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UPDATE 1-Carney sees big challenges as BoE eyes 'digital banknotes'

Thu, 12th Mar 2020 11:32

(Adds detail, reaction)

By David Milliken

LONDON, March 12 (Reuters) - The Bank of England must tread
carefully to avoid financial stability dangers if it creates a
digital equivalent to its existing banknotes, Governor Mark
Carney said on Thursday.

Cash usage is falling in Britain, making shoppers and
businesses more reliant on electronic money held with banks and
payment companies rather than banknotes issued by the BoE.

The BoE said it was seeking the public's views on how it
might design a digital currency of its own to operate alongside
physical cash -- though a decision on whether to go ahead would
need government approval.

"While CBDC (central bank digital currency) poses a number
of opportunities, it could raise significant challenges for
maintaining monetary and financial stability ... and would need
to be very carefully designed if it were to be introduced,"
Carney said in the foreword to a BoE discussion paper.

Cryptocurrencies such as bitcoin have failed to take off as
a means of payment in Britain, and the BoE has been critical of
the lack of detail behind Facebook's proposal for a
so-called 'stablecoin' called Libra.

The BoE's move was welcomed by think-tank Positive Money,
which is critical of commercial banks' lending policies.

"The government and central bank must continue to work
together to accelerate efforts to issue a digital currency
before they are beaten to it by the likes of Facebook," Positive
Money's head of policy David Clarke said.

The BoE said that if it introduced its own digital currency,
it would be denominated in sterling and would not replace
banknotes or commercial bank deposits, and need not be based on
the blockchain technology that underpins cryptocurrencies.

But, like cash, it would offer an alternative to using banks
for payments between individuals and businesses and could make
cross-border payments easier.

One of the BoE's deputy governors, Jon Cunliffe, has warned
that taken too far, a central bank digital currency could
undermine commercial banks -- a concern echoed in the BoE paper.

"If significant deposit balances are moved from commercial
banks into CBDC, it could have implications for the balance
sheets of commercial banks and ... the amount of credit provided
by banks to the wider economy," the BoE said.

"Nonetheless, CDBC can be designed in a way that would help
mitigate these risks," it added.

One option would be for the BoE to provide the underlying
infrastructure for a digital currency -- sitting alongside its
existing sterling payment systems -- but for private companies
to be responsible for dealing with customers.

The BoE consultation will run until June 12.
(Reporting by David Milliken; Editing by Kate Holton and
Catherine Evans)

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