Could a bitcoin-style monetary system spell the end for Britain's banks?
Deputy BoE governor warns digital-style currencies could deny commercial banks crucial deposits and hinder their ability to lend money.
The Bank of England (BoE) could become the hub of a bitcoin-style digital currency that sidelines high-street banks and cuts the costs of financial transactions, according to a senior executive at the UK central bank.
Ben Broadbent, BoE deputy governor, said a new system of holding cash in a banking version of the cloud, with encrypted keys to protect accounts, would likely prove a huge hit with customers, but warned that this could deny commercial banks vital deposits and potentially hamper their ability to lend money.
Broadbent, formerly a Goldman Sachs economist, dismissed claims that bitcoin was in a position to replace pounds and euros. Instead, the structure behind the most renowned digital currency could be adopted to manage the circulation of existing currencies.
Speaking at the London School of Economics on Wednesday, he said the settlement technology behind digital currencies, known as a distributed ledger, could become a parallel form of distributing funds and making financial transactions with the Bank acting as a backstop.
In this way, fans of digital currencies would achieve one of their main aims, which is to reduce the cost of electronic transactions that are currently handled by the major clearing banks. “The hope is that, by displacing these various middlemen, a distributed ledger would result in a cheaper and more secure system for providing these services,” he said.
Banks are at the heart of the current financial structure and provide a trusted platform for maintaining and protecting deposits. They also act as counter-parties in transactions, making sure that funds have moved from one account to another.
Broadbent said he was treading carefuly into the debate over the nature of money and how it was verified in transactions between customers, businesses and their banks. Yet he saw a way for the pound to exist on a separate platform, away from the current commercial banking structure.
The distributed ledger system is based on a database that is spread across multiple sites, countries or institutions, and can be shared and corroborated by anyone who has been given an access code, usually by virtue of buying the digital currency. Anyone can contribute data to the ledger and everybody who has access to the ledger has an identical copy of it at any given time.
By contrast, banks retain vast computer systems, often dating back decades, to store, verify and transact currencies for which they impose fees and charges.
Last year the Bank said bitcoin could pose a threat to financial stability in the UK should the digital currency’s popularity increase, though it concluded that its inherent volatility and the prospect of higher transaction costs meant it was unlikely to win over enough users to supplant the existing banking system.
In January, the government’s chief scientific adviser, Sir Mark Walport, published a report into the potential impact of distributed ledger systems, arguing that they could be used in the collection of taxes and the health service to improve services.
Broadbent said the vast markets in securities and bonds could also shift to a distributed ledger system, in effect cutting out the $54bn cost associated with the large number of intermediaries involved in clearing and settling transactions.
But he warned that while it was technically possible to introduce such a scheme, there would be a high price to pay. “Shifting deposits to the central bank, and away from the leveraged commercial banking sector, has two important implications. On the one hand, it would probably make them safer,” he said.
“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. 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’.
“On the other hand, taking deposits away from banks could impair their ability to make the loans in the first place. 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,.”