Is Digital Currency a Risk to the Banking Industry?

Executive Brief

With central banks increasingly interested in the notion of launching their own cryptocurrency, the consequences for the financial sector as a whole and commercial banking in particular come under scrutiny. The Deputy Governor of the Bank of England, Ben Broadbent, has given a speech at the London School of Economics suggesting that a central bank backed digital currency could cause major problems for commercial banks.

With a secure, convenient alternative, commercial banking would start to become less attractive, and fewer deposits could impact on other aspects of the commercial banking operations. However, is this a reason for central banks to not explore the concept of digital currency and the potential benefits that it could bring?

Read the full story below. 

With the recent news that China and latterly Russia amongst several countries are exploring the possibilities of creating their own digital currencies issued by central bank, the Deputy Governor of the Bank of England, Ben Broadbent, has recently suggested that this could be harmful to commercial banks.

The Bank of England itself is heavily invested into researching the potential of digital currency, but Broadbent has noted in a speech given at the London School of Economics that it could be a problem. If central banks switch towards a distributed ledger for widening access to the central bank’s balance sheet, then it could begin to impact on commercial banks, and as the central bank digital currency resembled a commercial bank account, the greater the effect. By taking away bank deposits from commercial banks it could impair their ability to make loans, and have to increasingly rely on the wholesale markets for funding.

This all sounds plausible, if the central banks begin issuing digital currencies directly, and people can withdraw, spend and deposit the currency with the central bank easily, then it is logical that the need for a commercial bank reduces. However this does require the premise that people will happily adopt the digital currency rather than fiat cash based existing currency in numbers.

The question is, he is probably right about the consequences, but is that necessarily a bad thing? Reducing the influence of commercial banks may be beneficial in the long term, requiring the lending strategies to become more streamlined to survive in the new commercial environment.

This could see the customer benefit all ways around, better lending services, and a more secure regular currency use through the digital currency. However, for many, the involvement of central banks in the process will be detrimental to the viability, Bitcoin’s rise has come partly from it being separate to the traditional financial system.

After 2008, trust in the traditional banking system is at an all-time low, and cryptocurrencies have all benefitted from that, is it feasible that a central bank ran cryptocurrency would be easily adopted? In some countries it may be highly successful, but in many I suspect that giving the central bank even more control over fan individual’s finances, even a digital version, is probably going to be a difficult concept to sell.

For the commercial banks, while the prospect of an impact as described is plausible, the need for physical cash and the involvement of the central banks likely means that in reality the impact will be negligible for many years yet. The ultimate fate of the commercial banks should not be used to curtail the exploration of the benefits that cryptocurrency can bring.

The views expressed by the authors on this site do not necessarily represent the views of DCEBrief or the management team.

Author: Thomas Moore

Thomas Moore is a writer and researcher with a love for the eclectic, family and the world we inhabit. He spends his spare time photographing the varied wildlife that surrounds us daily and contemplating why Firefly never made it past season one.

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