##economic and monetary stability with a federal reserve – backed digital currency | piie see for instance innovation to serve the public interest - speech by andrew bailey | bank of england bank of england 4. digital currencies may affect the way central banks deliver monetary control over and above any impact that digital currencies may have on the transmission mechanism, they could also have implications for how central banks achieve ‘ monetary control ’ : i. e. ensuring that short term market rates are aligned with official rates chosen by policy makers. 10 today, most central banks achieve this control by ensuring they at least meet banks ’ demand for central bank reserves, and remunerate those reserves such that market rates trade near or at the official rate. other things equal, flows into digital currencies issued or backed by the central bank, will drain reserves from the system. that could complicate monetary control if it causes banks to bid up for reserves, pushing up on short term market rates relative to official levels. such effects – ingloriously known as ‘ autonomous factors ’ in central banking jargon – are nothing new. increases in physical banknotes or government deposits, for example, also drain reserves – and scaling that historical variation by the sort of estimates for cbdc size shown in chart 2 suggests that day to day variation in cbdc demand would not pose materially greater uncertainty ( the orange bars in chart 6 ). sharper and less predictable inflows, e. g. during a period of stress – proxied in the purple bar in chart 6 using the extreme tail of existing autonomous flows – could however drive rather larger volatility. source : bank of england, bank calculations. this issue, and others discussed in my remarks, are also well covered in this 2018 report by the bank for international settlements ’ committees on markets and payment and market infrastructures : central bank digital currencies ( bis. org ). bank of england whether this matters for monetary control depends on the level of reserves at the point digital currencies are introduced, and the type of monetary control regime being operated. as of today, most major central banks use so - called ‘ floor ’ systems, with a level of reserves ( injected via qe ) that far exceeds most estimates of aggregate demand from the banking system. with such abundant reserves, even quite large unexpected variations in reserves holdings need not threaten monetary control ( ‘ zone a ’ in chart 7 ). that may change as central banks unwind their qe holdings.

scale, chart 1 compares two stylised benchmarks – the stock of banknotes ; and 20 % of retail commercial bank deposits2 – to the size of central bank balance sheets between the period before the global financial crisis and today. in the uk, the upper end of that benchmark range is nearly half the size of the bank of england ’ s balance sheet today, and six times that in 2007. this is the assumption used in the illustrative scenario in section 3 of the bank ’ s 2021 discussion paper new forms of digital money | bank of england, and reflects the share of uk deposits that is non interest bearing. bank of england sources : individual central banks ’ published data, imf, bank calculations. those are big numbers. but they aren ’ t unprecedented in the history of central banking. in the uk, even the top end of the range in chart 1 would still leave the stock of publicly - provided means of payment at around the levels seen in the mid - 20th century ( chart 2 ). this underscores the point that, while the technology for any future cbdc may be new, the use of the central bank balance sheet to provide state - backed transactional money would not be : indeed, it is one of the oldest functions of central banks. bank of england sources : bank of england, imf. 2. stablecoins that are truly stable may have much the same impact as public authorities reflect on the case for cbdcs, private sector providers have been developing so - called ‘ stablecoins ’, which claim to be pegged to the value of fiat currencies. i say ‘ claim ’, because recent weeks have suggested such promises may be less than fully credible. the value of terrausd – once one of the larger ‘ stablecoins ’ by market capitalisation – fell to zero in just a few days. and tether, sometimes asserted to be the backbone of the cryptocurrency ecosystem, lurched precariously below parity for a period ( chart 3 ). these gyrations have multiple causes. but ‘ stable ’ they are not. and the lack of complete, real time, information on the assets backing the promise of convertibility, 3 means that holders of such coins must accept at least the possibility of finding themselves badly out of pocket. such ‘ buyer beware ’ warnings may be sufficient for coins that are only in niche use. but they cannot be enough for any that reach systemic scale.