The Bank of England continues to devote significant resources to research into digital money in both private and public forms. With a national and international context in mind, the Central Bank’s most recent discussion paper, published on June 7, outlines the role and possible developments of both in the ongoing evolution of money.
Commenting on the paper’s release, BoE Governor Andrew Bailey said that “the prospect of stablecoins as a means of payment and the new CBDC proposals have raised a myriad of problems that central banks, governments and society as a whole need to carefully consider” . and address. It is important that we ask ourselves 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 designed to maintain the value of various fiat currencies – the BoE paper stressed that as they exist, it is still difficult to gauge future demand and thus the extent of its potential impact currently remain marginal. Nonetheless, the central bank explored various possible reasons why these new forms of private money might be preferred to commercial bank deposits in the future.
The BoE has two main focuses in analyzing stablecoins and their potential systemic impact, distinguishing their payment functions from their use as private money. For both, the central bank stressed that they are expected to meet equivalent regulatory standards, either in line with traditional payment chains or the traditional banking system.
The issuers are subject to “capital requirements, liquidity requirements and support from a central bank as well as a backstop to compensate depositors in the event of default”.
Emphasizing the importance of stablecoins, the BoE noted that commercial banks have never before faced a system-wide shift in the deposits they hold and therefore may need to adjust their balance sheets in response to potential outflows in order to maintain their current liquidity ratio. The BoE believes that this increase in refinancing costs for commercial banks is likely to raise the interest rate on new bank loans.
In the case of central bank digital currencies (CBDCs), the BoE has focused its attention on the need to ensure the widest possible financial inclusion and has also included feedback from outside the central bank, which has been advocating the privacy of CBDC transactions.
While the BoE mainly analyzes CBDCs from a payments perspective, it also considers aspects related to their possible use as a store of value and therefore considers whether a future CBDC should be interest-bearing. A tiered compensation system, including the possible use of zero or negative interest rates, could be a way to encourage the use of CBDCs primarily for payments rather than as a store of value, the BoE notes.
In addition, a remunerated CBDC would allow the central bank to directly influence the interest rate on a higher proportion of the money held by households and businesses, thereby strengthening the mechanisms for influencing monetary policy. It would also have an indirect impact on commercial banks’ lending and deposit rates.
As recently reported, BoE Deputy Governor Sir Jon Cunliffe has recently argued that universal access to a digital form of central bank money could be critical to ensuring financial stability in the future.