What type of technology would you use if you wanted to create a central bank digital currency (CBDC) i.e. a national currency denominated, electronic, liability of the central bank? It is often assumed that blockchain, or distributed ledger technology (DLT), would be required; but although this could have some benefits (as well as challenges), it may not be necessary. It could be sensible to approach this issue the same way you would any IT systems development problem – starting with an analysis of requirements, before thinking about the solution that best meets these.
James Barker, David Bholat and Ryland Thomas.
Central bank balance sheets swelled in size in response to the financial crisis of 2007-09. In this blog we discuss what makes them different from the balance sheets of other institutions, how they’ve been used in the past, and how they might evolve in the future as means to implement novel policies – including the revolutionary possibility that a central bank could issue its own digital currency.
The topics of central bank digital currency (CBDC) and distributed ledger technology (DLT) are often implicitly linked. The genesis of recent interest in CBDC was the emergence of private digital currencies, like Bitcoin, which often leads to certain assumptions about the way a CBDC might be implemented – i.e. that it would also need to use a form of blockchain or DLT. But would a CBDC really need to use DLT? In this post I explain that it may not be necessary to use DLT for a CBDC, but I also consider some of the reasons why it could still be desirable.
Central banks (CBs) have long issued paper currency. The development of Bitcoin and other private digital currencies has provided them with the technological means to issue their own digital currency. But should they?
Addressing this question is part of the Bank’s Research Agenda. In this post I sketch out how a CB digital currency – call it CBcoin – might affect the monetary and banking systems – setting aside other important and complex systemic implications that range from prudential regulation and financial stability to technology, operational and financial conduct.
I argue that taken to its most extreme conclusion, CBcoin issuance could have far-reaching consequences for commercial and central banking – divorcing payments from private bank deposits and even putting an end to banks’ ability to create money. By redefining the architecture of payment systems, CBcoin could thus challenge fractional reserve banking and reshape the conduct of monetary policy.