Recently, the Bank of England released a discussion paper on the issuance of a Central Bank Digital Currency. The bank insists that it has not yet decided on whether to issue a CBDC. To understand the risks, benefits, and practicality of issuing such a digital currency, the bank will engage stakeholders. As part of this engagement, it is inviting views from the members of the public.
Operate Along the Sterling
In the discussion paper, the BoE says that if it decided to issue a CBDC, it would not be a replacement to the fiat. Instead, it would operate alongside fiat currency. Additionally, its digital currency would be denominated in the British pound. As a result, one digital currency would be worth one CBDC. However, the bank acknowledges that such a digital currency could have additional features depending on the design they agree on eventually.
For the bank to introduce the CBDC, the bank would need to create a new payment infrastructure to support it. This would include the apps, the point-of-sale devices, and the database on which it would be based. In the paper, the central bank acknowledges that a CBDC might prove to be faster and more efficient than existing systems while offering new functionality with time.
How it would differ from Crypto
The discussion paper makes a distinction between a CBDC and existing cryptocurrencies. It notes that crypto coins such as Bitcoin are not considered money. Additionally, it notes that these crypto coins are usually volatile and are thus not a reliable store of value. It also points to stablecoins. It claims that these stablecoins might not offer stability and might come with other risks depending on the assets backing them and how they are stored. However, the CBDC issued by the BoE would not have any such risks since it would be issued by a central bank and perform all the functions of money.
No Need to Use the Distributed Ledger Technology
The discussion paper claims that the CBDC would not necessarily run on distributed ledger technology. It claims there is no reason why their digital currency could not be issued using centralized technology. However, it acknowledges that the digital currency could also be built using some of the component innovations of the DLT. These elements include smart contracts, cryptography, decentralization, and permissioned access to the network.
Potential Impact on the Economy
The paper has a section dedicated to the potential impact of the CBDC. It acknowledges that the issuance of the CBDC could lead to disintermediation of the banking sector in the UK. The result is that the entire structure of the banking sector could change. It could change how the central bank achieves its objective of maintaining financial and monetary stability. Before it decides to issue a CBDC, the bank would have to weigh the risks and benefits of such a decision.
While the BoE has not made a final decision on issuing a CBDC, this paper shows that it is seriously considering the issue. If discussions go as planned, the UK could become the second top-ten economy in the world to issue a CBDC currency after China, which is likely to issue its currency this year.
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