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 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: 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.
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 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.
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