Andy Haldane, a Bank of England executive, believes that a widespread digital currency can have a positive impact on financial stability.
The Bank of England, or BoE, is expanding its research on digital currencies, considering how these assets could form the basis of a „new monetary order.
Andy Haldane, chief economist at the central bank and Bitcoin Code app member of the Monetary Policy Committee, delivered a speech on Wednesday at TheCityUK 10th Anniversary Conference.
The 19-page transcript, entitled „Seizing the opportunities of digital finance,“ focuses on various issues related to digital currencies and their impact on financial stability and monetary policy.
The „traditional banking model would be disrupted“ by a widely used digital currency, Haldane predicted, adding that more attention should be paid to „the potential longer-term benefits of such structural change.
One of these benefits is the emergence of „narrow banking,“ which would partially separate the „secure“ payments-based activities of banks from their riskier lending activities.
„In principle, separating secure payments from risky lending activities could lead to greater alignment of risk and duration on the balance sheets of institutions offering such services.
On the monetary policy front, the manager is convinced that a digital currency can mitigate or even deny the prevalence of negative interest rates. According to Haldane, zero or negative rates „emerge from a technological constraint on the ability to pay or receive interest on physical money“:
„In theory, a widely used digital currency could mitigate, if not eliminate, this technological constraint by allowing the collection of interest rates on retail monetary assets.
Negative interest rates are an unconventional tool promoted by central banks to encourage financial institutions to lend money instead of accumulating it in their reserves. In an environment of negative interest rates, financial institutions pay to keep excess money in the central bank. Following the financial crisis in 2008, the European Central Bank, Bank of Japan and the Swiss National Bank followed this path.
The BoE is also exploring the various cases of using a central bank digital currency, or CBDC, but has not yet made any decisions in this regard, according to fintech director Tom Mutton.
Several central banks around the world are considering the possibility of a CBDC, while some monetary authorities have opted for a more proactive approach. China, for example, recently completed its largest pilot programme for the digital yuan, distributing online wallets to 50,000 people.
Meanwhile, the US Federal Reserve has published a series of research reports exploring the potential usefulness of a CBDC. One of the main conclusions of a recently published review was the need to identify the „inherent characteristics of CBDCs.