CAI0066

Written evidence submitted by Barclays

Barclays is a British universal bank. We are diversified by business, by different types of customer and client, and geography. Our businesses include consumer banking and payments operations around the world, as well as a top-tier, full service, global corporate and investment bank, all of which are supported by our service company which provides technology, operations and functional services across the Group. For further information about Barclays, please visit our website https://home.barclays/

Barclays is represented on the Bank of England’s (BoE) Technology Forum, intended to drive understanding of the technological challenges of designing, implementing and operating a Central Bank Digital Currency (CBDC).

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Barclays supports the Government’s enthusiasm for positioning the UK at the cutting edge of digital finance innovation.  The value of this opportunity depends on the UK’s ability to embrace new forms of digital money in a way that is safe, leverages collaboration between the public and private sectors, and drives tangible benefits to consumers and users of financial markets. Clarity from authorities as to the objectives and use cases for new forms of digital money will also be key to assessing and deriving benefit, and providing relevant firms with certainty.

In particular, the acceleration in development, and potential adoption of, new forms of digital money like a CBDC pose complex public policy, commercial and macroeconomic questions. It is critical such considerations are accompanied by robust and thoughtful scrutiny including by Parliament and we therefore welcome the Committee’s attention to these issues, and the opportunity to respond to this inquiry.

We have focused our comments on topics within the crypto-assets agenda where Barclays has a pertinent view. For context, Barclays does not currently handle physical crypto-assets, nor do we offer these products and services to individuals (i.e. retail customers). Barclays only offers limited products and services relating to crypto-assets to institutional clients.

We also want to distinguish between new forms of genuine money, and speculative investment assets as separate issues. Our comments are limited to the former.

For broader commentary please see UK Finance’s response, which we have inputted into and support. 

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What opportunities and risks would the introduction of a Bank of England Central Bank Digital Currency bring?

In order for digital money to operate as an enhancement to our current financial system, and avoid excessive risk, design choice will be key. We believe this should follow some fundamental principles (to apply to a CBDC, and cryptoassets more widely):

• Must do no harm as it relates to undermining market confidence/stability, consumer protection and financial inclusion.
• Should be intermediated, interoperable and handled by regulated counterparties only, in order to avoid fragmentation.
• CBDCs should not have capabilities that are hard for bank deposits (or bank issued liabilities) to replicate.

Opportunities for a CBDC

The starting point for assessing the opportunities of a CBDC should relate to its purpose and intended use cases. While there are myriad potential benefits associated with a CBDC, including (but not limited to) improving financial inclusion, avoiding the risks of new forms of private money creation, supporting efficiency in payments, and improving the availability and usability of central bank money, the extent to which these apply will depend on the domestic context in which a CBDC is pursued.

For example, in the US authorities are upfront about their interest in a CBDC to help maintain US leadership in the global financial sector[1]. Alternatively, the central banks of the Bahamas, China, the Eastern Caribbean and Ghana cite addressing persistent barriers to financial inclusion as a major motivation given their respective challenges with bringing unbanked and underserved populations into the payments system[2].

As the House of Lords Economic Affairs Committee report into CBDC’s notes, the drivers and use cases for a UK CBDC are comparatively less clear[3]. For example, the UK already has an efficient retail payments system relative to other countries, as well as credible and trusted forms of money (e.g. bank deposits and cash).

We would therefore welcome further clarity from the UK authorities on their objectives, and the problem statement to which a CBDC might provide a solution. Clarity and agreement on first principles could also enable greater public-private sector collaboration on options to achieve the desired objectives, including those that may carry less risks than a CBDC (risks outlined below).

Risks of a CBDC

Depending on the design choice, there are several potential material risks associated with the introduction of a UK CBDC. Most prominently, there is a structural and cyclical risk of commercial bank disintermediation, and consequent interrelated risks for credit creation and macroeconomic stability.

Implications for credit creation

Commercial banks are the primary providers of credit to the real economy, funded materially by deposits. In doing so, banks incur the liquidity risk of maturity transformation and allocate capital to provide credit.

Some design choices of a CBDC could drive displacement of bank deposits[4] from commercial banks’ balance sheets, either in normal times or in a stress, at scale[5] and potentially at pace. This will (all else being equal) reduce the ability of banks to lend. Banks will also likely be required to hold more liquidity against those deposits that remain on balance sheets (see section on implications for macroeconomic stability below), further reducing their capacity to lend.

Careful consideration should therefore be given to implications to the banking system as a whole and the availability of credit as a source of economic growth and investment to the real economy. We would welcome further planning, including the potential option of a trial or pilot CBDC, to test a full range of scenarios and behaviours that could materialise.

Implications for macroeconomic stability

Policymakers, including the BoE and ECB, acknowledge that the issuance of a CBDC or private stablecoin could potentially create risks to macroeconomic stability in the form of reducing the stress resilience of the banking sector. Specifically, through an increased reliance on wholesale funding (to maintain resilient liquidity positions and continue to provide credit to the real economy), and an increased likelihood of deposit outflow in a stress.

It is unclear how far substitution by wholesale funding in the banks’ funding mix could go, or what cost it would come at – even if banks are able to fully substitute lost deposit funding in wholesale markets, this would likely increase bank funding costs materially with the consequence of a corresponding increase in lending rates[6].

Working on the assumption that banks are able to replace a material proportion of deposit funding with wholesale funding, this would also have significant implications in terms of financial stability:

• It would increase the exposure of banks, and credit conditions, to refinancing risk and short-term volatility in market sentiment.
• It would also result in higher levels of encumbrance across the banking sector and increase the sector’s vulnerability to stress.
• This risk is further exacerbated by the increased likelihood of depositors moving their money into a CBDC in a stress scenario (as per the BoE’s consideration that a CBDC issued by a central bank could provide a safer alternative in times of stress), which would likewise expose the banking sector to more stress and potentially further destabilise credit supply.

There is also an important consideration arising from the potential increased reliance (indirectly or directly) on the non-bank financial sector to partially replace commercial banks as providers of credit to the real economy. Non-bank lending appetite for existing classes of credit provision is unknown, and as such the real economy effects could be highly material.

Mitigations

In recognition of some of the risks associated with a CBDC, particularly disintermediation and financial stability, policy makers are considering a range of possible mitigations. These include a phased approach to CBDC issuance to try to avoid rapid and potentially destabilising take-up (i.e. ‘bank runs’), the application of interest or not, and holding limits (maximum caps on deposit values in a CBDC).

While detailed and technical discussion of such mitigants is beyond the purview of this inquiry, we welcome the ability to work with authorities to further understand options to help mitigate acknowledged risks.

What impact could the use of crypto-assets have on social inclusion?

There is considerable academic consideration of the possible benefits of crypto-assets (defined here as CBDCs and stablecoins, not cryptoassets without a guaranteed value e.g. Bitcoin), in relation to social inclusion. These range from their potential to help solve barriers to domestic retail payment services, to the possibility of disbursement of social transfers to the public (in the case of a CBDC).[7] As discussed earlier, the extent to which these theoretical benefits can be realised will depend heavily on the domestic setting (i.e. the extent to which these exclusionary challenges are a relative problem[8]) and design choice.

External scrutiny of the social inclusion aspect has also paid close attention to the important caveat of public trust and stakeholder buy-in. To flag a separate, but related point concerning trust, it will be critical that new forms of digital money are subject to the same KYC and AML controls as with commercial bank deposits.

Digital inclusion is an often-overlooked consideration with regards to crypto-assets and a retail CBDC. Notwithstanding the specific design choices of a CBDC, or type of crypto-asset, the end user will need to have sufficient digital capabilities to engage and benefit from the innovation. Policy makers should consider relevant digital skills and literacy programmes to ensure their populations are sufficiently prepared for greater potential use of new forms of digital money.

How are Governments and regulators in other countries approaching crypto-assets, and what lessons can the UK learn from overseas?

Given the inherently international nature of crypto-assets, it is important the UK’s future framework is interoperable with other global standards and frameworks to reduce regulatory fragmentation. A common and agile taxonomy (to reflect crypto-asset evolution), including clear definitions and consistent regulatory standards[9], will help provide certainty for market participants whilst fostering innovation. In this context, the UK should review the recent EU Markets in Cryptoasset Regulation (MiCA), for example.

The cross-border nature of crypto-assets, and the varying stages of development and pace at which individual jurisdictions are agreeing frameworks for regulation, makes this a complex challenge but we believe the UK can play a key role in promoting global harmonisation. This includes ongoing dialogues with the G7/20, Bank for International Settlement (BIS), International Organisation of Securities Commissions (IOSCO) and the Financial Stability Board (FSB).

In addition, we believe the Global Financial Innovation Network (GFIN), the European Forum for Innovation Facilitators (EFIF), the BIS Innovation Hub and both the EU pilot scheme and upcoming UK FMI Sandbox could be good forums to provide supportive and safe environments to test innovations, and share best practices.

September 2022

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