A range of issues and uncertainties remain in the way of the creation of a "digital pound", and the Bank of England (BoE) has still not made a decision on its viability, according to a discussion paper published by the bank on Monday.
The paper was released with the purpose of broadening debate on central bank digital currencies (CBDCs) potential use in the UK. It explores the role of money in the economy, public policy objectives and implications, regulation and the implication of macroeconomic stability.
“We live in an increasingly digitalised world where the way we make payments and use money is changing rapidly," said Andrew Bailey, governor of the BoE.
"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.”
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One of the biggest risks of a digital pound, the bank said, would be the potential for digital money to undermine confidence in money and payments and in the financial system as a whole.
"Ensuring confidence in sterling entails the provision of safe money as a ‘risk-free’ means of payment for households, businesses and the wider financial system. And it entails the security and reliability of those payments. If a stablecoin were to fail to honour its obligations, or suffer an operational failure such as a breach of privacy, this could undermine public confidence in money and payments, and in the financial system as a whole," the paper said.
In an illustrative example modelled by the bank, a fifth of all UK retail deposits might transfer to new forms of digital money.
As a result of this potential outflow, commercial banks would have to adapt their balance sheets in response to maintain their current liquidity ratios.
It also said any stablecoin-based payment chain should be regulated to standards equivalent to those applied to traditional payment chains.
In April, the bank said it would launch a taskforce in collaboration with the Treasury, exploring the viability of a "digital pound", dubbed "Britcoin" by the press.
At the time, the BoE said any CBDC would be a new form of digital money that could be used by both households and businesses. It would exist alongside cash and bank deposits, rather than replacing them.
The government and the BoE have not yet made a decision on whether to introduce a CBDC in the UK and will engage widely with stakeholders to discuss the benefits, risks and practicalities of doing so, the Bank of England said.
Like other forms of cryptocurrency, CBDCs are a form of virtual money that uses an electronic record or digital token to represent cash. It is issued and regulated by a country’s monetary authority, which in the UK is the Bank of England. This is a key difference to cryptos like bitcoin, which are decentralised and unregulated.
Retail CBDC can be directly held by citizens and businesses. This is a step change from the current system where money is held at a bank. Instead of going to a cash machine to withdraw money from, say, Barclays, your money would instead be held directly on your mobile phone.
Interbank or wholesale CBDC is restricted to use by financial institutions like banks. It is used for big ticket bank-to-bank transfers and financial settlement processes.
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CBDCs represent a new frontier for central bank stimulus, potentially acting as a conduit for policies such as stimulus checks, emergency loans, and UBI (universal basic income). Central banks could induce more powerful, directed "money drops" to stimulate the economy rather than tinkering with interest rates.
Many backers of digital currencies say banking this way is more efficient. Instead of relying on intermediaries such as commercial banks, money can be transferred directly to the recipient and payments can be made in real time.
There is also an argument that CBDC helps prevent illicit or fraudulent activity. CBDCs make it easier for central banks to keep track of the exact location of a unit of currency. Cash, meanwhile, can be laundered or 'lost' more easily.
Potential drawbacks include the invasion of privacy associated with this sort of surveillance. Governments could obtain access to private individual spending data, for example.
Another fear is that CBDCs could herald the onset of a fully cashless society, which could harm poor, rural, and elderly communities who largely rely on cash.
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