BoE addresses ‘difficult and pertinent’ questions about digital money

The Bank of England continues to devote significant resources to digital money research both privately and publicly. With an eye on the national and international context, the latest central bank discussion paper, published on June 7, describes the role and possible developments of both in the current evolution of money.

Commenting In the publication of the document, the Governor of the Bank of England, Andrew Bailey, said that “the perspective of stable currencies as a means of payment and the emerging proposals of CBDC have generated a series of problems that central banks, governments and the society as a whole, should carefully consider and speak to. It is essential that we ask the difficult and pertinent questions when it comes to the future of these new forms of digital money. “

In the case of stablecoins, that is, privately issued digital currencies that are designed to maintain parity with the value of various fiat currencies, the BoE document emphasized that it remains difficult to measure future demand and therefore , the scale of their potential impact as they remain. marginal today. However, the central bank explored several possible reasons why these new forms of private money might be preferred over commercial bank deposits in the future.

The BoE has two focuses on the analysis of stablecoins and their potential systemic impact, distinguishing their payment functions from their use as private money. In the case of both, the central bank emphasized that they are expected to comply with regulatory standards equivalent to traditional payment chains or the traditional banking regime.

The issuers will be subject to “capital requirements, liquidity requirements and support from a central bank, and an endorsement to compensate depositors in the event of bankruptcy.”

Highlighting the importance of stablecoins, the Bank of England has noted that commercial banks have never before faced a shift in the deposits they create across the system and therefore may need to adapt their balance sheets in response. to possible outflows just to maintain its current liquidity ratio. The BoE assumes that this increase in financing costs for commercial banks is likely to increase rates on new bank loans.

In the case of central bank digital currencies, or CBDCs, the Bank of England has focused its attention on the need to ensure the widest possible financial inclusion and has also received feedback from outside the central bank that has advocated ensuring privacy. of CBDC transactions.

While the BoE is primarily looking at CBDCs from a payments perspective, it is also considering aspects related to their potential use as a store of value and therefore considering whether a future CBDC should earn interest. A tiered compensation scheme, including the potential use of zero or negative interest rates, could be a way to incentivize the use of CBDC primarily for payments and not as a store of value, the BoE notes.

In addition, a remunerated CBDC would allow the central bank to directly affect the interest rate on a greater proportion of funds in the hands of households and companies, thus strengthening the mechanisms to affect monetary policy. It would also indirectly affect the cost of credit and the deposit rates offered by commercial banks.

As recently reported, Bank of England Deputy Governor Sir Jon Cunliffe has recently argued that general access to a digital form of central bank money could be crucial to ensuring financial stability in the future.