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BoE tackles ‘difficult and relevant’ questions about digital money

The Bank of England, or BoE, continues to devote significant resources to researching digital money in both private and public form. Keeping an eye on both the domestic and international context, the central bank’s latest discussion papers, published on June 7, outlines both the role and potential development of money in the ongoing evolution.

commenting Upon publication of the paper, BoE Governor Andrew Bailey stated that “the potential of stablecoins as a means of payment and the emerging proposals for CBDCs have generated a number of issues that central banks, governments, and society as a whole should be cautious about.” Needs to be considered and addressed. When it comes to the future of these new forms of digital currency it is essential that we ask tough and relevant questions.”

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 is difficult to measure future demand and thus their potential impact. scale because they are currently modest. . However, the central bank explored various possible reasons why these new forms of private money may be preferred over commercial bank deposits in the future.

The BoE has two centers in analyzing stablecoins and their potential systemic impact, separating their payment functions from their use as private money. In the case of both, the central bank emphasized that they would be expected to meet regulatory standards equivalent to traditional payment chains or the traditional banking system.

Issuers will be subject to “capital requirements, liquidity requirements and support from the central bank, and a backstop to compensate depositors in the event of failure”.

Highlighting the importance of stablecoins, the BoE notes that commercial banks have never before faced a system-wide displacement of deposits created by them and thus need to maintain their existing liquidity ratios. may need to optimize its balance sheet in response to potential outflows. This increase in financing cost for commercial banks is perceived by the BoE as a possibility of increasing 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 broader financial inclusion and has also taken feedback from outside central banks that have advocated ensuring the confidentiality of CBDC transactions.

While the BoE is primarily analyzing CBDCs from a payment perspective, it is also considering aspects related to their potential use as a store of value and therefore considering whether to pay interest to CBDCs in the future. needed. A scheme of level remuneration, including the possible use of zero or negative interest rates in BoE notes, could be a way to encourage the use of CBDCs primarily for payments.

In addition, a remuneration CBDC would allow the central bank to directly influence the interest rate on a higher proportion of money held by households and enterprises, thereby strengthening the mechanism for influencing monetary policy. It will also indirectly affect the cost of credit and deposit rates offered by commercial banks.

As recently reported, BoE Deputy Governor John Cunliffe has recently argued that General access to digital form of central bank money This could be the key to ensuring financial stability in the future.