The Bank of England has decided it will not launch its own cryptocurrency due to its possible impact on the financial system, according to FT Advisor. The bank began researching cryptocurrencies in 2015 and was considering launching its own cryptocurrency.
The bank continues to research cryptocurrencies, but it has decided that having its own such currency could have negative ramifications on traditional banks. The bank believes that consumers would choose its cryptocurrency over paper money and would stop using commercial bank accounts as well as paper money.
Concern About Impact On Banks
The central bank feared consumers would withdraw funds from commercial banks and those banks would not have the funds to pay their depositors, bringing havoc to the economy. The banks would also not be able to borrow from other banks.
The central bank is also concerned that it would not be able to maintain financial stability using its interest rate policy.
The demand for traditional paper money is fairly elastic, meaning it responds through price changes to interest rates charged on the money. The bank said it is not sure if such elasticity would sustain itself in a cryptocurrency economy, undermining the bank’s ability maintain economic stability using interest rates.
Interest Rate As A Tool
Should the central bank believe there is too much debt in the economy, it can raise interest rates to reduce the demand for borrowing, thereby motivating people to save money. This would theoretically halt a debt bubble that would eventually burst.
Should the central bank believe there is insufficient demand in the economy, cutting interest rates would make debt cheaper, motivating people to borrow more and save less, thereby building aggregate demand in the economy. This would theoretically support growth.
The central bank indicated it does not consider existing digital currencies like bitcoin as a threat to the financial system.
Central Bank Governor Cites Benefits
Dr. Mark Carney, Governor of the Bank of England, recently made the case for a central bank-backed cryptocurrency to England’s Treasury Select Committee. According to Dr. Carney, there are clear positives to using blockchain technology for central banking practices.
“You don’t end up with those financial stability risks; you get financial stability benefits. And you save huge amounts of computational energy intensity,” he argued.
The governor also added that the central bank and its research unit are “disciplined” in their approach. “If we’re going to apply something to the core of the system, it’s going to need to meet five sigma quality rating.”