The cross-party Lords Economic Affairs Committee has published its ‘Central bank digital currencies: a solution in search of a problem?’ report.
The report has concluded that there is no convincing case for why the UK needs a central bank digital currency (CBDC).
The committee found that while a CBDC may provide some advantages, it could present significant challenges for financial stability and the protection of privacy.
A CBDC is different to a crypto asset such as Bitcoin, which is privately issued and not backed by any central party.
A CBDC would be a form of central bank electronic money that could be used to make everyday payments – in essence a ‘digital banknote’.
The Government has not yet decided whether to introduce a CBDC.
If a CBDC is introduced, it is inevitable that some people will transfer money out of their bank accounts and into CBDC wallets.
The report advises that, without safeguards such as limits on the amount of CBDC individuals can hold, financial instability could be exacerbated during periods of economic stress as people seek to replace bank deposits with CBDC which may be perceived as safer.
The report adds that, to prevent their use in large-scale criminal activity, any CBDC system could not support anonymous transactions in the same way that cash can be spent anonymously.
While there are design options that would provide some privacy safeguards, technical specifications alone may be insufficient to counter public concern over the risk of state surveillance.
The Bank of England risks being drawn into controversial debates on privacy.
A CBDC could enable central banks to conduct forms of unconventional monetary policy more easily.
While the Governor of the Bank of England told the committee that he did not see a CBDC as a way to implement monetary policy, the committee noted that his successors may disagree.
Such measures may increase the Bank of England’s role and influence in the economy and any changes to the Bank’s monetary policy toolkit should be scrutinised carefully.
The committee recommended that the Joint Taskforce publishes its assessment of the potential for monetary policy via a CBDC in its 2022 consultation to assist this scrutiny.
The introduction of CBDCs by the UK’s strategic competitors may have consequences for western foreign policy.
For example, the SWIFT messaging system enhances the US’s ability to implement sanctions.
However, there is political will in certain countries, such as China, to create alternatives to the existing international payments system using CBDC technology.
Lord Forsyth of Drumlean, Chair of the House of Lords Economic Affairs Committee, said: “The introduction of a UK central bank digital currency would have far-reaching consequences for households, businesses, and the monetary system. We found the potential benefits of a digital pound, as set out by the Bank of England, to be overstated or achievable through less risky alternatives.
“We took evidence from a variety of witnesses and none of them were able to give us a compelling reason for why the UK needed a central bank digital currency. The concept seems to present a lot of risk for very little reward. We concluded that the idea was a solution in search of a problem.”
The Committee’s other key findings and recommendations include:
At 3pm on Tuesday January 18 2022 the Lords Economic Affairs Committee is hosting an event, ‘Central Bank Digital Currencies: Plotting a Path Ahead for the UK’, with the Royal United Services Institute’s Centre for Financial Crime and Security Studies.
Find out more information about this open-to-all event.
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