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The Bank of England has released a new discussion paper in which it attempts to assess the systemic consequences of private stablecoins as well as a central bank digital currency.
The Bank of England continues to invest heavily in research on digital money, both private and public. The central bank’s newest discussion paper, issued on June 7, examines the function and potential developments of both in the continuous 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 — privately produced digital currencies meant to preserve parity with the value of various fiat currencies — the BoE research underlined that future demand and hence the scope of their potential effects remain difficult to predict, as they are now marginal. Nonetheless, the central bank investigated several reasons why these new forms of private money could be favoured over commercial bank deposits in the future.
In examining stablecoins and their possible systemic effects, the Bank of England distinguishes between their payment functions and their usage as private money. In both cases, the central bank highlighted that they will be expected to achieve regulatory norms that are similar to either regular payment networks or the traditional banking framework.
Issuers will face “capital requirements, liquidity requirements, central bank support, and a backstop to compensate depositors in the event of failure.”
The importance of stablecoins has been highlighted by the Bank of England, which has stated 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 to maintain their current liquidity ratio. The Bank of England expects this increase in commercial bank financing costs to lead to an increase in interest rates on new bank lending.
In the case of central bank digital currencies, or CBDCs, the BoE has emphasised on the need to guarantee the broadest possible financial inclusion while also taking into account criticism from outside the central bank that has campaigned for CBDC transaction privacy.
While the BoE is primarily assessing CBDCs from a payment standpoint, it is also assessing elements linked to their prospective use as a store of value and, as a result, whether a future CBDC could carry interest. The BoE suggests that a tiered compensation structure, which might include the use of zero or negative interest rates, might be one method to encourage the use of CBDCs primarily for payments rather than as a store of wealth.
Furthermore, a remunerated CBDC would allow the central bank to directly effect the interest rate on a larger share of money held by consumers and businesses, hence boosting monetary policy-influencing processes. It would also have an indirect impact on the cost of credit and deposit rates provided by commercial banks.
As previously noted, BoE deputy governor Sir Jon Cunliffe has stated that widespread access to a digital version of central bank money might be critical for preserving future financial stability.