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The creation of an official UK digital currency could lead to a run on the banks during economic downturns, a bipartisan committee of peers has warned.
The Lords Economic Affairs Committee said that the introduction of a central bank digital currency (CBDC) could pose “significant risks” in the UK.
Bank of England officials are currently investigating the prospect of issuing a retail CBDC, in a move that has been backed by finance ministers, including the chancellor, Rishi Sunak, and City of London minister, John Glen.
However, “the introduction of a UK central bank digital currency would have far-reaching consequences for households and businesses”, said Lord Forsyth of Drumlean, a Conservative peer who chairs the committee.
It was also noted it could have an impact on the country’s monetary system for decades to come and may pose significant risks depending on how it is designed, according to a report published by the committee.
Lord Forsyth said that the potential benefits of a digital pound, as set out by the Bank of England, were overstated and/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 former Scottish secretary of state continued. “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 witnesses included Bank of England Governor Andrew Bailey and his deputy Sir Jon Cunliffe, Glen and senior Treasury official Charles Roxburgh, among other experts.
When approached for comment, a spokesperson for the Treasury told VIXIO that no decision has been made on whether to issue a CBDC, but that like many countries, the UK is exploring the potential role of a CBDC, which will be informed by consultation and engagement with stakeholders.
The Bank of England, meanwhile, chose not to comment but a source close to the central bank has said that the report will be factored into its investigation into a CBDC.
The response to the committee’s report has been mixed in the City.
“Public trust is based on engagement and this report is an important contribution that sets out many of the questions we all need to explore,” said Adam Jackson, policy chief at Innovate Finance.
A CBDC can take many forms, and assessing these different models is part of the work that needs to take place, he continued. “The report principally focused on a retail CBDC and most of the risks identified relate to this. At this stage, there is arguably a stronger case to start with a wholesale CBDC, and the report’s support for further work on this is welcome.”
CBDCs cannot be viewed in isolation from other developments, including regulation of stablecoin, digital ID and other innovations in payments, Jackson warned. “The House of Lords rightly signals that these need to be considered in a joined-up way.”
"The conclusions of this report are disappointing as it suggests that CBDCs are a solution to a problem that doesn’t exist,” said Jannah Patchay, originating member of the Digital Pound Foundation, continuing to state that this is a very narrow view of innovation.
It is not only about solving challenges but also creating opportunities to make things better, Patchay argued. “There is a well-catalogued set of use cases and applications for CBDCs, including the potential for more effective policy delivery in the public sector,” she suggested.
“CBDCs are one of the key building blocks that will enable the UK's transition to a more sustainable, inclusive digital economy. A well-designed CBDC has the potential to deliver benefits that extend far beyond greater payments efficiencies,” she said, suggesting that having one that offers competitive and attractive features in its design and supporting market infrastructure can also create a platform for innovation across all sectors of the economy.
Meanwhile, others have welcomed the more considered approach and debate that the Lords committee report has garnered.
“It is positive to now see the UK is taking a cautious and measured approach. The implementation of a UK CBDC could have far-reaching consequences, not least the potential for increased state surveillance on individual spending and encroachment on individual privacy,” warned Thomas Cattee, head of white-collar crime at Gherson Solicitors.
It is reassuring to now see these specific concerns being raised and debated, he continued. “However, the UK is also sensibly taking a pragmatic approach and not closing the door to this initiative and has appreciated that there might be a case for a UK CBDC in the future.”
The issues at stake
The committee said that none of the witnesses who came before it were able to make a “convincing case” for why the UK needs a retail central bank digital currency.
As well as the potential for bank runs, which have been flagged by spectators beyond the UK, the report also raises the question of security, suggesting that there is a risk of state surveillance of people’s spending choices, as well as the creation of a centralised point of failure that would be a target for a hostile nation-state or criminal actors.
“While a CBDC may provide some advantages, it could present significant challenges for financial stability and the protection of privacy,” the report says.
Yet, the cross-party group of peers also said that it recognised that it is important to investigate the details of a digital currency, and encouraged the Bank of England’s taskforce to continue to look into it.
“We recognise that consumer payment preferences, technological developments and the choices of other countries may enhance the case for a UK CBDC in the future,” the report said.
The next step being taken by the Bank of England, alongside HM Treasury, is the opening of a consultation on the possibility of a CBDC in 2022, the UK’s finance minister has confirmed.
