Bank of England Report Considers Role of Digital Currencies in Central Banks

Digital Currency and its technology may have a place with central banks, according to a 50-page discussion paper by the Bank of England.

The paper, at a high level, examines a number of general themes relevant to central banks, such as the relationships between different policy frameworks and the employment of new methodologies.

In the final section, which reviews the central bank response to fundamental technological, institutional, societal and environmental change, the Bank considers the question: "Why might central banks issue digital currencies?"

Acknowledging their limitations in their current form, the report asserts:

"While existing private digital currencies have economic flaws which make them volatile, the distributed ledger technology that their payment systems rely on may have considerable promise. This raises the question of whether central banks should themselves make use of such technology to issue digital currencies."

It then lists multiple use cases for digital in a central bank. It could be used for interbank Settlement Settlement Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2 Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2 Read this Term, or it can be issued by banks and non-bank financial institutions (NBFI's) as currency.

It notes that there can be varying implementations of distributed ledger systems, and "remuneration would have to be designed in such a way as to incentivise honest participation in the system without leading to socially inefficient over-investment in transaction verification" (e.g. mining shouldn't be too burdensome on its economy).

Other relevant considerations include: government-backed deposit insurance, if remuneration should be linked to the official monetary policy interest rate, the role of banks and the availability of credit, and how institutions should be regulated.

The notion of digital currency playing a role in central banks has now been raised in several studies. One of the major hurdles will be the transition of such abstract prototypes into reality.

The examination of such issues is more pertinent in the UK considering its sought role as a global Fintech Fintech Financial Technology (fintech) is defined as ay technology that is geared towards automating and enhancing the delivery and application of financial services. The origin of the term fintechs can be traced back to the 1990s where it was primarily used as a back-end system technology for renowned financial institutions. However, it has since grown outside the business sector with an increased focus upon consumer services.What Purpose Do Fintechs Serve?The main purpose of fintechs would be to suppl Financial Technology (fintech) is defined as ay technology that is geared towards automating and enhancing the delivery and application of financial services. The origin of the term fintechs can be traced back to the 1990s where it was primarily used as a back-end system technology for renowned financial institutions. However, it has since grown outside the business sector with an increased focus upon consumer services.What Purpose Do Fintechs Serve?The main purpose of fintechs would be to suppl Read this Term leader.

A previous Bank of England report asserted that if digital currencies gain enough traction they can undermine the prevailing monetary system.