This week, the Institute of Chartered Accountants of England and Wales (ICAEW) answered On UK digital pound talks. They welcomed the talks and acknowledged their purpose of providing government funding in the digital age. However, ICAEW warns of the many potential implications of central bank digital currencies (CBDCs).
Deposit flight not only affects lending
Around the world, there is concern about bank flight into CBDCs, which could increase the cost of lending to consumers and businesses. ICAEW takes this a step further, observing that the decline of transaction banking will force banks to cut costs and seek other revenue streams.
One of the reactions could be branch closures, resulting in reduced cash availability. Another is the potential for extra charges for bank account holders. The net effect could be to marginalize low-profit, high-risk groups and impact financial inclusion.
Therefore, ICAEW’s first recommendation is to perform a deeper and holistic analysis of the payments value chain in order to assess the true impact of digital pound introduction from both positive and negative perspectives.
Design choices can create friction
The second recommendation is about interoperability and removing potential friction. Different design choices have a ripple effect. For example, prohibiting businesses from holding CBDC balances to protect bank deposits could make refunds difficult for merchants and hinder widespread adoption. However, an instant transfer from the seller’s bank account to his CBDC would likely make this possible.
Another example is the ban on non-UK residents from accessing CBDCs to address anti-money laundering issues. However, cross-border payment use cases are limited.
Today’s payments come with enhanced consumer protection.
A third recommendation concerns the regulatory framework and consumer protection. Today’s payments often come with protections that we take for granted, but in the case of CBDCs consumers may be unaware they are not protected. There are good points. For example, a user can complain to their bank and have it blocked from charging their merchant card. And there are remedies in case of fraud. A CBDC may provide a safe store of value, but in the absence of explicit legislation, the digital pound may not have this kind of protection in place.
“If CBDC adoption is to support trust and confidence, then appropriate regulation will need to fill that gap,” the authors write.