and ones on some distant electronic machine, well that ’ s long been the case. and if the word “ currency ” indicates an alternative unit of account – the “ bitcoin ”, for example – nor is this likely to be of enduring significance. you can find goods and services quoted in bitcoin. in the united states, at a rough guess, there may have been as much as $ 5bn worth of such transactions last year2. but in a country where annual consumer spending is twelve and a half trillion dollars, that ’ s a negligible proportion of the total. in the opinion of most i ’ m thinking here of things like direct debits, or the capacity to receive our monthly pay. according to coinbase, around 20 % of bitcoin transactions – worth $ 25bn in total – were for retail purposes. bis central bankers ’ speeches economists, it ’ s pretty unlikely that its use as a means of exchange will become very widespread. it ’ s not just that the value of bitcoin is extremely volatile, though that ’ s certainly been the case ( chart 2 ; see also ali et al ( 2014a and 2014b ) and yermack ( 2013 ) for the shortcomings of bitcoin as a useable money ). one should also recognise that established currencies have a significant built - in advantage. rather like a common language, the benefit to any individual of using a particular unit of account is greater if others use it too. that gives a big head - start to the incumbent. switches do very occasionally happen : degrade a currency sufficiently, via hyperinflation and collapse of the banking system, and people will eventually look for alternatives. but that ’ s generally the sort of thing that has to happen : almost always, these currency substitutions occur only once the existing currency has become deeply compromised3. even then, the thing people naturally reach for is an existing, trusted currency – often the us dollar – rather than some entirely new unit of account. so if it ’ s neither the “ digital ” nor the “ currency ” aspect of bitcoin that matters, what is it that has sparked so much interest? well perhaps a better name for what we ’ re talking about, albeit more of a mouthful, is a “ decentralised virtual clearinghouse and asset register ”. as the quarterly bulletin articles explain, the key innovation in bitcoin is its settlement mechanism. instead of relying on an independent third

door to the possibility of materially negative interest rates ( buiter ( 2009 ), rogoff ( 2014 ), haldane ( 2015 ) ). but that would require explicitly abolishing cash, not just introducing an electronic alternative. as long as it ’ s possible to hold something with a guaranteed nominal return of zero there ’ s a similar lower bound on all other forms of money, whether reserves at the central bank or a more widely available cbdc. leaving aside the question of whether or not you should actively get rid of banknotes8, a purely cash - like version of a cbdc would mainly involve substituting one zero - yielding liability of the central bank for another. it seems to me that the more material effects of a cbdc would arise if it provided competition not just for banknotes but for commercial bank deposits as well. it ’ s not simply that there ’ s more money to play for ( remember how much more is held in bank accounts ). it ’ s that the assets backing the two are qualitatively quite distinct. shifting resources from one to the other might therefore have an important effect on the relative supplies and prices of those assets. charts 3 and 4 make the point. modern commercial banks, whose sterling balance sheets are aggregated in chart 3, have what is called a “ fractional reserve ” structure. their holdings of liquid assets, including reserves at the central bank, are much smaller than their deposit liabilities ( the purple bar ). most of their assets are loans. but loans are “ illiquid ” : there ’ s no secondary market in which to sell them and, at least in the short run, their value to the creditor cannot be easily realised. indeed, when banks attempt to do so – by demanding early repayment or abruptly curtailing lines of credit – they can cause great economic damage, as we ( re - ) discovered after the 2008 – 09 crisis. this “ maturity transformation ” – the combination of on - demand liabilities and illiquid assets – imparts an inherent fragility to commercial banks ’ balance sheets. if everyone tried simultaneously to withdraw a bank ’ s deposits, it wouldn ’ t have enough liquid resources with which to meet the demand. that ’ s why banks are vulnerable to “ runs ”. taken with the economic costs of deleveraging, it ’ s also why society regulates and under - writes the banking system, via deposit insurance and central banks ’ lender - of - last