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The digital pound: A new form of Marmite for the financial sector?

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A committee of MPs has urged the Bank of England to ‘proceed with caution’ when considering whether to commit the country to a digital pound.

6th Dec 2023
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Love it or hate it, the development of the digital pound continues. Following the joint consultation from the Bank of England (the BoE) and HM Treasury earlier this year the Treasury Committee (the Committee) has now released their view on a “digital pound”.

Perhaps tellingly, the report is titled “The digital pound: still a solution in search of a problem?” with the committee concluding that the development of a Bank of England retail digital pound should ‘proceed with caution’.

To recap, a digital pound is a digital version of Sterling issued by the BoE and is also called a central bank digital currency (CBDC). The report succinctly sets out the difference between different forms of money and that there is significant interest in CBDCs, with 130 countries exploring a CBDC representing 98% of global GDP. A digital pound would not, certainly in the short term, replace physical cash and would exist alongside it following any introduction.

The Committee’s report identifies very few benefits which are outnumbered by the risks and challenges. The key concerns will not come as a surprise to followers of this topic, namely:

  • Privacy: As a digital pound will not be anonymous, the Committee states there needs to be “strong safeguards” put in place to protect privacy and to ensure that law enforcement cannot use BoE data beyond what is already permitted.
  • Data protection: Users may not know (and some might not care) how their information may be used. Therefore, the Committee considers it vital for it to be transparent about how user data would be collected and used.
  • Financial stability: Most money in circulation is from commercial banks. The Committee highlighted the risk that if savers start moving their money from commercial banks to the BoE, particularly at times of financial stress, this could accelerate bank runs. Therefore, the Committee recommended that the maximum investment limit be lower than that proposed by the BoE.
  • Financial inclusion: Increasing access to banking facilities has previously been raised as being a benefit. However, the Committee cast doubt on this, commenting that there is a risk that a digital pound could result in “accelerating the demise of physical cash”.
  • Will the Digital Pound have interest? There are still no plans for the digital pound to pay interest. However, interestingly, the Committee recommended that this be kept under consideration to ensure that any design does not prevent interest being paid in the future. 

The Committee stated that “the Government and Bank of England must resist the temptation to believe that a digital pound can “fix problems it can’t”. It also stated it supports further consultative work on the design of a digital pound to enable it to be launched, but only if the benefits outweigh the risks.

The story about the introduction of a digital pound is not over, however, with the government committing to a vote in Parliament before any introduction it would be fair to say that more convincing benefits need to be found. 

Replies (9)

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By FactChecker
06th Dec 2023 18:43

"Love it or hate it"? It's difficult to see why the first of those options is even on the table.

* “The digital pound: still a solution in search of a problem?”
* “report identifies very few benefits which are outnumbered by the risks and challenges”
* “Government and BoE must resist temptation to believe a digital pound can "fix problems it can’t"”

Considering the launch of a digital pound "only if the benefits outweigh the risks" may be an uphill struggle in a landscape with a dearth of any undisputed (let alone quantified) benefits ... and is hardly a conclusion that needed a Treasury Committee to generate it!

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By Justin Bryant
07th Dec 2023 09:49

Unless someone can convincingly explain to me why the current £GBP is not already fully digital (which it is as it can exist purely as electrons in your bank account and can move from one bank account to another digitally therefore), then this is just a load of guff. Unless you want to bypass the banking system perhaps, but then cash already does that job quite well. https://www.bbc.co.uk/news/business-67636571

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By JustAnotherUser
07th Dec 2023 10:12

Ok ill try to explain a few things which they will never want to talk about, its an election loser but I'm convinced this is the path we are on with a CBDC....

CBDC (digital pound) can have smart-contracts built into it...

Let's go tin-hat on the matter....

-Jenny gets her benefits in CBDC instead of GBP
-The contract now stops Jenny from buying cigarettes with her £££, and limits alcohol spending to 3%
-Processed food spending is limited
-Spending on fruit and veg is incentivised and subsidised
- Asda won the CBDC contract so now Jenny gets 10% off in Asda vs Tesco for using her CBDC in Asda
-Jenny cant withdraw cash and buy drugs
-Jenny is now incentivised by the smart contract to buy certain goods, in certain places and all this data can get consumed by big brother, geo tagged and tracked to the penny, destination and time of day
-Jennies CBDC spending habits shows her spending every weekend in north wales, Jenny gets flagged as more likely to have additional income from that dodgy caravan rent she doesn't declare
-Mike, Jennies partner who apparently lives 200 miles away at his mums, so Jenny can claim single parent is found to be geo tagged in the same area every week, at the same shops, flagged for fraud

rinse repeat for benefits, pensions and more.

PAC reports today that “levels of fraud and error in benefit expenditure are unacceptably high”, with the Department for Work & Pensions overpaying an “eye-watering” £8.6 billion in 2021-22. £6.5 billion of that figure was due to fraud

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Replying to JustAnotherUser:
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By Justin Bryant
07th Dec 2023 10:46

Yes; there are only downsides and no upsides per my above comment, unless you are into a Big Brother totalitarian state of course.

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Replying to Justin Bryant:
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By Justin Bryant
07th Dec 2023 14:04

It's basically meretricious.

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Replying to JustAnotherUser:
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By fitzroy
07th Dec 2023 12:47

This is not tin-hat stuff, the reality is that a CBDC can be controlled as you note. Agusten Carstens, the head of the Bank for International Settlements (the central bank of central banks) has explicitly stated such:

"...the key difference with the CBDC is that central banks will have absolute control on the rules and regulations that will determine the use of the CBDC and also we will have the technology to enforce that..."

What is also important to note is that, as the article states: "Most money in circulation is from commercial banks". The word 'from' in this sentence means 'issued by' commercial banks when they make what is referred to as a 'loan'.

Most people do not realise that all 'loans' whether to private individuals or corporations or to the Gov is how new money is created.

See BoE Q1 2014 bulletin Money Creation in the Modern Economy: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creatio...

Thus, commercial banks do not actually 'transfer' funds they already own when they make a 'loan'. The process of making a 'loan' creates new money which the bank then 'deposit' into the account of the 'borrower'. It is all already digital, as another reply on here states.

The key difference though, between the current digital money on account (issued by commercial banks) that we already use via the banking system, ie everything that is not coins (issued by the Treasury) or paper notes (issued by the BoE), is that CBDCs will be issued and controlled by the Bank of England and NOT, as currently the case, by commercial banks.

All commercial bank issued money is issued as debt, we live in a debt-based financial system where the banks issue the money (fiat currency) and receive the interest on same.

So the real questions are:

1. how does the banking world feel about CBDCs being issued by central banks and effectively removing their, extremely lucrative, monopoly on receiving interest on the money they currently have a licence to create.

2. how does the population feel about potentially having their every transaction monitored, and quite likely controlled by the state for whatever reason they feel fit. And whilst we currently live in a democracy, and the party line will be 'for your safety' or to 'control fraud' or to 'mitigate climate change' or whatever, do we feel that any Government is actually competent (and honest) enough to make those decisions on our behalf and enforce them, when we see £35billion (yes, with a 'b') was spent, and wasted, on a defunct track and trace system at the start of lockdown.

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By Duggimon
07th Dec 2023 10:28

I'd like to see any parliamentary consultations, debates, and certainly votes, restricted to only those members who can demonstrate at least a basic understanding of what digital currency is, what it does, how it works and why it exists, because I have zero faith more than maybe 5% of the current lot have even the slightest clue.

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Replying to Duggimon:
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By FactChecker
07th Dec 2023 11:59

Quite ... especially as most of even that 5% seem content to only investigate how it *could be made to* work and why *they might want* it to exist - aka 'what's in it for my pet projects and me'.

But I guess that applies to nearly all topics considered by Parliament nowadays.

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Replying to Duggimon:
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By Open all hours
07th Dec 2023 12:20

If we restrict parliamentary debates to only those who understand what they are listening to and talking about we can reduce the size of the chamber of the commons substantially.
Think you’re on to something.

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