The chief economist for the Bank of England, Andy Haldane, says digital currencies could reduce the country's prevalence of negative interest rates. In a statement, Haldane further spoke on the pros and possible risks that widely-accepted digital currencies have on the financial system.
Across the highly developed financial systems, negative interest rates become a problem as citizens are not incentivized to save. The Zero Lower Bound problem, also known as Zero Nominal Lower Bound¹, occurs when the short-term nominal interest rates are at or near zero, causing a liquidity trap. Andy states that this issue arises from the
“technological constraint on the ability to pay or receive interest in physical cash, whether positive or negative.”
According to the statement, Haldane claims that a widely-accepted digital currency could be the solution to negative interest rates.
“In principle, a widely-used digital currency could mitigate, if not eliminate, that technological constraint by enabling interest rates to be levied on retail monetary assets.”
In a conference held earlier in the week, Haldane spoke on the benefits and risks that digital currencies pose – including the sovereign central bank digital currencies (CBDC) and private stablecoins. He states that digital currencies would bring along a “structural shift” and profoundly benefit financial stability.
Haldane further explained this concept as “narrow banking,” whereby there’s a division in the payments and credit-based activities across the banking system. Using digital currencies on a broader scale could set up a stable and functioning banking system mitigating the risks arising in the banking system.
Historically, the banking sector faces risks from duration mismatches on trading bank’s balance sheets – a problem that can be solved by widely-accepted digital currencies, Haldane said.
“In principle, separating safe payments and risky lending activities could lead to a closer alignment of risk and duration on the balance sheets of those institutions offering these services.”
By introducing digital currencies, the banking system would reduce its “intrinsic instabilities” by introducing a two-way route for narrow banking – “narrow banking for payments (money backed by safe assets) and limited purpose banking for lending (risky assets backed by capital-uncertain liabilities).”