The Bank of England addresses “difficult and relevant” concerns about digital money

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

The Governor of the Bank of England commented on the publication of the document, Andrew Baileysaid The prospect of stablecoins as a means of payment and the emerging CBDC proposals have raised a number of issues that central banks, governments, and society at large need to carefully consider these new forms of digital money ”.

In the case of stablecoins, i.e. privately issued digital currencies designed to hold the value of various fiat currencies, the BoE document stressed that it remains difficult to measure future demand, and therefore the magnitude of its potential impact, as it remains marginal todayHowever, the central bank examined several possible reasons why these new forms of private money might be preferred to commercial bank deposits in the future.

The Bank of England addresses “difficult and relevant” concerns about digital money
The Bank of England addresses “difficult and relevant” concerns about digital money

The BoE has a dual focus on analyzing stablecoins and their potential systemic impact, distinguishing their payment functions from their use as private moneyFor both, the central bank stressed that they are expected to adhere to regulatory standards that are in line with traditional payment chains or the traditional banking regime.

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

Highlighting the importance of stablecoins, The Bank of England has found that commercial banks have never before faced a shift in the deposits they hold across the system and therefore may need to adjust their balance sheets in response to potential outflows in order to maintain your current liquidity ratio. The BoE believes that this increase in the cost of financing for commercial banks is likely to raise the interest rate on new bank loans.

In the case of central bank digital currencies or CBDC, the Bank of England has focused its attention on the need to ensure the greatest possible financial inclusion and has also received comments from outside the central bank advocating the privacy of CBDC transactions.

While the BoE analyzes CBDCs primarily from a payment perspective, it also considers aspects related to their potential use as a store of value and therefore Consider whether a future CBDC should earn interest.TO A tiered compensation system, including the potential to use zero or negative interest rates, could provide an incentive to use CBDC primarily for payments rather than as a store of value, the BoE notes.

Likewise, a remunerated CBDC would allow the central bank to directly influence the interest rate on more of the money in the hands of households and businesseswhich would strengthen the mechanisms for influencing monetary policy and would also indirectly affect the cost of borrowing and deposit rates of commercial banks.

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

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