The central bankers' bold new idea: print Bitcoins

When it comes to bitcoin and digital currencies, central banks might be considering the adage: "If you can't beat them, join them." In a research paper published on Monday, economists at the Bank of England advocated that central banks issue their own kind of digital currency. Using the U. S. as a case study, they argued it could give a permanent boost to the economy of around 3%, as well as providing policy makers with more effective tools to tame finan- cial booms and busts.

BOE economists John Barrdear and Michael Kumhof write that "reductions in real interest rates, distortionary taxes, and monetary transaction costs" would boost the economy.

Much like physical cash, digital currencies like bitcoin allow direct payment from one person to another, but they also have all the advantages of bank transfers, because large payments can be made instantaneously across the globe. But the main appeal of bitcoin isn't it's electronic. In fact, most money

that already is: Only about 5% of money in the economy is physical cash; the rest is bank deposits. Rather, a digital currency offers a decentralized way to make payments without needing commercial banks to stand in the middle and record the transaction. Payments are validated by other users in a global network of computers and then updated in a shared record known as the blockchain.

Central banks across the developed world, including the Bank of England and the Bank of Canada, are now studying the potential of this technology. Were central banks to issue digital cash and make it available to the general public, money would exist electronically outside of bank accounts in digital wallets, much as physical bank notes do. This means households and businesses would be able to bypass banks altogether when making payments to one another.

This could trigger a radical reshaping of the financial system.

"Making central bank money widely available could have an impact on deposits held at commercial banks and a knock-on effect on the banking system," the BOE said in a research paper last year, because the new digital money would be seen as a cheaper and safer alternative.

"I don't see how banks could compete," said Peter Stella, former centralbanking head of the International Monetary Fund and director of Stellar Consulting LLC.

Many economists would cheer at the prospect of all the money in the economy being issued by the central bank, instead of existing as current accounts or deposits, which are the liabilities of private banks. One of the authors of the BOE digital-currency paper, Mr. Kumhof, in 2012 co-wrote research for the IMF making the case for so-called full-reserve banking. He argued it could boost the U.S. economy by around 10%.

Key figures in American economics, such as Irving Fisher and Milton Friedman, have also advocated fullreserve banking. Under such a system, banks are forced to back every single deposit they issue to their customers with money at the central bank, essentially turning the central bank into the sole creator of money.