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Bank of England explores balance sheet implications of central bank digital currencies

The Bank of England (BoE) has published a new working paper on central bank digital currencies (CBDCs), exploring their design principles and balance sheet implications.

The paper presents three scenarios – each with a different set of sectors having access to CBDC:

  • Financial Institutions Access (Model FI), where the access is limited to banks and NBFIs. In this model, banks and NBFIs can interact directly with the central bank to buy or sell CBDC in exchange for eligible securities.
  • Economy-wide Access (Model EW), where access is also offered to household and firms, alongside banks and NBFIs. In this case, CBDC would serve as money.
  • Financial Institutions Plus CBDC-Backed Narrow Bank Access (Model FI+). Access to CBDC is limited to banks and NBFIs in this model too. But, in this case, there is at least one financial institution within the NBFI sector that acts as a narrow bank, which provides a financial asset to households and firms that is fully backed by CBDC but that does not extend credit.

The paper analyses sectoral balance sheet dynamics at the point of an initial CBDC introduction, and of an attempted large-scale run out of bank deposits into CBDC.

“We find that if the introduction of CBDC follows a set of core principles, bank funding is not necessarily reduced, credit and liquidity provision to the private sector need not contract, and the risk of a system-wide run from bank deposits to CBDC is addressed,” the authors wrote.

The BoE embarked on a multi-year research programme to explore the implications of CBDCs back in 2016. It published a working paper on “The macroeconomics of central bank issued digital currencies” in July 2016.

Other central banks including the Bank of Canada, and Norges Bank, and Riksbank, are also exploring the possibility of issuing CBDCs.

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