Bank of England: Not our job to protect private banks from central bank digital currencies

Bank of England Deputy Governor for Financial Stability Sir Jon Cunliffe said that it is not the job of the central bank to protect private banks from change.

According to a Nov. 13 Reuters report, Cunliffe said that it is not the Bank of England’s job to protect private banks from the disintermediation spurred by central bank digital currencies (CBDCs). He was very clear on that point:

“Our job is not to protect bank business models.”

Cunliffe explained that private banks will have to adapt to survive in the new financial system and pointed out that Bank of England’s “job is to ensure that if bank business models change, we manage the financial and macro-economic consequences of” the shift. Furthermore, he said that CBDC research should be prioritized to avoid the private sector deploying digital currencies before public institutions:

“[CBDC assessments] need to go up the political agenda quite fast before the political side discovers there are developments in the private sector that actually don’t fit with policy.”

Cunliffe’s remarks are strongly in tune with the comments recently voiced by the Bank for International Settlements’ (BIS) head of innovation hub, Benoît Coeuré. As Modern Consensus reported earlier today, he recently argued that financial innovation by private companies is behind the recent embrace of central bank digital currencies. He explicitly mentioned Facebook’s stablecoin project Libra:

“The real trigger was the announcement of Facebook’s Libra project. [Libra] is a global, closed and self-sufficient project since there is at the same time a means of payment, a storage mechanism with a wallet, and a global network which makes it possible to ensure transfers from one place to another without going through the central bank settlement systems.”

A CBDC would provide consumers with a way to directly hold central bank credit instead of using the services of a private bank. Given the additional risk and cost caused by adding such an intermediary, many fear that consumers would stop depositing their holdings at private banks when a digital currency makes it optional. Retail deposits are a cheap and stable source of funding for private banks to loan out, so this could have far-reaching consequences for such institutions.

Of course, the same thing applies to disintermediation by tech giants’ payments app, such as Apple Pay and Google Pay, which are trying to get between consumers and their banks and credit card issuers—much as China’s dominant Alipay and WeChat Pay have done.