Monday 7 June 2021 2:31 pm

Despite Bitcoin mania, the Bank of England is in no rush to ‘go crypto’

The Bank of England today published a summary of responses to a discussion paper on digital currency.

The central bank said payments made with ‘stablecoin’ should be regulated in the same way as payments made by banks if they become widely used.

Governor of the Bank of England, Andrew Bailey, clarified that “the prospect of stablecoins as a means of payment and the emerging propositions of Central Bank Digital Currency (CBDC) have generated a host of issues that central banks, governments, and society as a whole, need to carefully consider and address.”

Bailey stressed that “it is essential that we ask the difficult and pertinent questions when it comes to the future of these new forms of digital money.”

No rush

What is clear is that the Bank of England is in no hurry to ‘go crypto’, commented Sarah Coles, personal finance analyst at Hargreaves Lansdown in London.

Before it goes anywhere near issuing Britcoin, [the BoE] needs to be sure that creating its own digital currency wouldn’t do more harm than good,” she said.

The Bank has been looking into whether it ought to release its own digital currency. It’s not rushing into any conclusions, so has set up more consultations and groups to explore the issue.

It’s looking into whether or not to issue a Central Bank Digital Currency (CBDC). This currency would be totally different to crypto, because it’s issued by, and backed by, the central bank.

“It would be tied directly to the value of physical notes and coins, so it wouldn’t rise and fall in value. It would essentially be a digital banknote. This makes it more like stablecoins – issued by private companies but tied to traditional currency and directly exchangeable for traditional money,” Coles explained.

The idea would be to provide an alternative to the current card payment system, which could be faster, easier and cheaper, she added.

“It could also be used to create new monetary policy controls if needs be, so it could, for example, be used to deliver ‘helicopter money’ to boost the economy, or if digital money offered interest rates that tracked the base rate they could make the impact of changes in monetary policy more immediate and direct,” Coles added.

Not without risk

Such an undertaking does involve risks. For a starter, it might actually damage the effectiveness of existing monetary policy. If digital money doesn’t pay interest, and isn’t tied to bank lending, changing the base rate is going to have far less impact on spending.

Moreover, it could also undermine faith in the Bank of England and sterling unless it was protected by robust and comprehensive regulation.

“The digital currency, and other stablecoins, would need to be effectively regulated as fully as banks, so they could be completely relied on,” Coles noted.

It could also make borrowing more expensive.

“It’s likely that new digital money – whether provided by the bank or as stablecoin – would be backed by liquid assets rather than by loans. It would mean loans would have to be backed by issuing more wholesale debt, which is more expensive than taking money through deposits, which would make bank lending more expensive,” she said.

This in turn could mean a greater reliance on non-banks for loans which offers scope for innovation.

However, “if this sector didn’t expand, it could just make borrowing more difficult and expensive,” Coles concluded.