The Bank of England has today published a Discussion Paper which aims to broaden the debate around new forms of digital money and seek views on the Bank’s emerging thoughts on the subject.
These new forms of
digital money could be publically or privately provided. Central Bank
Digital Currency (CBDC) is the term used to describe the digital form of
central bank money. A ‘stablecoin’ describes digital tokens issued by
the private sector which aim to maintain a stable value at all times,
primarily in relation to existing national currencies. Their stability
of value is what distinguishes them from other digital assets using new
technologies.
For the purposes of the Discussion Paper, the forms
of digital money in the UK that are considered to be systemic are those
that have the potential to scale up and become widely used as a trusted
form of sterling-based retail payments. For all stablecoins deemed as
systemic, the Bank’s expectation is for them to be stable in value at
all times and offer 1-to-1 redemption with a robust legal claim.
Governor of the Bank of England, Andrew Bailey, said:
“We
live in an increasingly digitalised world where the way we make
payments and use money is changing rapidly. 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.”
The Discussion Paper published today considers the following issues -
- The role of money in the economy:
The paper examines existing forms of money and their uses. It considers
the conditions under which new forms of digital money might be
preferred to existing forms. The two forms most commonly used in the UK
by households and non-financial businesses are central bank money, in
the form of cash, and private money, mainly in the form of commercial
bank money, which is commonly understood as people’s bank deposits. The
paper also examines how any move towards new forms of digital money
could impact the financial system and wider economy through the lens of
money and credit creation.
- Fundamental questions across a range of public policy objectives:
The paper highlights the Bank’s close work with other UK and
international authorities to understand the challenges and opportunities
presented by systemic stablecoins. In addition, the Bank has reiterated
that it has not made a decision around CBDC but is actively exploring
the opportunities and risks of doing so, and will be guided by its core
objectives - maintaining monetary and financial stability. The paper
goes on to highlight a number of public policy considerations such as:
access to cash and declining cash usage; how new forms of digital money
can support innovation in payments; possible financial inclusion and
data protection implications; potential competition issues in the market
for new forms of digital money, and the ability of users to switch
between different services.
- An illustrative scenario
for the demand for new forms of digital money modelled by Bank staff.
New forms of digital money are not yet widely used in any economy which
means it is difficult to assess their demand and under what conditions
they might be widely held and used. Equally, commercial banks have never
faced a large-scale, system-wide displacement of the deposits they
create.
In the illustrative example, a fifth of all UK retail
deposits transfer to new forms of digital money. Factors such as
convenience, trust, and perceived safety are assumed to play a key role
in determining demand for 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.
An increase in banks’ funding costs is assumed to increase rates on new
bank lending, while some borrowers may find it cheaper to seek credit
opportunities in the non-bank financial sector.
While the overall
impact on lending rates and credit provision is relatively modest,
there is a huge range of uncertainty around the illustrative scenario.
Uncertainty around demand for new forms of digital money is why the Bank
is considering the need for limits to manage the transition period as
they emerge. The Bank will do more work to decide if they are necessary
and how they would fit with other objectives, including discussions with
Government and other authorities.
- The implications for macroeconomic stability:
The paper has five issues arising from new forms of digital money that
can create both a number of opportunities and risks for economic
stability. These include: public confidence in money and payments and in
the financial system as a whole; banking sector liquidity resilience;
credit conditions; money market functioning, and the implementation and
transmission of monetary policy.
- The regulatory environment:
Regulation lays the groundwork for innovation and needs to be clearly
established before a systemic stablecoin could safely operate in the UK.
In January HM Treasury consulted on the UK’s overall regulatory
approach to cryptoassets and stablecoins. Today’s Discussion Paper
builds on that work.
The Financial Policy Committee previously
set out two expectations for systemic stablecoins. The first addressed
the financial stability risks associated with the payment functionality
of stablecoins. A stablecoin-based payment chain should be regulated to
standards equivalent to those applied to traditional payment chains.
The
second expectation relates to the use of stablecoins as money.
Stablecoins used as money should meet equivalent standards as those
provided by commercial bank money, otherwise known as bank deposits. The
Bank’s view is that, to meet this second expectation, a core set of
features of the current banking regime need to be reflected in any
regulatory model for stablecoins. These models include capital
requirements, liquidity requirements and support from a central bank,
and a backstop to compensate depositors in the event of failure.
The
Discussion Paper explores a range of regulatory models that could
address both payments-related and money-creation risk. The Bank will
consult on any specific regulatory framework that would apply to
stablecoins, informed by responses, and pending the outcome of HMT’s
consultation on stablecoins.
The Bank of England has today
also summarised responses to its March 2020 Discussion Paper, ‘Central
Bank Digital Currency: opportunities, challenges and design.’
Respondents to the Discussion Paper showed strong agreement that the
Bank should, at the very least, be carefully studying CBDC, even if
there was a range of views on whether one was ultimately likely to be
needed or desirable.
While views varied among respondents, there
were some areas of significant agreement where a large majority
expressed a similar view. The Bank therefore has identified five core
principles from the responses which will guide its future exploration of
CBDC. These include:
- Financial inclusion
should be a prominent consideration in the design of any CBDC. Any CBDC
should have a high degree of accessibility to people, regardless of
their geographic location in the UK, age, socioeconomic status, digital
skills or disability.
- A competitive CBDC ecosystem
with a diverse set of participants will support innovation and offer
the best chance to deliver the benefits of CBDC. Respondents agreed the
Bank should provide the minimum level of infrastructure for the system
to be reliable, resilient, fast and efficient. The private sector should
take a leading role in responding to the needs of the end users.
- In assessing the case for CBDC, the Bank should assess whether non-CBDC payment innovations could deliver the same benefits.
An assessment of the net benefits of CBDC should therefore consider to
what extent they can instead be delivered by private sector proposals.
- A CBDC should seek to protect users’ privacy.
Feedback from respondents has emphasised the importance that users
place on having privacy in their transactions. As with existing forms
of digital payments, there are important legal compliance arrangements
that CBDC would need to meet, such as anti money laundering, countering
the financing of terrorism and sanctions. Subject to meeting these the
Bank should therefore seek to ensure that users enjoy a strong level of
privacy from any transactions associated with CBDC.
- While CBDC should “do no harm” to the Bank’s ability to meet monetary and financial stability,
opportunities to meet our policy objectives more effectively should
also be considered in CBDC exploration. The Bank is primarily focused on
possible benefits CBDC might bring for ‘payments’. It is also
considering the possible opportunities that CBDC may offer for monetary
and financial stability.
The response to this Discussion
Paper will help inform the Bank’s thinking on this issue and will
support the ongoing work of the recently announced CBDC Taskforce,
Engagement and Technology Forums.
Bank of England
© Bank of England
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article