The Bank of England recently became a big newsmaker: the Telegraph reported that it could launch its own cryptocurrency in 2018. However, the reality didn’t meet the expectation of cryptocurrencies enthusiasts.
Just a few days later, on the 4th of January, the central bank of U.K. denied the possibility of creating Bitcoin-style currency. The negative decision on the new cryptocurrency is explained by the concerns about the impact on the traditional banks.
While most of the governmental structures started talking about cryptocurrency regulation only when the sphere entered into the period of flourishing, the Bank of England has been studying the topic since 2015. It created a special commission to “carry out ongoing research into various types of digital currency, and the technology that underpins them”. The scope of studying includes private and central-bank issued digital currencies. It is also examining distributed ledger technology and blockchain.
Even though the cryptocurrencies are a trending topic in the financial sphere at the moment, the Bank of England decided to stay out of the trend, at least for now. The reason is the fear of creating turbulence in the economy.
The Bank of England has two major matters for postponing the launch of the cryptocurrency linked to pounds sterling. The first one is the possibility of breaking the existing banking system. If the central bank gave people the opportunity to transfer from their traditional bank accounts in commercial banks to the innovative digital money accounts of the Bank of England, lots of consumers would prefer using the digital technology on everyday basis.
That would cause the cash outflow in commercial banks. All the highstreet banks would simply become unable to pay their deposits. Such a situation is a sure sign of financial crisis. What is more, it would put an end bank loans simply because these financial institutions would be physically unable to allocate money for such operations. That all brings the Bank of England to the thought that a trendy action – launching cryptocurrency – may badly injure all the financial institutions of the country.
The second consequence of giving way to the central bank’s cryptocurrency is losing the control over financial stability. Interest rate policy is one of the most influential tools of controlling paper money.
Today the interest elasticity of the demand for money allows the central bank regulate the situation efficiently. The simplified example is the following: the lower the interest rate is, the cheaper it is to borrow money from banks.
That means that people would increase the volume ofmoney spent not saved. That is like fresh blood flow for the economy. The Bank of England doubts that the same rules would work for the digital currency. Anyway, the fast pace of the cryptosphere development would probably demonstrate soon the relevance of traditional money market tools.
The Bank of England has decided to stay an observer of the cryptocurrencies market, at least at the moment. Still, there are some positive moments for the Bitcoin fans. The first one is that one more important financial institution of Europe stated its official position on the cryptocurrencies.
The second one is that the Bank of England is not set against new technology – they do not see digital currencies as a threat to the stability of the financial system. The Bank of England decided to take its time and keep on examining the new sphere. At any rate, the more influential financial institutions are working on distributed ledger technology, the more promising its prospect is.