Lords lambast BoE central bank digital currency plansby
The House of Lords Economic Affairs Committee has branded a potential retail central bank digital currency as a ‘solution looking for a problem’ that risks introducing state surveillance of people's spending choices.
A report from the committee concluded that although a central bank digital currency (CBDC) may provide some advantages, the concept currently presents “a lot of risk for very little reward.”
In April 2021, the Bank of England and HM Treasury announced the creation of a joint taskforce to explore the potential of a ‘retail’ CBDC. This would differ from privately issued cryptocurrencies like bitcoin, as it would be a form of electronic money issued by the Bank of England that households and businesses could use to make payments.
Used alongside, rather than replacing, existing currency, it would be denominated in pounds sterling, like banknotes, so £10 of CBDC would always be worth the same as a £10 note.
More than 90 central banks are currently exploring CBDC options with 17, including major economies like China and South Korea, at a pilot stage and preparing possible launches in the near future.
Many developed economies are seeking to use CBDCs as a way to combat the loss of market share to private cryptocurrencies and tackle the rising market power of big tech companies with digital currency plans such as Meta/Facebook. Central banks are also concerned by the decline in the use of physical cash, which some officials believe anchors public confidence in the monetary system.
The Lord’s report, drawn from evidence provided by a variety of witnesses, argued that the introduction of a UK CBDC would have “far-reaching consequences” for households, businesses and the monetary system for decades to come.
Depending on how the final product is designed, the committee believes it may pose “significant risks”, including state surveillance of people’s spending choices, financial instability as people convert bank deposits to CBDC during periods of economic stress, an increase in central bank power without sufficient scrutiny, and the creation of a centralised point of failure that would be a target for cyberattacks from hostile nation-states or criminal actors.
While the Lords’ report took a sceptical view of the CBDC concept in the current environment, it raised several potential advantages, including the ability to provide faster, cheaper, cross-border payment facilities. However, the report went on to outline the international collaboration required to allow such a move to happen and highlighted work underway in both the private and public sectors to improve cross-border payments, which should make them more efficient with or without CBDCs.
Andrew Cregan, head of finance policy at the British Retail Consortium, also told the committee that a widely used CBDC has the potential to increase competition in the retail payments sector, which could reduce the fees charged by the existing payment operators.
However, the report also highlighted significant innovation taking place in the payments market, citing examples such as the growing use of payment apps increasing competition with the major payments networks as they can link directly to bank accounts rather than physical cards.
There was also disagreement on the effect CBDCs could have on financial inclusion. The Bank’s March 2020 discussion paper said that if cash use continued to decline, “there is no guarantee that the current private sector provision of the retail payment systems may meet the needs of all users, leaving underbanked groups of society particularly at risk.
“A well-designed CBDC may also help to boost financial inclusion … by being accessible to a broader range of people, potentially in different formats, than private-sector solutions,” stated the paper.
However, Natasha de Teran from the Financial Services Consumer Panel commented that the digital nature of any CBDC would likely prove to be a barrier for some people excluded from the financial system.
‘Let’s not throw the blockchain baby out with the bitcoin bathwater’
No decision has been made by UK authorities on a CBDC, with a further consultation paper on the issue due later in 2022.
The Lords’ report concluded that while a lot of work remains to be done on the concept, the case for a digital pound may change in the future and therefore the government and the Bank of England “could derive most benefit now by taking action to shape global standards which suit the UK’s values and interests, for example with regard to privacy, security and operational standards.”
In its evidence to the committee, AAT stated that given the international direction of travel towards CBDCs and the rapidly growing use of private-sector digital currencies in the UK, the body “supports meaningful exploration of the advantages and disadvantages of establishing a CBDC”.
“When considering the many negatives of existing digital currencies such as Bitcoin, AAT is inclined to agree with Bank of England Fintech Director, Tom Mutton, who recently stated, ‘let’s not throw the blockchain baby out with the Bitcoin bathwater’”