This week the Institute of Chartered Accountants in England and Wales (ICAEW) responded to the UK’s digital pound consultation. It welcomed the consultation and acknowledged the objective of providing government money in the digital age. However, the ICAEW warns of numerous potential consequences of a central bank digital currency (CBDC).
Deposit flight doesn’t just impact lending
Worldwide, there have been worries about deposit flight from banks to a CBDC, potentially resulting in higher lending costs to consumers and businesses. The ICAEW takes that a step further by observing that the erosion of transactional banking will encourage banks to cut costs and seek other sources of revenue.
One of the reactions could be branch closures, which in turn will reduce the availability of cash. Another is the potential for additional charges on bank account holders. The net effect could be to marginalize low profit and high risk groups, impacting financial inclusion.
Hence the ICAEW’s first recommendation is to perform a deeper, holistic analysis of payment value chains to asses the true impacts of a digital pound introduction, both from a positive and negative perspective.
Design choices could introduce frictions
The second recommendation is about interoperability and removing potential frictions. Various design choices have knock on effects. For example, preventing corporates having CBDC balances to protect bank deposits will make it harder for merchants to issue refunds and could impede widespread adoption. Although we’d observe it’s likely that instant transfers from the merchant’s bank account into CBDC will make this possible.
Another example is the prohibition on non-UK residents having access to CBDC to address anti money laundering issues. However, it limits the use case for cross border payments.
Current payments have better consumer protections!
The third recommendation is about a regulatory framework and consumer protections. There’s an excellent point about how today’s payments often have protections we take for granted, which may be absent in the case of a CBDC without consumers realising it. For example, users can complain to their bank and have merchant card charges blocked. And there’s recourse in the case of fraud. While a CBDC might provide a safe store of value, in the absence of explicit legislation these kinds of protections might not be in place for a digital pound.
“If trust and confidence is to be supported though adoption of the CBDC, appropriate regulation will need to bridge the gap,” the author wrote.