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Development of a Bank of England retail digital pound should "proceed with caution", UK members of parliament (MPs) have warned in a new report, emphasising concerns around data privacy and financial stability.
The Treasury Select Committee has urged the Bank of England and HM Treasury to address concerns before considering the implementation of a retail central bank digital currency (CBDC) or "digital pound".
The Treasury Select Committee has expressed support for further design work being undertaken by the Bank of England.
However, the committee emphasises that this project must not distract the institution from its primary objectives of controlling inflation and maintaining financial stability.
Indeed, it has also warned that investing further in this project must not result in the introduction of a retail digital pound becoming viewed as inevitable, cautioning that “it must be underpinned by clear cost-benefit analysis”.
Mitigating CBDC risks
What is clear throughout the report is that the MPs are sceptical of a digital pound. Although they accept the necessity of investigating one, the lawmakers are concerned about the risks that it brings about for society.
This echoes counterparts in the European Parliament, where members have recently called on the European Central Bank (ECB) to delay the “realisation” phase of the digital euro until the EU’s legislative package for it has been approved.
The committee, which consists of a cross-party group of MPs, has expressed concerns about the new risks a retail CBDC or digital pound could pose to the UK’s financial stability without careful management.
For instance, they warn that the UK economy may be more susceptible to bank runs if people can switch large amounts of bank deposits into digital pounds quickly in times of market turmoil, increasing the risk of bank failures.
The committee also registered concerns regarding estimates that a steady switching of some bank deposits into retail digital pounds could increase the interest rates on bank loans by 0.8 percentage points or more.
To mitigate these risks, members suggest a lower limit on the value of retail digital pounds each individual is initially allowed to hold, below the £10,000-£20,000 limit currently proposed by the Bank of England and Treasury in their consultation.
“It’s important that the Bank of England and Treasury are open to modernising the use of money in a way which keeps pace with technology while preserving economic stability and individual security,” said Harriet Baldwin, committee chair, in a statement.
“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.”
Stronger controls on privacy needed
MPs have also pushed the government to alleviate privacy concerns that organisations or the government could misuse personal data generated by the introduction of a retail digital pound, for example, to monitor or control how users spend their money.
These concerns, the MPs recommend, could be mitigated through regulation and legislated protections related to the ability of any future government to access people’s data.
In the report, members of the committee also highlighted the importance of ensuring a retail digital pound does not exacerbate financial exclusion by accelerating the demise of physical cash, which many in the UK still rely upon.
These concerns reflect those in the EU, where the possibility of a digital euro is currently being debated by legislators.
Here, for example, the European Commission used its legislation for a digital euro to also introduce legislation that favours the use of physical cash.
The Treasury Committee has also raised concerns that the next stage of work on a retail digital pound could incur significant costs.
In the report, the MPs urge both the Bank of England and the Treasury to be transparent about these costs through annual reporting.
“While we support the Bank of England's plan to continue working on the design of a potential retail digital pound, I would urge them to proceed with caution and maintain a genuinely open mind as to whether one is actually needed,” said Baldwin.
