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According to the BOE model, large-scale digital currency introduction could shift the direction of the current retail financial sector.
The Bank of England (BOE) has publicized its view on the widespread use of digital currency in the financial sector. According to the BOE, deposits received by retail banks could be populated by digital currencies if governments throw in their weight and begin offering them.
The BOE created a model of the banking sector to measure possible changes and effects of introducing these currencies on a large scale. As part of the modeling, the BOE created a scenario where a fifth of all deposits in retail banks are digital.
The result revealed that if this happens, the financial sector may not simply be business as usual. Generally, any huge changes in the usual flow of deposits, cash, or money in general, could tell on money markets.
Several central banks, including the BOE, have been considering the effects of a central bank digital currency (CBDC), trying to decide whether or not to introduce it. This BOE model largely shows that introducing CBDCs needs to be properly assessed.
According to a recent statement by BOE Governor Andrew Bailey:
“We live in an increasingly digitalized world where the way we make payments and use money is changing rapidly. The prospect of stable coins as a means of payment and the emerging positions of CBDC have generated a host of issues that central banks, governments, and society as a whole, need to carefully consider and address.”
BOE Modeling Reveals Effects of Digital Currency in Financial Sector
The BOE has expressed views that seem somewhat polar as derived from its modeling. According to a BOE paper, a CBDC could inject speed, cost-effectiveness, and general efficiency into the financial sector. These changes could considerably pump economic activity. According to BOE Deputy Governor, Sir Jon Cunliffe, digital currencies could potentially reduce business costs.
However, Cunliffe also iterates possible downsides. According to him, the current banking system would lose a large number of regular deposits if the wind shifts in the direction of digital currencies:
“The banking system would have to attract funds, probably from the wholesale markets, because they would lose retail deposits. It might put the cost of credit up by a fifth of a percent.”
Regardless, the BOE believes that whatever disadvantage a CBDC brings would not last for long. The BOE’s paper says that introducing digital currencies would only disrupt markets in the short term. The central bank believes that “in the long-run, these markets should adapt.”
In general, the BOE’s publication considers digital currency and how it would affect specific issues. The paper discusses public policy objectives as it relates to several factors. These include international authorities, the potential demand for digital currencies, regulatory framework, and macroeconomic stability. Nevertheless, as far as a timeline is concerned, there is none for a BOE-issued CBDC. Cunliffe specifically said that it could take “a number of years.”