Bank of England describes how central banks will use digital currency

Leo Zhang

By Leo Zhang

Along with several other central banks, the Bank of England is actively researching on implementing Central Bank Digital Currency (CBDC). Recently, the BoE published a working paper on how CBDC might affect its balance sheets in practice. The study looks at the implications of such instruments on systemic financial stability. Specifically, the authors analyze banks' susceptibility to "runs" from bank deposits to CBDC. According to the paper, CBDC is defined as electronic bank money that satisfies the following properties:

"[It] can be accessed more broadly than reserves, (ii) potentially has much greater functionality for retail transactions than cash, (iii) has a separate operational structure to other forms of central bank money, allowing it to potentially serve a different core purpose, and (iv) can be interest bearing, under realistic assumptions paying a rate that would be different to the rate on reserves."

The primary goal of issuing CBDC in this context would be to digitalize financial assets such as deposits which, by extension, would improve optionality with regards to monetary policy. That is--it would be used in ways antithetical to bitcoin, which is limited in issuance and whose supply increases at regular and predictable intervals.

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"[The paper] studies sectoral balance sheet dynamics at the point of an initial CBDC introduction, and of an attempted large-scale run out of bank deposits into CBDC. We find that if the introduction of CBDC follows a set of core principles, bank funding is not necessarily reduced, credit and liquidity provision to the private sector need not contract, and the risk of a system-wide run from bank deposits to CBDC is addressed."

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