A combination of “systemic” central bank digital currencies (CBDCs) and stablecoins might substantially change the delivery and management of monetary policy and the amount and composition of central banks’ assets and liabilities.
On Wednesday, Andrew Hauser, director of markets at the Bank of England, highlighted this in his speech at the Federal Reserve Bank of New York.
The magnitude of the repercussions would heavily rely on the ultimate design of any systemic digital currency. Hauser stated that digital currencies pose no “redline” risks to central bank balance sheets. However, central bankers should begin planning for the “important implications” that central bank digital currencies and stablecoins would have for their balance sheets by including answers to them into their operational toolkits.
As the only issuer of fiat currency, central banks manage the money supply of a nation’s economy by adjusting interest rates, regulate commercial banks by establishing capital and reserve requirements, and serve as a lender of last resort. Money issued is regarded as a balance sheet liability, which may be repurchased or sold to commercial banks if necessary.
Hauser described how CBDCs and other digital currencies might disrupt the status quo by altering the privileged relationship between central and commercial banks. Under some situations, digital currencies might usher in the competition for credit, lower the number of deposits held by commercial banks and thus reserve rates, and threaten the capacity of central banks to function as a lender of last resort.
The @bankofengland‘s Andrew Hauser argues a #CBDC could have a big impact on the Bank’s balance sheet: “We need to understand these impacts, and build them into the design of CBDCs and our operational toolkits” https://t.co/1rEJ28L34N
— Central Bank Payments News (@cbpaymentsnews) June 1, 2022
In the aftermath of the TerraUSD stablecoin meltdown, Hauser pointed out how such systems may be controlled. In the United Kingdom, any stablecoin reaching systemic size – defined as one with the potential to scale rapidly and become widely used for payments – have to meet the standards expected from a commercial bank. These include stringent central bank supervision, strenuous legal claims, and transparency regarding the assets used to back its currency.
This indicates that stablecoins, even if maintained by private enterprises, would be required to conform to the monetary system established by central banks, functioning as a de facto form of state-backed liability.
CBDCs would be the first new liability used by central banks in centuries. “The dog may be old,” Hauser said, “but it can still perform new tricks!”