Bank of England’s digital currency pushes ahead
The Bank of England (BoE) has unveiled a cunning plan for its central bank digital currency (CBDC) in its never-ending quest for financial stability.
In the bone-dry, 54-page “Staff Working Paper No. 725, Central bank digital currencies – design principles and balance sheet implications”, BoE sets out to explain its desires and ambitions.
While it does a lot of analysis, it says it “does not currently plan to issue CBDC”. This paper is part of this research agenda.
The bank states: “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.”
There are four core principles.
CBDC pays an adjustable interest rate; and CBDC and reserves are distinct, and not convertible into each other.
Next, BoE says there is no guaranteed, on-demand convertibility of bank deposits into CBDC at commercial banks (“and therefore by implication at the central bank”).
Finally, the central bank issues CBDC only against eligible securities (principally government securities).
The bank makes it clear that the final two principles imply that households and firms can freely trade bank deposits against CBDC in a private market, and that the private market can freely obtain additional CBDC from the central bank, at the posted CBDC interest rate and against eligible securities.
That is pretty much it in a nutshell. The rest of the paper explains BoE’s plans and principles, which we’ve just summarised, in a very Spock-like and logical manner.
You can read it here.