According to a report by the Bank of England, in which it positions itself on the introduction of a digital central bank currency, such a central bank currency is under discussion. However, a final decision on the implementation of such a currency is still pending.
The Bank of England declares its position on the introduction of a Central Bank Digital Currency (CBDC) in a 57-page report. In the paper, the Central Bank of England discusses risks and opportunities and presents a CBDC model.
So has cash become obsolete?
Along with several other central banks around the world, of which the Chinese seems to be the most advanced, the Bank of England is now announcing details of its implementation of a currency named CBDC. According to the report, the increasing digitization of payment transactions makes the introduction of a special currency a matter of urgency. This will lead to a gradual replacement of cash by digital payment alternatives.
Central banks have a responsibility to respond to this development by introducing a digital currency. The declining use of cash with a simultaneous increase in the use of debit cards is increasingly leaving the field of financial services to privately owned companies that also fulfil the role of issuers.
As "trustworthy issuers", central banks would have to issue electronic money to supplement cash. Whereas 63 percent of payment transactions were made in cash in 2006, the volume of cash payments in 2018 was only about 28 percent. The declining use of cash is thus accompanied by an increase in payments with debit cards and digital payment options.
The CBDC model
The report addresses the opportunities and risks of a digital central bank currency. Risks exist for commercial banks, as consumers could transfer their deposits to a CBDC. This would affect bank lending, which in turn could jeopardise financial stability and affect monetary policy control.
So here are the benefits. The central bank can intervene in the market for digital payments and thus retains its effectiveness. The report also describes a possible CBDC model. The central bank should operate the infrastructure for a CBDC that runs alongside the RTGS (Real Time Gross Settlement) system. The currency would be issued to consumers via service providers who would act as an interface between the bank and the user.
Whether or not the Core Ledger will ultimately run on block chain basis has not yet been decided. Despite the advantages and potential of this technology, the bank has concerns about security, scalability and data protection.
Although the plans are at an advanced stage, the central bank has not yet decided. The current report should therefore be read more as a blueprint. Whether and when the Bank of England will issue a digital central bank currency cannot be said at present. But the plans are progressing.
