The Treasury Committee urges the Bank of England and HM Treasury
to address data privacy and financial stability concerns before
considering the implementation of a retail Central Bank Digital
Currency (CBDC) or ‘digital pound’.
In a new report, the cross-party group of MPs accepted that a
retail digital pound issued by the Bank of England might have
benefits including stimulating innovation and competition in
payments, but questions remain over whether the positive impacts
outweigh the risks and costs.
The Bank of England and HM Treasury have set out their proposed
design for a retail digital pound – a new, electronic form of
money supplied by the Bank of England and available to households
and businesses to make payments, akin to a digital banknote. This
differs from a wholesale CBDC which would be used for payments
between financial institutions, for example to settle foreign
exchange or securities transactions.
In their consultation, the Bank of England and HM Treasury judge
it is 'likely that the digital pound will be needed in the
future’.
Unlike a wholesale CBDC, which would represent more of an
evolution from the current payments landscape, the Committee
expresses concerns about the new risks a retail CBDC or digital
pound could pose to the UK’s financial stability without careful
management. For instance, the UK economy may be more susceptible
to bank runs if people are able to switch large amounts of bank
deposits into digital pounds quickly in times of market turmoil,
increasing the risk of bank failures.
It also registered concerns regarding estimates that a steady
switching of some bank deposits into retail digital pounds could
increase the interest rates on bank loans by 0.8 percentage
points or more.
To mitigate these risks, members suggest a smaller limit on the
value of retail digital pounds each individual is initially
allowed to hold than the £10,000-£20,000 limit currently mooted
by the Bank of England and Treasury in their
consultation.
MPs urge the government to alleviate privacy concerns that
organisations or the Government could misuse personal data
generated by the introduction of a retail digital pound, for
example to monitor or control how users spend their money. These
concerns could be mitigated through robust regulation and
legislated protections related to the ability of any future
government to access people’s data.
In the report, members of the committee highlight the importance
of ensuring a retail digital pound doesn’t exacerbate financial
exclusion by accelerating the demise of physical cash which many
in the UK still rely upon.
The Treasury Committee notes that the next stage of work on a
retail digital pound could incur significant costs and urges both
the Bank of England and Treasury to be transparent about these
costs through annual reporting.
The Treasury Committee is supportive of the further design work
being undertaken by the Bank of England but emphasises that this
project must not distract the institution from its primary
objectives of controlling inflation and maintaining financial
stability. Investing further in this project must not result in
the introduction of a retail digital pound becoming viewed as
inevitable – it must be underpinned by clear cost-benefit
analysis.
Chair of the Treasury Committee, ,
said:
“It’s important that the Bank of England and Treasury are open to
modernising the use of money in a way which keeps pace with
technology while preserving economic stability and individual
security.
“It must be clearly evidenced that a retail digital pound will
provide benefits to the UK economy without increasing risks or
leading to unmanageable costs before any decision is taken to
introduce it into our financial system.
“We must also keep a close eye on ensuring that any retail
digital pound does not worsen financial exclusion for those
reliant on physical cash. The digitisation of money can’t, in any
way, leave those people behind.
“While we support the Bank of England's plan to continue working
on the design of a potential retail digital pound, I would urge
them to proceed with caution and maintain a genuinely open mind
as to whether one is actually needed.”
