The UK Parliamentary Treasury Committee has issued a stern warning about the development of a central bank digital currency (CBDC), or ‘digital pound’, and the potential dangers to financial stability.
Lawmakers urged the Bank of England and HM Treasury to thoroughly consider data privacy and financial stability issues before moving forward with the implementation of this new form of currency.
The proposed digital retail pound, designed to differentiate from the wholesale CBDC used for financial institution transactions, was seen as an electronic equivalent of fiat money that would be accessible to both individuals and businesses for payment purposes.
Although the Bank of England and HM Treasury have both recognized the future need for a digital pound, members of Parliament remain cautious.
Main concerns
Key concerns focused on the risks a retail CBDC could pose to the UK’s financial stability. The Committee highlighted fears of an increase in bank runs, where rapid transfers of bank deposits into digital pounds during market turmoil could increase the risk of bank failures.
In addition, concerns were raised about the possible increase in bank lending rates, possibly by 0.8 percentage points or more, due to a gradual shift from bank deposits to digital pounds.
To limit these risks, the Committee proposed introducing a smaller digital retail pound holding limit per individual than the initially proposed range of £10,000 to £20,000.
The MPs also urged the government to “address privacy concerns” and ensure that regulators and other entities cannot misuse personal and financial data generated by the introduction of a CBDC.
Lawmakers also emphasized that the government should not be able to control how people spend their money.
Cost-benefit analysis
The Committee recommended the introduction of strict regulations and legal protections for access to data. It stressed the importance of ensuring that the introduction of a digital pound would not hasten the decline of physical cash.
Cash remains a vital financial resource for many in Britain and replacing it would worsen financial exclusion, lawmakers said.
The committee expressed concern about the significant costs of developing and introducing a CBDC. It urged the Bank of England and the Treasury to maintain transparency about these costs through annual reporting.
The Treasury Committee said it supports the Bank of England’s ongoing efforts to design a potential retail CBDC. However, it stressed that the project should not undermine the institution’s primary objectives of controlling inflation and maintaining financial stability.
The lawmakers added that the introduction of a digital retail pound should not be seen as inevitable, and that a detailed cost-benefit analysis should support its development.