The Bank of England has published a new discussion paper that tries to
gauge the systemic implications of both private stablecoins and a
central bank digital currency.
The Bank of England is continuing to devote significant resources to
researching digital money in both private and public forms. With an eye
on both the domestic and international context, the central bank’s
latest discussion paper, published June 7, outlines the role and possible developments of both in the ongoing evolution of money.
Commenting
on the paper’s publication, BoE governor Andrew Bailey said that “the
prospect of stablecoins as a means of payment and the emerging
propositions of CBDC have generated a host of issues that central banks,
governments, and society as a whole, need to carefully consider and
address. 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 — i.e., privately issued
digital currencies that are designed to maintain parity with the value
of various fiat currencies — the BoE paper emphasized that it remains
difficult to gauge future demand and thus the scale of their potential
impact, as they remain marginal at present. Nonetheless, the central
bank explored various possible reasons why these new forms of private
money could be preferred to commercial bank deposits in the future.
The
BoE has two foci in analyzing 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 will
be expected to meet equivalent regulatory standards to either
traditional payment chains or to the traditional banking regime.
Issuers
will be subject to “capital requirements, liquidity requirements and
support from a central bank, and a backstop to compensate depositors in
the event of failure.”
Highlighting stablecoins’ significance, the
BoE has noted that commercial banks have never before faced a
system-wide displacement of the deposits they create and thus may need
to adapt their balance sheets in response to potential outflows just in
order to sustain their current liquidity ratio. This increase in funding
costs for commercial banks is assumed by the BoE to be likely to
increase rates on new bank lending.
In the case of central bank
digital currencies, or CBDCs, the BoE has focused its attention on the
need to ensure the broadest financial inclusion possible and has also
taken on feedback from outside the central bank that has advocated for
ensuring the privacy of CBDC transactions.
While the BoE is
mainly analyzing CBDCs from the perspective of payments, it is also
considering aspects related to their potential use as a store of value
and, therefore, considering whether a future CBDC should be
interest-bearing. A scheme of tiered remuneration, including the
potential use of zero or negative interest rates, could be one way to
incentivize the use of CBDCs primarily for payments rather than as a
store of value, the BoE notes.
Moreover, a remunerated CBDC would
allow the central bank to directly affect the interest rate on a higher
proportion of funds held by households and enterprises, thereby
strengthening mechanisms for affecting monetary policy. It would also
indirectly affect the cost of credit and deposit rates offered by
commercial banks.
As recently reported, BoE deputy governor Sir Jon Cunliffe has recently argued that general access to a digital form of central bank money could be crucial for ensuring financial stability in the future.
source link : https://cointelegraph.com/news/boe-tackles-difficult-and-pertinent-questions-about-digital-money
