Last week, UK Finance – Britain’s leading financial services trade association – responded to the Bank of England’s recent digital pound consultation. It is particularly worried about the high holding limits currently envisaged for the central bank digital currency (CBDC) project.
The organization that absorbed the British Bankers’ Association in 2017 argued that the proposed holding limits of £10-£20,000 ($13-$26,000) may introduce more risks than benefits to the financial system. They also want to see commercial bank digital currencies (deposit tokens) supported simultaneously and even considered as a potential CBDC alternative.
Digital pound holding limits
The UK Finance’s response covered many issues but puts the economic and financial stability impacts of holding limits at the top of the list. It’s concerned that a flood of money shifting from banks to CBDC could impact the ability of banks to extend loans. And it wants greater clarity on the holdings for business customers.
“Many members believe the Bank’s current proposals do not strike the right balance between functionality/usability and mitigation of risks to financial stability and credit creation stemming from the introduction of a new direct central bank liability,” the document reads.
The organization believes a lower range of £3-£5,000 ($3,800-$6,400) would be enough to meet consumers’ current and future payment needs. Members agree that finding the “‘goldilocks’ zone of ‘just the right amount'” might prove challenging, particularly during a crisis, but this lower alternative would go a long way in reducing the risk of disintermediation. It is also more in line with the ECB’s digital euro proposal.
The paper is broadly supportive of the central bank’s work to explore the opportunities for digital money in the UK, but it also says the BoE should not limit itself to CBDCs.
“We can envisage a future where digital pounds are available to those that want them but they sit alongside technologically ‘upgraded’ commercial bank money,” it notes, alluding to the potential of commercial bank deposit tokens.
The organization agrees that these alternatives would still need to be tested, but they imagine a “multi-asset infrastructure” supporting various types of electronic money, including central and commercial bank digital currencies and potentially regulated stablecoins.
This idea borrows heavily from the Regulated Liability Network (RLN) concept, which proposed a shared network with central bank money, commercial bank money, and electronic money. That’s not surprising because the RLN’s first pilot was in the UK earlier this year. Later this week, the New York Federal Reserve will share results of its RLN Proof of Concept.