finance

BoE governor says ‘regulated’ central bank digital currency preferred option


Andrew Bailey has indicated that he would prefer a “regulated” form of central bank digital currency, involving a platform in which the Bank of England would oversee commercial banks and users of sterling in electronic wallets.

Speaking to the Lords’ Economic Affairs Committee on Tuesday, the BoE governor appeared to reject the two extremes of offering an anonymous digital token akin to banknotes or allowing retail accounts at the central bank.

The BoE and the Treasury have committed to launch a consultation on the idea of a central bank digital currency next year with a view to launching one in the latter part of the decade.

Central bank digital currencies have become a hot topic with the steady decline in the use of cash and the backing by tech giants of so-called “stablecoins” — digital tokens linked to currencies such as the dollar, euro, yen or sterling.

All these concepts differ from cryptocurrencies, such as Bitcoin, which do not have a stable value and are more similar to an asset with a value dependent on demand for holding it.

But central bankers see stablecoins as an unregulated threat to existing currencies and have accelerated their internal discussions of alternatives in response.

Bailey said he was “sceptical” that the best type of new payment system would be “some world of asset-backed stablecoins which has money-like features which could be regulated”. But he acknowledged this raised the question about what form a central bank digital currency might take to make it cheap and easy to use as part of the normal payment system.

The governor said that while he was not attracted to the idea of the BoE becoming the banker for millions of people and becoming a competitor for high street banks, it would want a core regulatory role in the system.

He said the bank role should be to “provide the means of settlement and central bank money to a platform in which banks and maybe wallets holders would be the participants and regulated,” adding: “The bank would need to have regulatory powers over the firms that were on the platform because that’s the direct interface.”

The type of digital sterling the BoE would likely settle on would be one based on a centralised payment system rather than one that cut out the central bank and allowed tokens to be exchanged between two people like banknotes.

Bailey acknowledged there would be issues around privacy and the management of personal data in the establishment of any digital central bank currency.

For users, a central bank digital currency would be little different from transactions using debit or credit cards or other payment systems, such as PayPal, that it would be directly guaranteed by the state, as cash is now, thereby reducing the risk of using it and potentially lowering costs of transactions.

Bailey reiterated that Bitcoin and other cryptocurrencies were growing rapidly and needed greater regulation. “We don’t regard it today as a direct financial stability issue, but we do regard it as having all the potential of becoming a threat to financial stability which is why we need to take action on that front,” he said.

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