Bank of England: Digital Cash – the end of monetary policy as we know it?

Last week the Bank of England released a key paper that analyses the ‘macroeconomics of central bank issued digital currencies’. The paper essentially asks what would happen if people could hold money electronically at the central bank, instead of having to use bank deposits (created by commercial banks). We wrote about it briefly last week but we’re still working through the fine details of the 69-page mathematical model to figure out the implications for our work. In the meantime, the Bank of England’s staff blog has just released a much more accessible discussion of the issues:

“…taken to its most extreme conclusion, CBcoin issuance could have far-reaching consequences for commercial and central banking – divorcing payments from private bank deposits and even putting an end to banks’ ability to create money.”

The very existence of a digital equivalent to cash – what we’ve called Digital Cash in our own paper on the idea – could (theoretically) lead to banks being unable to create money:

“Another scenario would see a large-scale shift of customer deposits into CBcoin, forcing banks to sell off their loan books. Bank deposits could still exist but as saving instruments, no longer used to make payments. Banks could still originate loans, provided they lent money actually invested by customers, say, in non-insured investment accounts that couldn’t be used as a medium of exchange. Banks would operate like mutual funds, losing their power to create money and becoming pure intermediaries of loanable funds, as described in economic textbooks.”

Read the full article: Central bank digital currency: the end of monetary policy as we know it?