Digital Currency and its technology may have a place with central banks, according to a 50-page discussion paper by the Bank of England.
The paper, at a high level, examines a number of general themes relevant to central banks, such as the relationships between different policy frameworks and the employment of new methodologies.
In the final section, which reviews the central bank response to fundamental technological, institutional, societal and environmental change, the Bank considers the question: “Why might central banks issue digital currencies?”
Acknowledging their limitations in their current form, the report asserts:
“While existing private digital currencies have economic flaws which make them volatile, the distributed ledger technology that their payment systems rely on may have considerable promise. This raises the question of whether central banks should themselves make use of such technology to issue digital currencies.”
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It then lists multiple use cases for digital in a central bank. It could be used for interbank settlement, or it can be issued by banks and non-bank financial institutions (NBFI’s) as currency.
It notes that there can be varying implementations of distributed ledger systems, and “remuneration would have to be designed in such a way as to incentivise honest participation in the system without leading to socially inefficient over-investment in transaction verification” (e.g. mining shouldn’t be too burdensome on its economy).
Other relevant considerations include: government-backed deposit insurance, if remuneration should be linked to the official monetary policy interest rate, the role of banks and the availability of credit, and how institutions should be regulated.
The notion of digital currency playing a role in central banks has now been raised in several studies. One of the major hurdles will be the transition of such abstract prototypes into reality.
The examination of such issues is more pertinent in the UK considering its sought role as a global FinTech leader.
A previous Bank of England report asserted that if digital currencies gain enough traction they can undermine the prevailing monetary system.