Bank of America (BoA) is challenging the Bank of England's assertion that a U.K. central bank digital currency (CBDC) would act just as a form of digital cash, saying it's more likely to replace checking accounts as the way in which consumers hold the majority of their funds.
The BOE sees a possible CBDC – referred to colloquially as Britcoin – as fundamentally a substitute for cash, BoA says. "Such a construct could [however] potentially be a 15x bigger amount replacing £440 billion ($598 billion) of current accounts not just £30 billion in cash," it wrote in its research paper "Digital Money in the U.K."
The BOE has yet to decide whether to develop a digital pound. Its most recent move was to establish two forums in September last year to explore the key issues around a CBDC. The U.K. central bank has said that should it proceed, the earliest a CBDC could be rolled out is the second half of this decade.
Given that consumers hold only small amounts in cash, there would be greater convenience in switching a current account into Britcoins, BoA said. That could be an area of concern for commercial banks. Checking accounts, or current accounts as they are called in the U.K., are the lifeblood of commercial banks' business models, providing them with stable funding over a long term.
"This makes the BOE assumption that users would only substitute a digital sterling for their cash holdings a risky one for banks," BoA said, referencing concerns recently aired by the House of Lords Economic Affairs Committee in its report exploring a potential U.K. CBDC.
That committee described it as inevitable that consumers would transfer money from their bank accounts into CBDC wallets.
BoA concludes that Britcoin would represent a "rebundling" of money. Should consumers hold substantial amounts in a Britcoin wallet, banks would not be able to rely on the stability or duration of checking account deposits. Nor would they be able to cross-sell products such as credit cards and mortgages as effectively as they do now.
In extremis, this could bring about a restructuring of the institutional framework of finance, BoA says. The report describes how holding money in a bank is safer than holding it in a non-bank – such as payment providers checkout.com or Wise – because bank customers have access to the Financial Services Compensation Scheme, which guarantees deposits up to an amount of £85,000, something non-banks largely lack.
However, should a non-bank provider offer a wallet that can store Britcoin, it would be at least as safe an option as a checking account. Possibly more so, given that Britcoin would be central bank money.
"The BOE, in its analysis, ascribes fleeting reference to the potential move of transactional relationships out of banks," according to BoA. "If these went to a third-party provider, we consider that the high value savings balances tied to current accounts would automatically become less stable for the bank as well."
Commercial banks would then be at risk of losing both the funds and the relationship of their customers.