The Bank of England publishes "New Forms of Digital Currency", calling for regulation to be on par with bank deposits

On June 7, the Bank of England released a research report titled "New Forms of Digital Currency". The report stated that before new forms of digital currency "are widely used, issues regarding currency security and macroeconomic stability need to be addressed". The report pointed out that if digital currency is to be popularized, it should meet the same standards as today's bank deposits, and it is intended to call on countries to build a strict and standardized regulatory framework for digital currency.

In the report, Governor Bailey pointed out that "over the past 10 years, payment methods have undergone rapid innovation, and with the COVID-19 pandemic, this innovation is accelerating... The scale of cash payments is declining, and the demand for payment convenience such as e-commerce has stimulated the public's interest in digital payments... Large fintech companies are also developing new forms of alternatives to traditional currencies."

In the report, Bailey said the Bank of England has not yet decided whether to issue a CBDC and "there are a range of issues that need to be considered in consultation with government agencies."

The report identifies crypto assets as a new way of payment and value preservation, and strongly calls on relevant institutions to establish a sound supervision system in order for crypto assets to fulfill these two functions.

Currently, the Bank of England's report is open to global comments, and the deadline for soliciting opinions is September.

Liande.com has also pointed out before that the UK's CBDC has also been continuously advancing. In April this year, the Bank of England stated that it had set up a new working group to explore the possibility and future of CBDC introduction with the Ministry of Finance.

There are also reports that British Chancellor of the Exchequer Rishi Sunak advocates the issuance of "Britcoin", but everything is not very clear and whether to continue is still under discussion.

Opportunity: Digital currency may strengthen the guiding power of monetary policy

In April, the Bank of England said in a statement that any central bank digital currency is likely to be a new form of digital currency that can be used by households and businesses. The first sentence of the summary of this report reads:

“New forms of digital currencies, whether publicly or privately offered, will be the latest innovation in the evolving economy’s payment methods. They can contribute to faster, cheaper, and more efficient payments. They may enhance financial inclusion, but they may also pose risks.”

The report acknowledges that new forms of digital currencies “may offer benefits in terms of cost and functionality, and may also enhance the guidance of monetary policy.”

Therefore, the tone of this report is in favor of digital currency. The craze in the cryptocurrency circle is seen as a threat by traditional financial institutions, but a huge opportunity by central banks, and this is no exception for the Bank of England.

Challenge: What the central bank needs to do is to guard the door

The report also stated that the overheating of digital currencies will threaten the stability of the traditional financial system. On the one hand, a large amount of funds will be transferred to digital currencies in terms of investment. On the other hand, the central bank will lose control of interest rates and various traditional functions. Especially in times of inflation, the threat will be obvious.

The Bank of England still believes that if there is a sudden overheating, it will inevitably lead to the agitation of speculators, so it is very repressive and calls on all countries to establish a more stable and complete regulatory system before the digital assets overheat. And, most importantly, it must be ahead of the times in technology.

Stablecoin or CBDC?

The Bank of England said that this new form of digital currency could be a "stable currency" issued by private companies or a CBDC issued by the central bank. Therefore, the new form of digital currency must complete its mission in an absolutely safe manner.

Regarding stablecoins issued by companies, the report believes that "it is crucial to gain the trust of users, the same trust as existing currencies." The report calls for sufficient supervision, which will inevitably undermine the stability of the entire financial system.

This report was also released during the G7 summit. The timing of its release must be to seek support from the central banks of Europe and the United States. Currently, the finance ministers of the G7 countries are also present, and the eyes of financial giants are also watching the wind closely.

As we all know, the world's first CBDC has been launched in 2020, and China's central bank digital currency has already gone through multiple rounds of practice, completed its layout in multiple cities, and completed coupling experiments with the systems of Alipay and the People's Bank of China.

Several major developed countries participating in the G7 meeting have been calling for "banding together" since 2020 to take the initiative, and are also calling on member countries to establish a "protective wall" regulatory policy. Therefore, this report is actually an obvious attempt to seek a protective umbrella.

Although the Bank of England’s CBDC is still under discussion, it is still unlikely that countries will recognize Facebook’s stablecoin Diem. Because the report states at the beginning,

“The Financial Policy Committee has set out expectations for stablecoins. These are intended to ensure that the public has the same confidence in stablecoins as in commercial bank money. The regulatory model outlined in this report illustrates a potential approach to meeting these expectations, establishing a safe regulatory environment for stablecoins to operate in the UK and providing a clear foundation for sustainable innovation. Importantly, there is considerable uncertainty about the demand for new forms of digital currencies and their impact on the economy. Therefore, precautionary measures may need to be taken to allow space for the impact of any new form of digital currency on the financial system to be assessed after it is introduced.”

The only short-term phenomenon that can be predicted is that while banks in various countries build high walls, they will quietly launch CBDCs with unsatisfactory technical foundations, and finally cooperate with private enterprises under the spirit of "openness" to get a piece of the pie in order to raise the technical threshold.