Bank of England Backtracks on Digital Currency

The UK’s central Bank has dropped any plans to launch its own digital currency but has said it will continue to research the proposition. The decision to ditch a digital currency in the short-term is thought to be anchored by concerns about the impact of such a currency on the global financial system.  

The Bank has made no secret of its research of a digital currency linked to the pound. Its own research unit was expected to report on a trial within the next 12 months, but now the Bank has indicated it has concerns that a mass move by the public to a digital currency might cause trouble for the commercial banks, which would in turn, cause “turbulence” in the economy, it said.

 

 

The interest in digital currencies has exploded in recent months as many have seen their values increased exponentially. Bitcoin is at the centre of the cryptocurrency craze and has seen its value increase more than 12-fold during 2017, only to fall back on the highs reached early in 2018.  XRP, a cryptocurrency created by the fintech company Ripple is the best performing cryptocurrency of 2017, registering astonishing 37,000 per cent gains.

With over 200 digital currencies on the market, reaching a combined market capitalisation of $600 billion, the money supply is ballooning. November 2017 presented a big turning point for digital currencies when Bitcoin hit a unique milestone where its market cap exceeded the value of all reserve assets. When Bitcoin surpassed the $291 billion mark, Christine Lagarde, the IMF’s managing director, warned central Banks about the massive disruption that could take place. All central banks need to reconsider how digital currencies affect money supply and stability domestically and abroad. The demand for paper money is “elastic” and can be controlled with interest rate changes. However, the growth of digital currencies may weaken a government’s powers to use interest rates to control borrowing and manage financial stability.

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