The Bank of England (BoE) is expanding its review of digital currencies, including an assessment of how these assets could form the basis of a “new monetary order.”
Andy Haldane, the BoE’s chief economist and current member of the Monetary Policy Committee, spoke at the City of England’s 10th anniversary conference on Wednesday.
The 19-page speech, titled “Seizing the Opportunity of Digital Finance,” explored a range of topics related to digital currencies and their impact on financial stability and monetary policy.
Haldane said that “the traditional banking model would be disrupted by widely available digital currencies,” adding that “greater attention needs to be paid to the potential long-term benefits of this structural shift.”
One of these benefits is the emergence of so-called narrow banks, which to some extent isolate a bank’s “safe” payment activities from its riskier lending business.
“In principle, separating safe payment and risky lending activities would allow institutions that provide these services to more closely align the risk and duration of their balance sheets,” Haldane said.
On monetary policy, the BoE governor believes that digital currencies could reduce or even eliminate negative interest rates. Haldane said zero or negative interest rates “arise from technical limitations on the ability to pay or receive interest on physical cash.” He added: “In principle, a widely used digital currency could at least reduce this technical limitation, or even eliminate it, by imposing an interest rate on retail monetary assets.”

Negative interest rates are an unconventional policy tool introduced by central banks to encourage financial institutions to lend rather than hoard funds. In a negative interest rate environment, financial institutions deposit excess cash with the central bank. The European Central Bank, the Bank of Japan and the Swiss National Bank all implemented this practice after the 2008 financial crisis.

The Bank of England is also exploring various use cases for central bank digital currencies (CBDCs), but has not yet made any decisions on this, said Tom Mutton, head of fintech.

Central banks around the world are considering the possibility of establishing central bank digital currencies (CBDCs), and some monetary authorities have taken a more proactive approach. For example, China recently completed its largest digital yuan pilot, distributing digital yuan red envelopes to 50,000 people.

Meanwhile, the Federal Reserve has released a series of research reports exploring the potential utility of CBDCs. A key conclusion of a recently published literature review is the need to determine the "intrinsic characteristics of CBDCs."