The UK will likely have to issue a digital currency, says the BoE’s deputy governor
Bank of England Deputy Governor Jon Cunliffe has argued that a fundamental change in the way public and private money is spent and circulated could make universal access to a digital form of central bank money vital to ensuring financial stability in the future.
In a speech at the OMFIF Digital Money Institute in London, Cunliffe reflected on past, present and future trends in the widespread use of private money by commercial banks, noting that the COVID-19 pandemic has accelerated existing trends from public to private money for everyday payments .
About 70% of respondents to a recent Bank of England survey said they were using less cash than they were before the pandemic, and they typically turned to options like contactless payments and internet transactions.
As this shift from public money in the form of cash to private, commercial bank money continues to accelerate, Cunliffe predicted that newer technologies are likely to spark an equally significant change in the use and even concept of money, with possible implications for its resilience as social convention.
Tokenization and distributed ledger technologies, especially when used by big tech players outside of banks, are likely to offer the public more flexible, data-driven forms of money that offer new capabilities in the digital world.
With the emergence of new phenomena such as stable coins, programmable money, smart contracts and micropayment channels, Cunfliffe said central banks are already grappling with key issues to adjust existing regulatory frameworks that are currently designed for the circulation of commercial banks.
For Cunliffe, these technology-driven changes also raise the question of whether central banks should take the risk that publicly available government money will continue to decline or even disappear entirely.
Without anticipating the Bank of England’s upcoming published study of these challenges, Cunliffe argued that new forms of private money are likely to be a strong case for adopting public digital money (e.g., a central bank digital currency, or CBDC) to to anchor public confidence in the uniformity of money; In other words: confidence in the substitutability of all money in the economy.
Getting access to physical cash, as the Bank of England has already promised, will likely not be enough, he argued. “In the UK, it is likely that the state will have to spend public digital money that meets the needs of modern life if we are to keep public money that is fit for general use and available to citizens,” he said.
Cunliffe also noted that, particularly in times of systemic stress, the “perception that there is no way out of private money, that there is no access to secure cash that is government-backed, could undermine confidence”. From this perspective, a CBDC would be crucial for ensuring financial stability across the country.
Cunliffe had already announced in November 2020 that the central bank would have to adapt to changes in banks’ business models and deal with the financial and macroeconomic consequences of these changes.