On December 20, 2017, Governor Mark Carney of the Bank of England (BoE) told members of Parliament that blockchain may improve transactions between financial institutions. However, he noted "fundamental problems" with a cryptocurrency designed for usage by the general public, as these central bank digital currencies (CBDCs) might carry risks of financial instability.
"You (could) create a situation where you can have an instantaneous (bank) run," explained Carney. "As soon as there were any concern, people can switch in their account at the Bank of England."
In Carney's hypothetical scenario, citizens would be able to open accounts directly with the central bank, something that he worries could conceivably concentrate wealth. If everybody got spooked by something (e.g., a terrorist attack or change in bank policy), then the BoE might be susceptible to citizens yanking their money out simultaneously. If money were available digitally, a bank run could be that much more dramatic.
Carney also worried that the BoE ought not to be the primary lending power in the nation. "There are many talents of the Bank of England, but I think credit allocation across the entire economy would not be a good idea," Carney assessed. "So there are some fundamental problems if you push the retail design all the way down, unless you restrict the amount that people have."
With a little bit of creative thinking, perhaps a central bank could work alongside private banks to limit exposure to the oftentimes irrational public. There are other possibilities, too. Capping withdrawals through regulation or circuit breakers might alleviate the issues raised by Carney. Of course, the devil is in the details. Many iterations of testing will be required before CBDCs become a viable reality, and it's quite possible that CBDCs will be non-standard across countries.
It's clear that digital currency has been on Great Britain's radar for at least a couple of years. In 2015, in a speech to the Northern Ireland chamber of commerce, Andy Haldane, chief economist and the executive director of monetary analysis and statistics at the BoE, raised the possibility of a CBDC, proposing it as a method for enacting sub-zero interest rates.
For now, though, the predominant mode of digital money remains non-fiat. With regard to non-state cryptocurrency, Governor Carney reiterated the BoE viewpoint that bitcoin does not present a threat.
"At present, we don't view it as a financial stability issue," he said, comparing the total market capitalization of cryptocurrencies ($611 billion at the time of writing) to that of Apple ($895 billion). Although "significant," Carney explained that cryptocurrencies represent something "more like an equity-type risk that's spread fairly widely around the world."
The points raised by Carney today indirectly touch upon a point of interest in the present cryptocurrency architecture – the notion that services outages at cryptocurrency exchanges might actually preserve the price of bitcoin and other cryptocurrencies. If people can't access their accounts to place buy or sell orders, then the prevailing price remains unchanged. The service just drops offline for a period of time, and when trading resumes, it's as if the panic never happened.
Last week, the United Kingdom's Financial Conduct Authority, like Carney, determined that the fundamental risk of bitcoin is limited. "I don't think bitcoin is prevalent enough at the moment to be a systemic threat in the way we experienced during the financial crisis other threats," said Andrew Bailey, chief executive of the FCA.
The FCA previously issued a warning to investors about token offerings (ICOs) and highlighted the speculative nature of cryptocurrency contracts for differences (CFDs). In October 2017, the FCA noted the difficulty in acquiring banking services for early-stage firms working with DLT.