Posted on 03-24-2020.
The Bank of England (BoE) has published a discussion paper, exploring the pros and cons of a potential issuance of CBDC pegged to the British pound. In the paper, BoE offers more pros than cons and pledges to hear out thoughts on the matter from the general public.
“We are in the middle of a revolution in payments. Banknotes—the Bank’s most accessible form of money—are being used less frequently to make payments. At the same time, fintech firms have begun to alter the market by offering new forms of money and new ways to pay with it.”Cash payments share compared to other means of payment. Source: UK Finance These sentiments echo earlier conclusions made by other central banks. The recent Deutsche Bank report went as far as to predict the final downfall of fiat money in the next decade.
“The forces that have held the current fiat system together now look fragile and they could unravel in the 2020s. If so, that will start to lead to a backlash against fiat money and demand for alternative currencies, such as gold or crypto could soar.”
“The initial introduction of CBDC is likely to lead to some substitution away from the forms of money currently used by households and businesses (i.e. cash and bank deposits). If this substitution was very large, it could reduce commercial bank funding, with potentially harmful impacts on the level of credit that banks could provide.”BoE also made a point of comparing CBDC to certain forms of cryptocurrencies that emerge within the rapidly changing payment landscape, such as stablecoins. BoE believes that CBDC may actually provide safer payment services while branding stablecoins as “risky” and “not real money.”
“CBDC would be something fundamentally different from ‘cryptocurrencies’, such as Bitcoin. Many crypto-assets are privately issued and not backed by any central party. They are not considered a currency or money because they do not perform the essential functions of money: they are too volatile to be a reliable store of value, they are not widely accepted as a means of exchange, and they are not used as a unit of account. “Some privately issued crypto-assets, known as ‘stablecoins’, aim to overcome these shortcomings and provide stability of value via some form of backing. Depending on the nature of assets backing the ‘coin’, and how they are held, the stablecoin may be unable to provide stability of value and may come with other risks. In contrast, a UK CBDC would be a new risk‑free form of a (digital) pound sterling, issued by the central bank, and would, therefore, perform all the essential functions of money.”Another curious con mentioned in the paper pertained to the possibility of cash being completely phased out by CDBC. In BoE’s opinion, this might be problematic because physical cash has certain unique characteristics that would be lost if it were to fall out of general use. Namely, the level of privacy transactions performed with a cash offer, which is impossible with most existing electronic fiat payment systems and will certainly be unavailable for CBDC.
“Although CBDC is often associated with Distributed Ledger Technology, we do not presume any CBDC must be built using DLT, and there is no inherent reason it could not be built using more conventional centralized technology. However, DLT does include some potentially useful innovations, which may be helpful when considering the design of CBDC. For example, elements of decentralization might enhance resilience and availability, and the use of smart contract technology may enable the development of programmable money.”That being said, BoE does not rule out selective use of certain features of DLT systems like smart contracts or cryptography.