi-nationalisation of the banking sector, in part because consumers could go directly to the Bank of England to deposit funds and make payments. However, this would depend on the features of a central bank digital currency and whether it was offered to consumers directly by Threadneedle Street.
Etay Katz, a financial regulatory partner at law firm Ashurst, said the role of high-street banks was an essential component for financial stability. “Any suggestions that digital money can involve direct relationship between the central bank and retail customers has the capability of causing a major systemic shock and it is not clear how banks can adapt their funding models to this development,” he said.
Others believe a central bank digital currency would ensure a more democratic and sustainable financial system was built amid the rapid growth of cryptocurrencies and online platforms.
Simon Youel, the head of policy and advocacy at the campaign group Positive Money, said: “With the decline of cash and emergence of private digital currencies, we urgently need a new form of public money in the form of a central bank digital currency, to ensure that we aren’t surrendering the future of money to unaccountable private interests.
“A central bank digital currency would open up access to our central bank to everyone, taking away the unique privileges enjoyed by private banks, and ending our reliance on them to manage our money and make payments.”