Bank of England Chief Economist Andy Haldane has said that digital currencies’ disruptive benefits must not be overlooked by focusing on the risks. He was speaking at TheCityUK Conference. There are concerns that if central bank digital currencies (CBDC) or stablecoins become widely used, commercial banks will struggle to attract the same level of deposits, which will impact their ability to lend. Haldane noted that a focus on this risk has meant the potential benefits of splitting payments and lending into different institutions has not been assessed.
The primary criterion is that digital currencies “do no harm” to financial and monetary stability. But Haldane noted that doesn’t mean there won’t be disruption to incumbents as that’s the nature of innovation.
Stablecoins are backed by bank balances and highly liquid, low-risk securities. This asset profile is classed as “narrow banking” compared to commercial banking with its broader and riskier lending profile. Hence there’s a concern that if stablecoins are widely adopted, “narrow banking” might crowd out funding for the broader commercial banking sector.