Digital currencies could reduce risk in the financial system and aid monetary policy with interest rates close to rock bottom, Bank of England chief economist Andy Haldane has said.
Haldane also told The City UK’s annual conference that new technological infrastructure should be considered to help small and medium-sized businesses better access finance after years of difficulties.
Central banks and groups of private companies are currently looking into creating their own digital currencies.
Facebook made a splash last year when it announced Libra, a digital “stablecoin” that would be backed by assets. It would allow users to store, spend and transfer money digitally. The idea is that it would be easier to use than physical cash and could be global.
The Bank of England is currently looking into creating its own digital currency. Such a currency would let businesses, households and financial firms make payments and store value in electronic central bank money.
Regulators have been wary of digital currencies, especially ones set up by private groups. They worry that they could become unstable as they would be harder to regulate.
For example, Haldane said there could be “large, unstable flows of funds from commercial banks deposits into private sector stablecoins… especially at times of stress”.
Yet he also said that there could be advantages. In particular, digital currencies could separate payments, which are by and large safe and backed by liquid assets, from bank lending, which is more risky.
Haldane also said that digital currencies could help manage the problem of record-low interest rates.
With UK interest rates currently at 0.1 per cent, the Bank is reluctant to cut them further, partly because it worries that they would not be passed on to lenders’ customers.
Yet Haldane said a “widely-used digital currency could mitigate” this problem as it could provide a simpler way for interest rates to be levied on assets.
Tech could help boost SME lending
Haldane also said technology could help solve the shortfall of lending to smaller businesses.
Small and medium-sized enterprises (SMEs) have historically found it more difficult to access finance than bigger firms. The public spending watchdog has estimated that smaller firms could face a “funding gap” of around £20bn.
Haldane said this was largely due to the fact that lenders have less information about smaller companies than bigger ones. This means they charge more for the more uncertain lending. And it also makes it more difficult for smaller firms to shop around.
To solve this problem, Haldane advocated the Bank’s proposals for an “open data platform” for SMEs. The platform would be a place where data about companies could be more easily shared, hopefully increasing their access to different banks.
It could also include “data from insurance and utilities companies, credit rating and social media data companies, and government sources such as the Passport Office, DVLA, HMRC and Companies House,” Haldane said.
Haldane said the coronavirus crisis had “materially strengthened the case” for such a system. After around £60bn of Covid lending, many companies are likely to need “some debt remediation or re-profiling,” he said.
“The open platform could reduce significantly those information frictions, lubricating the process of corporate debt workout and recovery.”