Bank of England Studies Effects of Central Bank Digital Currency

The BoE has published two working papers on the risks and effects of CBDC.

by Marin Marinov
22 May • 4 min
In News

The Bank of England (BoE) has issued two working papers analyzing the risks and applications of a Central Bank Digital Currency (CBDC). It also underlined that the reports do not indicate a possible introduction of a CBDC.

The untested nature  of such a CBDC means that the impact on the monetary transmission mechanism is uncertain, but we believe the most likely consequence would be that CBDC would strengthen the monetary transmission mechanism, for a given change in policy instruments,” authors Jack Meaning, Ben Dyson, James Barker and Emily Clayton, concluded.

The first paper examines potential impact on the monetary transmission mechanism, while the second studies the balance sheet and financial stability aspects of a central bank cryptocurrency.

What is CBDC?

The first paper, dubbed “Broadening narrow money: monetary policy with a central bank digital currency”, lays out monetary implications of CBDC. According to the paper CBDC is “any electronic, fiat liability of a central bank that can be used to settle payments, or as a store of value.” This is the so-called single, universally accessible CBDC.

The paper examines possible risks connected to central bank digital currency and underlines some solutions like introducing a notice period for large CBDC withdrawals, not paying interest on balances held above a given limit, or imposing fees on unusually large balances that could approximate the storage costs of cash.” The report also suggests a daily transfer limit for CBDC accounts.

one coin next to notes

The second paper, named “Central bank digital currencies — design principles and balance sheet implications”, extends the analysis from the first one into three models:

1. Financial Institutions Access model where banks and non-banks financial institutions (NBFIs) sell and buy CBDC for eligible securities;

2. Economy-wide Access model where CBDC serves as money for all economy players, including households and companies;

3. Financial Institutions Plus CBDC-Backed Narrow Bank Access model where one institution plays the role of so-called narrow bank and provides financial assets, fully backed by a CBDC, to households and firms excluding credit services.

“We show that, if CBDC is introduced in an orderly manner, the size of bank balance sheets may be, but need not be, reduced. Indeed, CBDC does not necessarily lead to a contraction in bank funding,” Michael Kumhof and Clare Noone, authors of the report concludes.

The paper underlines the need for further models and researches for a deeper analysis.

Recently, the Swiss government has requested a report investigating the potential risks and benefits to issuing a state-backed cryptocurrency, so-called e-Franc. The Bank of Korea also set up a taskforce for analyzing the implications of cryptocurrency and blockchain, including CBDC. Norway’s central bank issued a working paper for central bank digital currency that aims to “ensure confidence in money and the monetary system.”