At a time when the issue of a central bank virtual currency is still a controversial and understudied subject, the Bank of England published a staff working paper that took a deeper look at the risks associated with what it calls “CBDCs,” or central bank digital currencies.
The central bank explored three different possibilities of such a coin, each with a different level of public access:
- A restricted-access model in which only banks and other accredited financial institutions (NBFIs) can use it,
- A semi-restricted model where households and firms have access to it only indirectly (i.e., as a backbone for transfers), and
- A completely unrestricted model where everyone can use it at will.
Although it’s unlikely that we’ll see a central bank-issued cryptocurrency any time in the immediate future, this working paper establishes the theoretical groundwork for how such a thing would function in various contexts.
The phenomenon also caught the interest of Switzerland’s executive branch, which submitted a proposal to parliament to study the effects of an e-franc.
However, the country’s central bank may put up some resistance to the idea, as the institution appears convinced that this would exacerbate any bank run situations because such a phenomenon would change its role in the economy.
According to its working paper, the Bank of England partly disagrees with this notion.
“It could [...] be argued that a run on a single bank can be sufficient to trigger systemic financial sector problems, and that the presence of CBDC makes such a run more likely because of its electronic, click-of-a-button nature. But this is not convincing. The reason is that bank deposits at different financial institutions are also electronic and easy to use, and a run that moves existing deposits from a single troubled institution to other institutions in this regard not fundamentally different from a run via CBDC. But such a run is of course perfectly possible today, in a world without CBDC. This can therefore not be an argument against CBDC,” the bank wrote in its paper.
The rest of the paper goes along the reasoning that having CBDC would not significantly affect financial stability one way or another any more than other products do.
The Bank of England concluded that it is not inherently dangerous or threatening to implement such a system, as long as it’s implemented with caution and “in an orderly manner.”
This article appeared first on Cryptovest
