Bank of England has released a paper termed the ‘one bank research agenda’ which discusses five main themes, spanning all aspects of central banking and focusing in particular on the intersections between policy areas, one of them being ‘The Central bank response to fundamental technological, institutional, societal and environmental change.’
They cited the innovations in payments and credit in recent times, in the shape of digital currencies and alternative sources of finance. Further it read “Digital currencies, potentially combined with mobile technology, may reshape the mechanisms for making secure payments, allowing transactions to be made directly between participants. This has potentially profound implications for a financial system whose payments mechanism depends on bank deposits that need to be created through credit. Similarly, technology has enabled the emergence of new business models, such as peer-to-peer lending and crowdfunding, which create alternative sources of finance for both individuals and businesses.”
The paper discussed the challenges of existing private digital currencies like Bitcoin. While it has shown that it is possible to transfer value securely without a trusted third party, 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.
They further discuss the various applications of digital currencies: It could be used as a new way of undertaking interbank settlement, or it could be made available to a wider range of banks and NBFIs. In principle, it might also be made available to non-financial firms and individuals generally, as banknotes are today. The costs and benefits for monetary and financial stability would likely vary in the different cases, being more pronounced the more widely a digital currency is held. For example, making central bank money widely available could have an impact on deposits held at commercial banks and a knock-on effect on the banking system. Another relevant issue is the impact that offering a new method of settlement in central bank money would have on existing payment systems.
Security continues to remain an important concern with digital currency, with the paper emphasising on devising a system which could utilise distributed ledger technology without compromising a central bank’s ability to control its currency and secure the system against systemic attack and the regulatory issues surrounding digital currency.
The paper also discusses the implications for central bank policy of sustained growth of technology enabled alternative finance citing donation-based crowdfunding to invoice trading and peer-to-peer lending as examples. It addresses various areas which need more research and states that the changes that may arise from technology-enabled alternative finance could have implications for all areas of central bank policy, including monetary policy, microprudential policy and financial stability policy. For example, they could alter the transmission mechanism of monetary policy. And if they grow sufficiently, they could be a source of macroprudential and microprudential risks, with potential implications for regulation.
The Bank’s is attempting to embrace digital currency and financial technology, evident from the launch of its first ever visualisation competition in conjunction with the One Bank Research Agenda conference where they released six new publicly available Bank data sets. The winning entry will receive £5000. The Bank announced in its Strategic Plan their commitment to opening up more of our data to the public in order to crowdsource answers to key research questions and support collaborative research with Bank staff.
(image credit: Paul Wilkinson)