Launch of Digital Pound Must Not Be Considered Inevitable: Treasury Committee Warns

A general view of the Bank of England in London on Sept. 21, 2023. Aaron Chown/PA Wire

While research should continue, the launch of a digital pound must not be considered inevitable, the Treasury Committee of Parliament warned on Saturday.

The committee published its first report on creating a UK Central Bank Digital Currency (CBDC), saying it’s likely to be costly and it’s still not clear whether the benefits are likely to outweigh the risks.

While there are “some potential benefits” to creating a digital pound, “their extent is unclear and there are significant risks and challenges to be worked through, particularly in relation to privacy and financial stability,” the committee said.

According to the report, potential benefits a CBDC can bring to the economy include helping innovation in domestic payments and maintaining public access to a form of central bank money. However, the extent of the benefits is unclear, and it’s not clear whether a CBDC is the only way, or the best way to achieve them.

The risks of creating a CBDC include financial instability, privacy and data breaches, and accelerating the demise of physical cash.

The report also said building the infrastructure for a CBDC is likely to be very expensive, and a “rigorous cost-benefit analysis” will be needed.

The BoE and the Treasury “must approach this analysis from a neutral stance—the launch of a digital pound must not be viewed as an inevitable consequence of investing in further detailed design work. The policy question must remain ‘why do it’ rather than becoming one of ‘why not do it,'” the report says.

A retail CBDC is a digital version of cash that’s issued and backed by the central bank, as opposed to bank deposits that are created by private banks, and decentralised cryptocurrencies such as Bitcoin.

With the use of cash dwindling and commercial stablecoins cropping up, most central banks have begun looking at creating CBDCs. According to think tank Atlantic Council’s CBDC tracker, 130 countries are exploring the option, with 11 of them having launched a CBDC and 21 in a pilot phase.

The BoE is one of the banks examining the case, consulting on how a digital pound should be designed.

In 2021, the House of Lord Economic Affairs Committee published a report, saying the committee was “yet to hear a convincing case for why the UK needs a retail CBDC.”

In its report published on Saturday, the Treasury Committee also urged the BoE and the Treasury to approach it with caution.

“It is vital that a digital pound does not increase risks to UK financial stability,” the report said.

If a CBDC is launched, the switching of money from bank deposits to digital pounds could trigger a bank run and increase the risk of bank failures.

To mitigate the risk, the BoE has proposed to limit the amount of digital pounds an individual can hold at around £10,000 to £20,000. The proposed cap is higher than the amount being considered at the EU, which is €3,000, according to the Treasury Committee.

“To reduce the risk of large-scale outflows from bank deposits into digital pounds, there could be merit in a more cautious approach of a lower initial limit on individual holdings ... with a view to increasing it over time,” the report said.

A huge concern regarding CBDCs is around privacy and data protection, especially with international chattering at platforms such as the World Economic Forum about the benefit of using programmable CBDC platforms to put expiry dates on money and to control what people can buy.

Trade body Electronic Money Association told the Treasury Committee that “the prospect of having one’s every transaction observed, stored and analysed in perpetuity is dystopian, and yet within reach,” the report said.

The BoE has said it will only get anonymised data and won’t take advantage of the programmability of the digital pound. It also said private firms that provide digital wallets for the digital pound may use the programmable infrastructure to provide users with extra functions.

Users may also choose to surrender some data privacy to gain benefits.

The Treasury Committee said strong privacy safeguards “would be vital were a digital pound to be introduced.

“Although the Bank of England and government state that it is not their intention to be able to access users’ data, it is conceivable that they may in future be tempted to try to make use of such a powerful source of information. It is important to guard against this risk in the fundamental design of the digital pound.”

The committee recommended that “any primary legislation used to introduce a digital pound” should ban the government or the BoE from using CBDC data “for any purposes beyond those already permitted for law enforcement.”

It also said CBDC wallet providers must be “robustly regulated” so they can’t misuse users’ data.

Common arguments for CBDCs include greater financial inclusion, but the committee said the benefit is likely lower in the UK, where there’s already a well-functioning payments infrastructure.

On the contrary, a CBDC may make things worse for those who are unable or unwilling to use digital money.

The government and the BoE “must resist the temptation to believe that a digital pound can fix problems it can’t,” the report said, adding it “must not make financial exclusion worse.

“There is a risk that the introduction of a digital pound accelerates the demise of physical cash, causing difficulties for those currently reliant on it.”

The committee said it supports future research on a CBDC, but cautioned that the BoE must control the costs and don’t get distracted from its primary function of controlling inflation and maintaining financial stability.