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Carney: UK central bank digital currency not likely in short term

The Bank of England is not likely to issue a central digital currency for the UK in the short term, according to the Bank's governor, Mark Carney.02 Mar 2018

In a speech at the Scottish Economics Conference at Edinburgh University on Friday, Carney said that the Bank of England "has an open mind" about the possible creation of a central bank digital currency (CBDC), but said "a true, widely available reliable CBDC does not appear to be a near-term prospect".

He highlighted "current technological shortcomings in distributed ledger technologies and the risks with offering central bank accounts for all" as reasons for this.

Carney also said that whether or not a central bank digital currency was desirable would also depend on "the answers to a series of big policy questions".

"A general purpose CBDC could mean a much greater role for central banks in the financial system," Carney said. "Central banks may find themselves disintermediating commercial banks in normal times and running the risk of destabilising flights to quality in times of stress. There are also broader societal questions (that others would need to answer) such as how society balances privacy rights with the extent to which the information in a CBDC could be used to fight terrorism and economic crime."

"A CBDC shouldn’t be a solution in search of a problem or an effort of central bankers to be down with the kids. Especially because there are more immediate ways to give you what you want," he said.

Charlie Clarence-Smith, a specialist in digital currencies and their regulation at Pinsent Masons, the law firm behind, said that he agreed with Carney's assessment.

"There are too many crypto/tokenised 'solutions' being crow-barred into 'problems' that do not exist," Clarence-Smith said. "Identify the problem first and then investigate to see if blockchain technology might be a suitable, cost effective solution to solve it. The proof of concept stage is key in determining this, whether the potential use-case is a payment token, utility, or asset token."

In his speech, Carney set out what he sees as the potential of blockchain, or distributed ledger technology (DLT).

"The technologies underlying crypto-assets, particularly distributed ledger, can: increase the efficiency of managing data; improve resilience by eliminating central points of failure, as multiple parties will share replicated data and functionality; enhance transparency (and auditability) through the creation of instant, permanent and immutable records of transactions; and expand the use of straight-through processes, including with 'smart contracts' that on receipt of new information, automatically update and if appropriate, pay," Carney said.

"These properties mean distributed ledger technology could transform everything from how people manage of their interactions with public agencies, including their tax and medical records, through to how businesses manage their supply chains," he said.

Carney also said that he was of the view that regulating aspects of the cryptocurrencies industry was preferable to placing an outright ban on their use or exchange, as some countries have done, such as China.

"A better path would be to regulate elements of the crypto-asset ecosystem to combat illicit activities, promote market integrity, and protect the safety and soundness of the financial system," Carney said. "The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system."

He cited moves to bring cryptocurrency exchanges within the scope of anti money laundering (AML) rules in the EU and US as an example of the regulatory approach being taken in some jurisdictions, and further backed the treatment of "crypto-assets" as securities.

"In my view, holding crypto-asset exchanges to the same rigorous standards as those that trade securities would address a major underlap in the regulatory approach," Carney said. "So-called initial coin offerings will not be allowed to use semantics to avoid securities laws designed to protect retail investors in particular."

Carney also explained that the Prudential Regulation Authority (PRA) in the UK is looking into how other regulatory requirements, including the holding of capital, apply crypto-asset activities.

"Bringing crypto-assets into the regulatory tent could potentially catalyse innovations to serve the public better," Carney said.