Andy Haldane, the Chief Economist at the Bank of England, talked yesterday about central bank digital currencies (CBDCs) and stablecoins, making some slightly contrarian points. In his opinion, concerns about digital currencies disintermediating banks for deposits overlook the benefits of narrow banking. He also believes the ability to charge negative interest rates is an enormous benefit of CBDCs. And he stated the Bank of England would make the ‘pivotal’ CBDC decision within a year or so.
Most discussions about CBDCs touch on worries that a desire for consumers to have a safe haven for money will make CBDCs more attractive compared to bank deposits. Hence, to fulfill the lending role of banks, they will have to resort to more expensive funding sources. And the shift involved could be destabilizing.
Haldane’s point is that CBDCs and stablecoins effectively split the deposit-taking and credit functions resulting in narrow banking on the deposit side. In this scenario, “safe, payments-based activities (are) segregated from banks’ riskier credit-provision activities.” And in his view, beyond the transition, that could be a good thing because he believes the mix has resulted in financial instability. In the future, when it comes to lending, risky assets will be backed by risky liabilities.
Turning to monetary policy, there’s the current issue of having a zero lower bound on interest rates which he describes as a technological constraint on physical cash. If rates could become negative, that could boost economic output by as much as 2%.
Of course, if a CBDC existed alongside physical cash, that might not work so well. But that’s a socio-political decision.
Haldane also noted that CBDC holders at other times could earn interest, saying that “the inability to pay interest on public money is a relic of a bygone era.”
Because this is a sensitive area generally avoided by central banks, they are not exploring potential interest rate remuneration to CBDC holders which he believes is very important. “The design of the remuneration schedule for CDBC will, in my view, be one of the most significant decisions made by central banks in the next half-century,” said Haldane.
Meanwhile, Russia’s central bank Governor Elvira Nabiullina also expressed some contrarian views earlier this week. She believes all payment networks should be required to support the local CBDC alongside any currency native to the network.