In a talk given at the Portadown Chamber of Commerce in Northern Ireland on September 18, Andrew G Haldane, Chief Economist at the Bank of England (BoE), has hinted at the possibility that the U.K. government might issue a digital currency. Though the disclaimer “The views are not necessarily those of the Bank of England or the Monetary Policy Committee” ensures plausible deniability, Haldane’s talk seems to indicate that the BoE is at least seriously considering the possibility.
Haldane is chief economist at the BoE and executive director of monetary analysis and statistics. Listed by Time Magazine in 2014 as one of the 100 most influential people in the world, Haldane is a member of BoE’s Monetary Policy Committee and oversees research and statistics across the bank.
Haldane focuses on the inability of central banks to set negative interest rates to stimulate economic growth, which hinders the effectiveness of monetary policy and is known as the Zero Lower Bound (ZLB) problem.
“A central bank cannot reduce nominal interest rates below zero,” explained a 2014 IMF working paper cited by Haldane. “This constraint arises from the existence of an asset, cash, with a guaranteed return of zero. A negative interest rate would mean that someone lends $100 and receives less than $100 in the future. Such a loan would never occur, because the lender could do better by putting cash in a safe deposit box.”
Therefore, Haldane suggests looking for technological means for implementing a negative interest rate on physical currency. More than a century ago, German economist Silvio Gesell proposed a stamp tax on currency to generate a negative interest rate. Modern variants of the stamp tax on currency have been proposed – for example, by randomly invalidating banknotes by serial number.
Another possibility is to abolish paper currency, which would also represent a way to fight criminal activities that rely on cash exchange.
Yet another possibility would be to issue government-backed currency in an electronic rather than paper form.
“This would preserve the social convention of a state-issued unit of account and medium of exchange, albeit with currency now held in digital rather than physical wallets,” says Haldane. “But it would allow negative interest rates to be levied on currency easily and speedily, so relaxing the ZLB constraint.”
Haldane observes that the technology underpinning digital currencies has changed rapidly over the past few years, due to the emergence of Bitcoin and crypto-currencies.
“What I think is now reasonably clear is that the distributed payment technology embodied in Bitcoin has real potential,” says Haldane. “On the face of it, it solves a deep problem in monetary economics: how to establish trust – the essence of money – in a distributed network. Bitcoin’s “blockchain” technology appears to offer an imaginative solution to that distributed trust problem.”
Whether a variant of this technology could support central bank-issued digital currency, and whether the public would accept it as a substitute for paper currency, are, according to Haldane, open questions that do not have easy answers.
“That is why work on central bank-issued digital currencies forms a core part of the bank’s current research agenda,” concludes Haldane. “Although the hurdles to implementation are high, so too is the potential prize if the ZLB constraint could be slackened. Perhaps central bank money is ripe for its own great technological leap forward, prompted by the pressing demands of the ZLB.”
In a previous presentation, Haldane stated that digital currencies are “harder money” than a gold standard, because “sustained adoption would see ongoing deflation.” A few months ago the Bank of England published a research paper titled “Innovations in payment technologies and the emergence of digital currencies.”
“The distributed ledger is a genuine technological innovation that demonstrates that digital records can be held securely without any central authority,” reads the conclusion of the paper. A recent U.K. Treasury document titled “Digital Currencies: Response to the Call for Information” shows that the British government is interested in supporting and understanding blockchain-based digital fintech, and understands the potential benefits it could bring to society.
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