EU report rules in favour of central bank-backed digital currencies

While the paper concludes that cryptocurrencies such as bitcoin could not supplant traditional currencies to any significant degree due to scalability limitations, it opens out the prospect of central-bank backed digital coins as an alternative to the current fractional reserve banking system.

Acknowledging that such a move would encourage consumers to switch their accounts away from traditional lenders and instead hold deposits in the new digital currency accounts, the report suggests that might not be such a bad thing.

"To avoid recurrent instability of the banking system, commercial banks would need to come up with more reliable funding sources than deposits," states the paper. "As the fractional reserve character of the current banking system can be a major source of instability, such a disruptive change is not necessarily a bad development, but could finally pave the way for a more stable financial system."

The report is at odds with guidance issued by the Bank for International Settlements, which argues that central banks should steer clear of developing their own digital currencies, billing the development as a move into unchartered waters with potentially serious implication for monetary policy and financial stability.

Recent speeches by executives at the Reserve Bank of Australia and the Reserve bank of New Zealand have echoed the BIS policy stance. In an Australian Economists Briefing just yesterday, Tony Richards, head of the payments policy department of the Reserve Bank of Australia remarked: "For the time being at least, consideration of a possible new electronic form of money provided by the Reserve Bank to households is not something that we are actively pursuing. Based on our interactions with our counterparts in other countries, it is also not front of mind for most other advanced economy central banks."

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