In an 11-page bulletin titled, “The economics of digital currencies”, the Bank of England assesses that digital currencies, theoretically, can undermine the monetary system if Sterling would be abandoned in their favor. This, however, is unlikely:
“Digital currencies do not currently pose a material risk to monetary or financial stability in the United Kingdom. Should they achieve limited adoption as a payment system, they are unlikely to undermine the Bank’s ability to achieve monetary stability.”
An interesting section deals with the hypothetical scenario of banks issuing IOU’s in digital currency during an era of widespread usage. Distinction is drawn between “narrow banking”, where notes are redeemed on a one-to-one basis, and “free banking”, whereby money can be printed subject to the discretion of a central authority. If digital currencies were to adopt more flexible money supply rules in the future (it doesn’t at the present), then issuing banks will face an interesting choice of approach.
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Last month, UK Finance Minister George Osborne expressed cautious support for Bitcoin and digital currencies, part of comments on the importance on sustaining London’s leading position in financial innovation.