By Howard Schneider

NEW YORK (Reuters) – Improvements in digital funds and the potential adoption of a central financial institution digital foreign money might drive central banks to overtake how they conduct financial coverage, doubtlessly rising their steadiness sheets and the instruments used to regulate rates of interest, Lorie Logan, government vice chairman of the New York Federal Reserve, stated on Thursday.

Logan, who heads the market operations for the New York Fed, was talking generically in regards to the affect of digital improvements on all central banks, not on the implications of a central financial institution digital foreign money for the Fed. The last word affect, she stated, would rely on how a digital providing is designed, how broadly it’s supplied to banks, companies or households, and whether or not it pays curiosity.

However she and different audio system at a Columbia College and New York Fed symposium agreed that central banks’ potential journey into the world of cryptocurrencies and stablecoins might immediate dramatic modifications in how financial coverage is performed, and pose challenges in protecting management of rates of interest and setting the dimensions of the central banks’ steadiness sheets.

“The innovation occurring in cash and funds has the potential to change the prevailing…financial system upon which present financial coverage implementation frameworks are

designed,” stated Logan, who might be taking on as president of the Dallas Federal Reserve this summer season. “How issues evolve from right here is unsure, and the affect of those improvements could possibly be revolutionary, or extra evolutionary.”

Most international central banks are not less than exploring whether or not to ascertain their very own model of a digital foreign money.

If these find yourself drawing deposits away from legacy banks, for instance, it might drive central banks to extend their very own steadiness sheets to supply extra liquidity to the system.

“In some circumstances, the steadiness sheet may need to regulate quickly due to surprising giant shifts in legal responsibility demand,” she stated.

“In an surroundings with new private and non-private digital currencies, liquidity backstops for conventional banks could develop into much more necessary,” she stated, referring to conventional short-term lending instruments that central banks provide to industrial banks and different monetary establishments.

Digital currencies “might improve market effectivity,” she stated, “however it might additionally result in swings in deposit flows” that might impact the short-term rates of interest central banks attempt to management.