The rise in the usage of digital currency can result in massive bank withdrawals, putting financial stability at risk and affecting the whole economy according to Bank of England. This is because a lot of individuals would become interested in investing their funds in these currencies as they don’t afford the usual disadvantage of putting money in banks.
However, there is a new type of digital currency known as Stablecoins which the central bank plans to start issuing to users as they are based on the traditional currency value and are designed to track government-backed currencies.
This new currency would be a welcomed addition because it can be issued by banks but writing on the impact of wide-scale digital currency adoption, Bank of England warned that taking deposits out of current accounts and saving accounts and turning them to digital currency may threaten bank’s stability. You can read more about that on Profits through the Oil Profit.
Citing a scene where more than five per cent of the UK businesses and households change the funds they deposited into digital currency, the bank says such a move would increase the costs of operation for high-end banks since they would lose a main source of income. In turn, this would affect borrowing costs and availability.
The Central Bank also states that if private stablecoins become widely used, this could affect the central bank’s ability to control inflation and promote economic growth through setting interest rates. According to the report, there is a high degree of uncertainty about how the change will affect providing credit and loans.
To solve this issue of crypto investment affecting banks in the UK, the Central Bank of England is proposing to introduce a digital currency, named “Britcoin” by Rishi Sunak. According to the bank, it has not yet decided to go forward with plans but is considering its benefits and risks/
According to Andrew Bailey, central bank governor, governments, central banks, as well as society at large need to carefully consider the prospect of stablecoins and central bank digital currencies. “As digital money evolves, we need to ask the difficult and pertinent questions.”
Several economists claim that creating a digital currency would be supported by the government with the mandate of the banking sector, for example, because clients couldn’t deposit money and pay directly at the Bank of England. The extent the bank’s digital currency will be accepted is dependent on its features and on whether threadneedle street offered directly to consumers.
To maintain financial stability in the UK economy, Etay Katz says banks play a crucial role. The suggestion that digital assets could involve direct relationships between the client and the central banks could trigger a significant systemic shock, he continued, and banks may not be able to adjust their investment models.
As cryptocurrencies and online platforms grow rapidly, some have advocated a digital currency from the central bank to establish a more sustainable and democratic financial system. There is an urgent need for central bank digital currency, as the reduction of cash and the rise of cryptocurrencies make it necessary for people not to surrender Money’s future to unaccountable private interests.
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