Bank halts crypto-currency plans over stability fears

Bank halts crypto-currency plans over stability fears

The Bank of England (BoE) has been researching the possibility of launching its own digital currency to rival bitcoin, but fears about the impact on the wider financial system means it has no “current plans” to do so.

The central bank said it began examining the implications of digital currencies, the most famous of which is bitcoin, three years ago in 2015.

Trading in bitcoin prompted feverish activity last year. The price of one bitcoin rose above $19,000 (14,000) in the days before Chirstmas, but has slumped somewhat since then as is currently $13,500 (£10,050). At the start of 2017 one bitcoin was trading at just $1,000 (£737). 

Today (4 January) the Bank of England told FTAdviser that it continues to research the topic of crypto-currencies like bitcoin, but any plans to launch its own digital currency were dropped amid concerns about the impact on the traditional banks.

If the central bank launched a digital currency of its own, it worried consumers would stop using commercial bank accounts and, instead, have a bank account with the Bank of England, and choose to use digital technology to purchase goods and services over paper money.

The central bank added it feared if there were a flurry of withdrawals from commercial banks in favour of using the Bank of England's crypto-currency, highstreet banks would not have the cash to pay all depositors, causing turbulence in the economy.

Bank lending would freeze up as the commercial banks would not have the cash to lend, and would be unable to borrow the money from other banks.  

It also expressed concern about its ability to maintain financial stability through interest rate policy in a world of digital currencies.

The central bank believes that demand for traditional paper money is relatively “elastic”, that is, it responds to changes in its price - the interest rate charged on it.

The Bank of England said it is unsure whether this elasticity would continue in a world of digital currencies, weakening the Bank's ability to maintain economic stability through the use of interest rates.

Primarily, if a central bank is concerned that debt levels in the economy are too high, it can put interest rates up, to weaken demand for borrowing, and incentivise people to save, which may prevent a debt fuelled bubble being created, and bursting. 

If the central bank is worried that demand in the economy is too low, it can cut interest rates, which has the effect of making debt cheaper, to entice people to borrow more, and save les,, increasing the level of aggregate demand in the economy, which should boost growth. 

The Bank of England added that it does not view the digital currencies currently in existence, such as bitcoin, as a threat to the stability of the financial system.