Britcoin could pose ‘significant risks’ to banks
A consultation into ‘Britcoin’ is due to be held this year but the Lords Economic Affairs Committee says there is no “convincing case” for the new cryptocurrency.
The committee said that the introduction of a central bank digital currency (CBDC) could pose “significant risks” in the UK.
A report by the committee said: “The introduction of a UK CBDC would have far-reaching consequences for households, businesses, and the monetary system for decades to come and may pose significant risks depending on how it is designed.
“These risks include state surveillance of people’s spending choices, financial instability as people convert bank deposits to CBDC during periods of economic stress, an increase in central bank power without sufficient scrutiny, and the creation of a centralised point of failure that would be a target for hostile nation state or criminal actors.”
The committee said that none of the witnesses who came before it, which included Bank of England governor Andrew Bailey and economic secretary to the Treasury John Glen, were able to make a “convincing case” for why the UK needs a state-backed cryptocurrency.
Laith Khalaf, head of investment analysis at AJ Bell, said: “The best known cryptocurrencies like Bitcoin are currently too volatile to provide a functional means of exchange, but more recently developed stable coins, pegged to traditional currencies, could open up a new financial frontier. In theory that might wrestle some control of the UK monetary system away from the central bank, which could pose its own dangers. Not to mention the risk that other countries which introduce digital currencies could find themselves with a leg up in the technological arms race.
“It’s true that a digital pound could cause widespread disruption in the banking sector if it is introduced, as well as increasing the chance of a run on commercial banks in times of financial stress.”
If consumers were to adopt Britcoin in large numbers, it could mean a big shift of money out of savings accounts, which are a key source of funding for commercial banks to lend into the economy.
In order to persuade customers to stick with them, banks might have to increase the interest rates on offer on savings, which would then be passed onto borrowers in order to preserve bank margins.
Another possible scenario is the end of free banking, with banks starting to charge for basic services in order to make up for lost profitability.