Excerpts from speech by Andrew Bailey, governor of the Bank of England at Brookings Institution, Virtual Event, 3 September 2020
Innovation is a good thing. As authorities and regulators it is not in our interest – the broad public interest – to stop innovation. Moreover, when supported by clear standards and expectations, innovation can support the pursuit of public interest objectives such as greater inclusivity and network resilience. Making such standards clear early is much preferred to attempting to claw back the ground later, and particularly if that comes after things go wrong.
This is the backdrop to innovation in payments, particularly in the area of so-called digital currencies, developed to offer new forms of “money”.
Central Bank Digital Currency
A very reasonable and important question is whether a better outcome would be for central banks themselves to harness much of the technological and IT systems innovation and directly digitize cash? A Central Bank Digital Currency (CBDC) would be an electronic form of central bank money that could be used by households and businesses to make payments.
Digital central bank money would surely address the decline in the use of paper money without the complications of creating the protections required around stablecoins? Yes and no is I suspect the answer. The question is a good one and should be considered (and is being so) but the answer is not in yet. It’s a very big question.
Offering a CBDC would allow broad access to central bank money in a digital form. But any launch of a CBDC requires careful prior consideration to fully explore all the issues and implications in order to make an informed decision, including ascertaining that there would be demand for such a thing. CBDC, whilst offering much potential, also raises profound questions about the shape of the financial system and the implications for monetary and financial stability and the role of the central bank.
There are fundamental questions in play. What might a CBDC mean for monetary policy transmission – would it bring new tools and fuller, faster transmission of policy choices? To what extent would a CBDC ‘disintermediate’ the banking sector, and what impact would this have on the cost and availability of credit, and the resilience of banking business models and funding? And what services and infrastructure should a central bank offer as part of a CBDC and what might best be left to the private sector?