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Backers of a UK digital pound have yet to make a convincing case that its benefits would outweigh risks to financial stability and personal privacy, an influential group of MPs warned on Saturday.
The House of Commons Treasury committee said the Bank of England and HM Treasury should continue exploring a central bank digital currency, but urged both to “proceed with caution” because of “significant risks and challenges”.
These included questions over how the authorities would use digital pound holders’ personal data, and the possibility of households pulling savings from traditional accounts and converting them in periods of bank stress.
Like authorities in other economies including the eurozone, the Treasury and BoE have been examining the case for a central bank digital currency amid falling cash usage and the threat of competition from Big Tech companies.
Around the world, 100 countries are exploring CBDCs, while 11 have already launched one, according to the Atlantic Council think-tank.
The idea is to create an electronic alternative to cash that is riskless and universally accepted. Publicly backed digital currencies would sit in wallets on smartphones, fending off the threat that privately controlled digital currencies created by tech groups gain too much traction.
However, officials and politicians around Europe have yet to conclude that the case for CBDCs is convincing enough to outweigh the hazards they could create.
A consultation paper from the Treasury and BoE in February found current trends and technological advances made it likely that a digital pound would be needed by the end of the decade, although the project has yet to be given the go-ahead.
In its report, the TSC sounded a sceptical note without arguing against continued investigation of the idea. “It is not clear to us at this stage whether the benefits are likely to outweigh the risks,” the committee said.
Harriett Baldwin, Conservative MP and committee chair, said: “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.”
The committee noted that the UK could become more susceptible to bank runs if people were able to transfer large quantities of savings into digital pounds quickly in times of market turmoil.
It also raised concerns that if enough bank deposits were moved into digital pounds, interest rates on bank loans might be driven up by 0.8 percentage points or more.
One way of reducing these risks would be to adopt a lower initial limit on the size of individual holdings than the BoE’s proposed £10,000-£20,000 ceiling, the TSC noted. The European Central Bank has discussed a €3,000 digital euro limit per person.
Calling for “strong privacy safeguards” to address concerns that government authorities could snoop on digital pound users, the TSC said it was vital any CBDC did not worsen financial exclusion by accelerating the demise of cash.
In a joint statement on Saturday, the Treasury and Bank of England said they would respond formally to the report in due course.
“We will also shortly publish the response to our consultation paper setting out the next steps,” they said. “We have always been clear [that] a digital pound would only ever be introduced alongside cash and that protecting individual privacy is paramount in any design.”
Robert Johnson is a UK-based business writer specializing in finance and entrepreneurship. With an eye for market trends and a keen interest in the corporate world, he offers readers valuable insights into business developments.
