The advent of digital currencies and blockchain technology has engendered great consternation and interest from policy makers around the world. The concept of bitcoin or other cryptocurrencies may be the next step in fiat currency. Having made the leap from barter to coins and then to paper notes is not the end of it all. Removing the physical quality of money may be just around the corner – and the Bank of England is one institution that is willing to contemplate this profound possibility.

In case you missed it, the Bank of England published a working paper on the “Macroeconomics of Central Bank Issued Digital Currencies”. Effectively the researchers John Barrdear and Michael Kumhof asked “what if” the Bank of England created its own Bitcoin? What, on earth, would that mean for the economy and the rest of the world?

Creating a “central bank digital currency” (CBDC) or a “universally accessible and interest-bearing central bank liability, implemented via distributed ledgers that competes with bank deposits as medium of exchange” is not that far-fetched. The technology already exists but this has never been done. It should be more surprising that more central banks are not considering the same. The rise of private digital currencies has already pulled a certain amount of transactions outside the purview of state banks. The BoE document reviews both the pros and the cons of a CBDC reviewing structural issues, price, output stability and financial stability. Of course one of the biggest benefits for consumers is the potential to reduce the cost of transactions and perhaps cut traditional banks entirely out of the equation.

The BoE white paper is based on the theoretical as not much empirical data exists quite yet. The authors close with more questions than answers. But just posing the question “what if” is enough to get the conversation started.

The Bank of England White Paper on Digital Currencies is embedded below.