Bank of England could issue own digital currency

The potential of a central bank-backed digital currency is touched on with the publication of the BofE's 'One Bank Research Agenda' - a wide-ranging framework to transform the way research is done at the Bank.

"While 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," states the Bank. "This raises the question of whether central banks should themselves make use of such technology to issue digital currencies."

The Bank of England is not alone in its thinking. Earlier this month a senior researcher at the Federal Reserve Bank of St Louis floated the idea of a government-backed 'Fedcoin' that uses a bitcoin-style protocol but the US dollar as the monetary object, combining the best of cryptocurrencies and cash.

For the Bank of England, a Bank-backed digital currency system 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," the Bank continues "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, says the Bank, 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," states the paper. "Another relevant issue is the impact that offering a new method of settlement in central bank money would have on existing payment systems."

The UK Government is keen to promote the benefit of new technologies as a means to inject more competition into the banking system. The Bank's open-minded approach to the digital currency debate got the seal of approval from UK Chancellor George Osborne, who tweeted:

Good that @bankofengland looking into digital currencies - need to ensure UK customers benefit from new tech and #Fintech firms flourish

— George Osborne (@George_Osborne) February 25, 2015