Bank of England officials make "material step forward" in debate around central bank cryptocurrencies

 
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Economists fear a central bank currency could trigger the virtual equivalent of the run which sank Northern Rock in 2008 (Source: Getty)

Bank of England officials today said they had made a “material step forward” which could potentially address one of the major risks of central banks issuing their own digital currencies.

Officials from the Bank today published a blog laying the groundwork for a central bank cryptocurrency which would not cause runs on commercial banks, in a further sign the Old Lady of Threadneedle Street is seriously considering the options for its own rival to cryptocurrencies such as bitcoin and ethereum.

The Bank insists it is not currently working on plans to create its own digital currency, but its researchers have already produced a significant body of work debating the pros and cons of such a step.

Bank governor Mark Carney last week said he was open-minded about the possibility of introducing a central bank currency, although he has also criticised the cryptocurrencies currently available.

Read more: Former Goldman Sachs president Gary Cohn predicts global cryptocurrency

The officials set out “four core design principles” for a central bank digital currency (CBDC) which would avoid the possibility of destroying the banking sector, a major concern raised by previous Bank research.

The research was authored by Michael Kumhof, a former Stanford University economics professor who works as senior research advisor in the Bank’s research hub, and Claire Noone, a Reserve Bank of Australia official who worked in the Bank’s note operations division.

The research changes the “balance between the costs and benefits” of a central bank-issued digital currency, the authors said.

The currency should pay an adjustable interest rate to allow it to lower rates if demand surges. Meanwhile, commercial banks’ reserves should not be convertible to the currency and they should not be obliged to convert deposits into central bank money, the authors said.

Read more: Bank of England chief Carney says cryptocurrencies are failing

Economists have expressed fears that the availability of super-safe central bank money to consumers could make bank runs unavoidable in crisis situations.

Non-obligatory convertibility would make it a “business decision” to allow depositors to shift to the central bank currency, allowing banks to manage their risks rather than leaving them exposed to the whims of the market.

However, Kumhof and Noone acknowledged that “risks remain”, and that central bank digital money could still affect the stability of bank deposits and bank profitability.

“If designed badly, CBDC presents major risks to financial stability,” they warned.

Read more: A quick and easy way to boost the economy? Make Bitcoin a formal currency

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