Consultation Launched On Central Digital Currency

Is a central digital currency the way forward for UK finance?

June 15, 2021

Consultation Launched On Central Digital Currency

The Bank of England has launched a consultation on whether a Central Bank Digital Currency would be sustainable and necessary, as cryptocurrency continues to dominate the global financial discourse.

As well as managing the public digital currently, the CBDC would also help to regular private digital currencies such as Bitcoin. The Bank of England joins many other central banks around the world in exploring a centralized digital currency – China is already trialling their option.

Current Digital Process Explained

Around 97% of money currently in circulation is digital, with only 3% made up of physical cash and coins. The way that we handle digital payments for online transactions, card payments and more is therefore extremely important.

However, while coins and cash are created by the central bank, digital currency is not – it’s created by commercial banks whenever they make a loan to customers.

Therefore, the total money supply in the country is not determined by the government or the Bank of England, but instead by the number of new loans that are given to personal and business customers, and how much of that has been repaid.

This was not by design, but all happened based on the historic practice of banks issuing deposits in exchange for keeping customers’ precious metals. Banks realised that customers rarely withdrew their metal and so the potential to lend more against the metal was possible.

Despite the gold standard ending, banks now simply lend against cash assets, with the central bank determining that commercial banks must have reserves lent to them, on which interest is charged.

Plans for the CBDC

With the introduction of a CBDC, households and businesses could hold digital money in their accounts with the central bank. As these would be regulated, it would prevent the major fluctuations and potential disasters in the markets caused by unregulated cryptocurrencies.

The larger concern for the Bank of England remains stablecoins – those that are tied to a singular currency but owned or partially backed by major corporations, such as Diem which is part-baked by Facebook. Customers could move their savings away from the central bank to enjoy perks when shopping at major retailers.

A central bank option reduces the threat of these, and it’s also the safest option available for customers. While private currencies could be subject to vast taxpayer bailouts that could devastate customers and the market, state-owned currencies don’t require those bailouts or insurance.

A central digital currency would also mean that the bank could have more of an influence on customers. Currently, changes in central interest rates impact mortgages and loans, but those beneficial changes could instead be passed straight into all customers regardless of whether they are drawing a loan or not.

The consultation is seen as potentially the biggest shake up of the British banking system in the last 200 years, and it remains to be seen how successful it will be.

Ian Lewis
Ian Lewis
Ian is an experienced writer with 15 years’ experience working in journalism and marketing. He’s worked in-house in financial institutions as well as writing freelance pieces for a variety of banking and financial trading websites.

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