Bank of England Releases Working Paper on Digital Currency

Bank of England

Last May 18th, the Bank of England issued a staff working paper that laid out various scenarios, possible risks and financial stability issues of central bank digital currencies (CBDCs).

The paper would construct three theoretical models of CBDC, depending what sectors would have access to the CBDC, from a narrow version limited to banks and non-bank financial institutions (NBFIs) to direct and indirect access extended to non-financial firms and the general public.

The first model, called the Financial Institutions Access model, limits itself to banks and NBFIs. These institutions will interact directly with the central bank to purchase and sell CBDC in exchange for eligible securities. These financial institutions are not to provide an asset to households and firms, which will continue to be backed by central bank money.

The second model, the Economy-wide Access model, assumes that access to CBDCs is granted not just to banks and NBFIs, but also to firms and the general public. This way, a CBDC can serve as money for all agents in the economic environment. Like in the previous model, only banks and NBFIs can interact directly with the bank to purchase or sell CBDCs, while firms and the public must use a CBDC Exchange to buy and sell CBDCs in exchange for deposits.

The final model, named the Financial Institutions Plus CBDC-Backed Narrow Bank Access model, again limits access to banks and NBFIs. There is at least one financial institution which will act as a narrow bank, which will provide financial assets to households and firms that are fully backed by a CBDC, but this type of bank does not extend loans or credit.

The report found that there is no reason to believe that introducing a CBDC would have a negative impact on private credit or on total liquidity provision to the economy. However, the report does stipulate that further models and research are necessary before any conclusions can be made.

Many Central Banks have begun studying the possibility of introducing CBDCs and on their potential impact on the banking system. Last week, Norway’s Central Bank, Norges Bank, issued its own working paper on CBDCs. Their report investigated aspects the Norges believe should be considered when assessing whether or not to issue a CBDC.

The Federal Council of the Government of Switzerland also recently requested a report on the risks and opportunities that could potentially impact its own state-backed digital currency, or the so-called “e-franc”. The council proposal also wants to examine and clarify any legal, economic and financial aspects of the e-franc.

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