Bank of England Publishes Work On Central Bank Cryptocurrencies

Different financial institutions and banks worldwide are starting to think about issuing cryptocurrencies. These digital assets are known as central bank digital currencies – or CBDCs – which would allow for the institutions to reduce operational costs, transaction times, and increase efficiency.

Bank of England Paper on CBDCs

The Staff Working Paper No. 725 titles itself ‘Central bank digital currencies – design principles and balance sheet implications,’ and has been written by Michael Kumhof and Clare Noone.

The paper sets out three different models of central bank digital currency, which are the following:

• Financial Institutions Access (Model FI)
• Economy-wide Access (MODEL EW)
• Financial Institutions Plus CBDC-Backed Narrow Bank Access (Model FI+)

The first one is related to a CBDC which access is limited to banks and NBFIs. The second, alongside banks and NBFIs, households and firms also have access to CBDC, working as money for all agents in the economy. The last proposal is referred to a limited access of the CBDC to banks and NBFIs.

The text reads as follows:

“Central banks are increasingly studying the monetary policy and financial system implications of issuing central bank digital currencies (CBDC). Even though the Bank of England does not currently plan to issue CBDC, it recently published an extensive research agenda on the topic.”

The main purpose of the paper is to continue analysing the possibilities that CBDC would bring to the economy, to the financial stability, and the market in general.

The conclusion says that if a CBDC is introduced in an orderly manner, the size of bank balance sheets may be, but need not be, reduced.

“Indeed, CBDC does not necessarily lead to a contraction in bank funding,” explains the paper. “But more importantly, there are, up to a first approximation that abstracts from second round and price-mediated effects, no adverse effects on private credit or on total liquidity provision to the economy.”

At the moment, some countries, including Venezuela, Iran and Russia are planning to launch their own cryptocurrencies. Indeed, Venezuela did it, and it is known as the Petro. But these countries have in mind CBDCs as a way to avoid international sanctions and dependency on the US dollar.