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Bank of England could issue own digital currency

26 February 2015  |  18563 views  |  4 Bitcoin

Like its counterparts in the US, the Bank of England is pondering the implications of issuing its own digital currency.

The potential of a central bank-backed digital currency is touched on with the publication of the BofE's 'One Bank Research Agenda' - a wide-ranging framework to transform the way research is done at the Bank.

"While existing private digital currencies have economic flaws which make them volatile, the distributed ledger technology that their payment systems rely on may have considerable promise," states the Bank. "This raises the question of whether central banks should themselves make use of such technology to issue digital currencies."

The Bank of England is not alone in its thinking. Earlier this month a senior researcher at the Federal Reserve Bank of St Louis floated the idea of a government-backed 'Fedcoin' that uses a bitcoin-style protocol but the US dollar as the monetary object, combining the best of cryptocurrencies and cash.

For the Bank of England, a Bank-backed digital currency system could be used "as a new way of undertaking interbank settlement, or it could be made available to a wider range of banks and NBFIs."

"In principle," the Bank continues "it might also be made available to non-financial firms and individuals generally, as banknotes are today."

The costs and benefits for monetary and financial stability would likely vary in the different cases, says the Bank, being more pronounced the more widely a digital currency is held.

"For example, making central bank money widely available could have an impact on deposits held at commercial banks and a knock-on effect on the banking system," states the paper. "Another relevant issue is the impact that offering a new method of settlement in central bank money would have on existing payment systems."

The UK Government is keen to promote the benefit of new technologies as a means to inject more competition into the banking system. The Bank's open-minded approach to the digital currency debate got the seal of approval from UK Chancellor George Osborne, who tweeted:

Comments: (4)

Derek Corcoran
Derek Corcoran - Avoka - Denver | 26 February, 2015, 11:03

A step in the right direction, I think. But obviously one of the value propositions of a crypto-currency like BitCoin is the fact that it's borderless. Will we ever have a Guardians of the Galaxy inter-galactic currency like the "Unit". Or Red Dwarf's Dollarpound. Would you believe there's a Wikipedia article listing fictional currencies - brilliant - http://en.wikipedia.org/wiki/List_of_fictional_currencies 

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Christopher Williams
Christopher Williams - RTpay - Boca Raton | 26 February, 2015, 12:00

The sooner we can move to digital currencies the better, not least as a way of reducing the use of cash as a major form of tax evasion. While there may remain a case for cash in denominations of maximum $5, for small purchases, the elimination of anything larger could reduce evasion in the EU by $200 Billion on VAT alone. 

The Bank of England could create an excellent example of how this may work, with some direct benefits in increasing the international appeal of sterling as a reserve currency (again). 

But the more important role would be to indicate to the ECB as to how the euro could be brought into a format whereby there is identification of country of issuance, country of use and country of depositary. Without being too negative, there should be a reasonable 'Plan B' element to any break-up of the national responsibilities within the Euro Group, hopefully enabling the euro to continue in an overall form, but under better reporting structure.

 

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Eduard Literate
Eduard Literate - DC Bank - Calgary | 27 February, 2015, 15:16

This is an absolutely awful idea. There is no reason for the government to be developing a payment system unless the market has failed to deliver one. Seems to me that the market is incredibly robust here, and there is no reason for any government to be directing public funds towards competing with all sorts of other payment delivery systems. In Canada the gov't is divesting itself of its half-baked "mint-chip" system for that very reason. 

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John Candido
John Candido - Black Cabs - Melbourne | 15 April, 2016, 09:11

It's a wonderful idea really. The sooner the better.

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