Bank of England Releases a Working Paper on State-Owned Digital Currency

Bank of England, the central bank of U.K has issued a staff working paper that weighs and highlights all the possible risks and financial stability issues pertaining to Central Bank Digital Currencies (CBDCs).

The staff working paper formulates three different models for a CBDC considering different sectors having access to the state-owned digital currency. This includes a narrow CBDC wherein the access is limited only to banks and non-bank financial institutions (NBFIs). The other two models talk about a direct to indirect access which can be extended to households and non-financial firms.

The Financial Institutional Access model clearly states that the access to the CBDC will be given only to banks and NBFIs. In this model, big financial institutions can directly coordinate with the central bank to buy/sell CBDC in exchange for other eligible securities, Financial Institutions will not be allowed to sell any assets to households and firms that are backed by central bank money.

In the Economy-wide Access Model, the access to CBDC is granted beyond banks and NBFIs, even to firms and households. In this model, only banks and NBFIs will be allowed to directly interact with the central bank whereas the “households and firms must use a CBDC Exchange to buy and sell CBDC in exchange for deposits.”

The third type of model in the report is the Financial Institutions Plus CBDC-Backed Narrow Bank Access model. In this case access is again limited to NBFI’s and banks, however, any one financial institution will act as a ‘narrow bank’ while providing financial assets to households and firms which are backed by a CBDC, but cannot extend credit.

Moreover, the report also goes to mention that after all these possibilities, there is absolutely no reason that a CBDC will have an adverse effect on the total liquidity provision as well as private credit to the economy. However, this implementation of the CBDC is not likely to happen anytime in the near future soon as the report notes that more research and further models are required to arrive at a concrete decision in this regard.

Moreover, this is not for the first time that the Bank of England is considering an option to have the nation’s own digital currency. Earlier this year at the very beginning of 2018, rumors to have its own Bitcoin-style digital currency emerged.

In addition to England, a lot of other central banks are considering the potential impact on CBDC on their economy. Recently the Norwegian Central Bank proposed the idea of having its own digital currency. A few days back, the Swiss government also pitched for having their own digital currency e-franc.