Are British banks bracing for “panic” surrounding the digital pound?

2023-07-07 by

Hugues Marty

Could the introduction of the British central bank digital currency (CBDC) threaten local banks? A recent publication from UK Finance, an organization representing over 300 banking and financial institutions in the UK, suggests so. The organization is urging the government to lower the maximum balance that individuals can hold in the CBDC, revealing once again that banks fear being sidelined in the global CBDC landscape.

Fear of “panic” linked to the digital pound

UK Finance, which brings together more than 300 banking and financial actors in the United Kingdom, has released a report on the future British digital pound, a project initiated by the government. The Bank of England is considering limiting the holdings of the CBDC to £10,000 per person, equivalent to approximately €11,600 at current exchange rates, or even £20,000. However, commercial banks argue that these limits are still too high and advocate for reducing the cap to £5,000.

According to The Times, banking institutions fear that the CBDC could contribute to banking panics and capital flight. In the event of contagion of “bank runs,” similar to those witnessed earlier this year, customers may mass withdraw their assets from traditional banks and convert them into the CBDC, perceived as a safer option. This could create a domino effect leading to bank failures.

This risk, which has been highlighted by other banks worldwide, exposes the uncomfortable position of banks concerning CBDCs. Banks are private entities that offer services related to the fiat currency of the territory in which they operate. In this sense, the government theoretically has the power to exclude the banking sector entirely from its CBDC project.

As a result, banks worldwide have made calls to be involved in CBDC projects and position themselves for the distribution of these new digital currencies. CBDCs expose the existing gap between private banking institutions and the state as the issuer of an official currency.

This underscores the ongoing transformation of the financial sector, which has evolved over the years to rely more and more on non-banking actors and emerging technologies such as blockchain. The coming years will define the new balance concerning central bank digital currencies and shape the future of the financial landscape.

The transformation of the financial sector

The rise of blockchain technology, cryptocurrencies, and now CBDCs is challenging traditional financial institutions. The emergence of non-bank actors offering financial services and the development of decentralized finance (DeFi) platforms are transforming the way individuals and businesses manage their finances.

CBDCs represent a paradigm shift, as they are digital representations of a nation’s currency issued and backed by the central bank. These digital currencies offer advantages such as instant transactions, increased transparency, and potential programmability. However, the entry of CBDCs into the market raises questions about the role of banks and their future relevance.

Banks face the challenge of adapting to the changing financial landscape and finding their place in the era of digital currencies. They must embrace innovation, explore new business models, and collaborate with emerging fintech companies to remain competitive.

The role of banks in the CBDC era

While the rise of CBDCs presents challenges for banks, it also offers opportunities for collaboration and innovation. Banks can play a vital role in the distribution, management, and integration of CBDCs into the existing financial infrastructure.

Banks’ established trust and extensive customer networks position them as trusted intermediaries in the CBDC ecosystem. They can provide secure wallets, facilitate transactions, and offer value-added services such as lending, savings, and investment products. By leveraging their expertise in regulatory compliance and customer relationship management, banks can bridge the gap between traditional financial systems and the digital world.

Moreover, banks can leverage CBDCs to enhance financial inclusion by providing access to banking services to the unbanked and underbanked populations. CBDCs can offer a secure and efficient means of conducting financial transactions, overcoming traditional barriers such as geographical limitations and infrastructure constraints.

In conclusion, the concerns expressed by British banks regarding the introduction of the digital pound reflect the challenges traditional banks face in a rapidly evolving financial landscape. The advent of CBDCs signals a significant transformation in the monetary system, with implications for banks’ role and relevance. While banks must navigate these changes and address potential risks, they also have the opportunity to collaborate, innovate, and leverage their strengths to shape the future of finance in the CBDC era.