- The BoE has released its digital money report
- Paper considers the implications for legacy financial infrastructure if 'stablecoins' replace physical cash
On Monday the Bank of England published its discussion paper on digital money. Predictably, the document throws up more questions than answers about how the UK financial system would adapt to the introduction of a central bank digital currency (CBDC), a concept already nicknamed Britcoin.
One takeaway at least, is how the bank seems to view digital money. The focus of the letter is ostensibly on the effects on legacy financial infrastructure if stablecoins (crypto tokens pegged to a central bank currency) or CBDCs replace physical cash (the part of the money supply known as M1) in more real-world transactions.
The composition of the money supply affects liquidity in financial markets, inflation in the real economy and interest rates, but there is a balancing act for policy makers.
Blockchain entrepreneurs predictably are looking to the potential benefits of digital cash: Vaibhav Kadikar, founder of trading platform CloseCross acknowledges concerns but argues a digital expansion of M1, while putting inflationary pressure on the economy “also allows for easy and low-cost credit in today’s world.”
Longer established actors in the financial system are more cautious. Hargreaves Lansdown’s Sarah Coles cautions that a CBDC could undermine confidence in the Bank of England without stringent regulation. It’s a tough balancing act and one the UK needs to get right as it makes digital and financial innovation pillars of the post-Brexit economic strategy.
