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Bank of England Publishes Working Paper on Central Bank Digital Currencies (CBDCs)

Recently, the Bank of England published a staff paper that detailed the possible scenarios of risks and financial stability of central bank digital currencies (CBDCs).

According to this paper, there are three models of CBDC that are dependent on the sectors that have access to CBDC. These sectors range from narrow ones whose access to CBDC is limited to banks and non-bank financial institutions (NBFIs), to those whose access is direct and indirect and this access is usually extended to households and non-financial firms.

The first model is the Financial Institutions Access model which the paper explains that it is limited only to banks and non-bank institutions.  These institutions’ capability to interact with the central bank to purchase and sell CBDC in exchange for eligible securities is direct. However, the financial institutions in question are not allowed to issue assets to households and firms that are backed by central bank funds.

The second model as descry bed by the paper is the Economy-wide Access model. This is based on the assumption that access to CBDCs is wholly granted to banks and NBFIs, households, and firms. In this case, a CBDC acts as money for all the agents in the economy. As explained in the first model, only banks and NBFIs interact directly with the central bank in order to purchase and sell CBDCs. According to the report, “households and firms must use a CBDC Exchange to buy and sell CBDC in exchange for deposits.”

The last model is the Financial Institutions Plus CBDC-Backed Narrow Bank Access model. In this one, access is limited to banks and NBFIs. Here, there is one institution that acts as a ‘narrow bank.’ This one provides ‘’ financial assets to households and firms that are fully backed by a CBDC, but that does not extend credit.’’

The report goes further to suggest that there are no grounds to believe that the introduction of a CBDC would negatively affect private credit or on total liquidity provision to the economy. Even with this clean bill of health, Central banks are carefully studying the introduction of CBDCs and how they may affect the banking ecosystem.

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