Should the Bank of England issue a digital currency?

We might all have accounts at the Bank of England.

By Dr John Whittaker, Lancaster University.

The Bank of England is the bankers’ bank. It takes deposits from Barclays and Lloyds, for instance, but not from members of the public. Yet, this long-established arrangement is being reconsidered, most recently in a report from the Economic Affairs Committee at the House of Lords. Under proposals for Central Bank Digital Currency (CBDC), individuals and companies would be able to hold accounts directly at the Bank of England and use them for payments, possibly using ‘digital wallets’, bypassing High Street banks.

This would make payments more efficient, they say, particularly if cooperation between central banks in different countries allowed for handling cross-border payments. And given the shrinking use of physical banknotes, it would improve financial inclusion by allowing more people to have bank accounts.

As another claimed advantage, the Bank of England would be able to compete for payments services against crypto currencies such as Bitcoin and the newer ‘stablecoins’ and keep up with the 90-odd other central banks that are considering CBDC. The Chinese central bank has already set up a large-scale pilot CBDC.

There is a snag. If we transfer our deposits from High Street banks to the Bank of England, how are the banks to fund their lending? And what does the Bank of England do with all the deposits? One obvious solution to this conundrum would be for the Bank of England to take over loan portfolios from the banks.

But the Bank of England is responsible for safeguarding the nation’s currency and would shun lending to riskier borrowers; anyway, it’s not a good idea to have a public institution making retail lending decisions. So, what about the Bank of England simply lending the funds back to the banks? The Bank would then require quality collateral, which again would leave many of the banks’ current borrowers without finance, or paying a higher interest rate. There are other ways of recycling the Bank of England’s new CBDC funds but they would all suffer from the same likely result of more expensive retail credit.

The other hitch is that any improvements in payments systems might well be more simply achievable by other means such as regulation of competition amongst financial intermediaries. The House of Lords concluded that no ‘convincing case’ had been made for a retail CBDC in the UK. Maybe we shall have to stick with our ordinary bank accounts after all.

Dr John Whittaker, a senior teaching fellow in the Department of Economics at Lancaster University, submitted evidence to the House of Lords Economic Affairs Committee for their ‘Central bank digital currencies: a solution in search of a problem?’ report. The report was assembled after the Bank of England and HM Treasury created a joint taskforce to explore the potential of a retail central bank digital currency (CBDC), a digital banknote that could be issued by the Bank of England and used by households and businesses to make everyday payments.

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