BOE Models Big Shift Toward Digital Currency Bank Reserves

A big portion of consumer deposits at retail banks could shift to digital currencies if governments start offering them, the Bank of England indicated in a discussion paper about the issue.

The U.K. central bank modeled the impact of introducing digital forms of money on the retail banking sector and in one scenario considered what would happen if a fifth of all deposits went digital. The BOE said any large-scale reallocation of cash may impact money markets.

The findings indicate the scope and complexity of issues emerging as central banks weigh modernizing the way cash and payments systems work. The BOE along with many of its peers is considering whether to introduce a digital currency that would smooth the way online payments work.

“We live in an increasingly digitalized world where the way we make payments and use money is changing rapidly,” BOE Governor Andrew Bailey said in a statement. “The prospect of stable coins as a means of payment and the emerging propositions of CBDC have generated a host of issues that central banks, governments, and society as a whole, need to carefully consider and address.”

A digital pound would be issued directly to consumers, not via banks, Deputy Governor of the Bank of England Sir Jon Cunliffe said in an interview with Sky News on Monday. It would be named a “stablecoin” to differentiate from bitcoin.

“Deposits would flow out of the banking system,” Cunliffe said. “The banking system would have to attract funds, probably from the wholesale markets, because they would lose retail deposits. It might put the cost of credit up by a fifth of a percent,” according to BOE modeling.

In terms of a time frame for introduction, Cunliffe said the BOE was still in an exploratory phase. “It’s a number of years before something like this could be introduced.”

The paper said a digital currency could boost economic activity, by contributing to faster, cheaper, and more efficient payments.

“Any of these proposals, whether they’re stable coins or central bank digital currencies, offer the potential to bring down costs” for businesses, Cunliffe added.

It also throws up risks of transitioning from current forms of money to the digital kind. The BOE suggested a transition period would be necessary, during which it would limit the pace of migration.

“Any large-scale reallocation of cash around the financial system has the potential to impact how money markets function,” the BOE paper said. “Hence, there is a risk of some disruption to money markets in the short-term, as new forms of digital money emerge. But in the long-run, these markets should adapt.”

Digital money could also be programmable, Cunliffe said, citing the example of “giving your children pocket money but programming the money so that it couldn’t be used for sweets.”