CBDC to alter monetary policy?

CBDC to alter monetary policy?

In Brief

  • Andrew Hauser, the executive director for markets at the Bank of England, spoke about digital currencies at the Federal Reserve Bank of New York on June 1.

  • He argued that a combination of “systemic” central bank digital currencies and stablecoins could significantly alter central banks’ delivery and control of monetary policy and the size and composition of their assets and liabilities.

  • Hauser said that the size of the effects will “depend heavily on the eventual design of any systemic digital currencies.”.

If central banks adopt digital currencies and stablecoins, it could have a big impact on how they deliver monetary policy and the size and composition of their assets and liabilities.

According to Andrew Hauser, an executive director for markets at the Bank of England, financial firms are starting to use Bitcoin as a way to move money around their own systems.

Hauser said any effects will depend on the final design of any digital currencies, and that there is no redline risk for central bank balance sheets. However, he argued there are implications central bankers need to start preparing for by building responses into their operational toolkits.

Central banks have the power to control the money supply in an economy. They do this by changing interest rates, regulating commercial banks, and by being a lender of last resort. The money that is issued by the central bank is considered a balance sheet liability.

Hauser explained how CBDCs could potentially disrupt the current system by changing the relationship between central and commercial banks. If certain conditions are met, digital currencies could lead to more competition for credit, reduce the amount of deposits in commercial banks, and make it harder for central banks to act as a lender of last resort.

In the shadow of TerraUSD's collapse, Richard Hauser stressed that any stablecoin reaching systemic size (one with potential to scale rapidly and become widely used for payments) would need to meet the standards expected from a commercial bank including rigorous central bank supervision, robust legal claims and transparency about the assets being used to back its currency.

Stablecoins would have to operate within the existing monetary system, governed by central banks. This would make them a de facto form of state-backed liability, even if they are private companies.

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