The UK House of Lords Economic Affairs Committee published a report on January 13 that casts doubt on the benefits of creating a UK retail central bank (CBDC) digital currency and sends a message to the Bank of England (BoE) that any proposal would need parliamentary approval.
The committee acknowledged that digital central bank currencies can have some, if not many, benefits for consumers, but the risks associated with banking intermediation or cybersecurity outweigh those benefits. “We have not yet heard a compelling case for why the UK needs a digital currency for retail direct mail,” the committee said in its report.
The title of the report already indicated Lords’ point of view – “CBDCs: A Solution in Search of a Problem?” The report raises questions such as, “What problem do central bank digital currencies answer? What exact threat do private digital currencies pose? How can the CBD ensure robust privacy safeguards while also meeting financial compliance rules?” Joint Action, set up by the Bank of England and the Treasury, as it explores the potential of central bank retail currencies.
More than 90 central banks are exploring digital central bank currencies, and from the committee’s point of view, they have two common drivers. First, central banks are concerned that big tech companies could issue their own digital currencies to users of their networks, enabling them to gain excessive market power. Second, central banks are concerned about the decline in the use of physical cash, which some have said is boosting public confidence in the monetary system. However, it does not appear that the Lords have found compelling reasons to justify that the creation of a CBDC is the best way to address these concerns.
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In addition, Lords said the introduction of a central bank digital currency in the UK would have far-reaching consequences for households, businesses and the monetary system, including state monitoring of people’s spending habits, a lack of banking intermediation, and the creation of a centralized system that would be the target of cyberattacks.
The report does not go so far as to suggest that the UK should not have a direct mail retail digital currency, but it does raise important questions about the motivations behind the initiative. The report deconstructs one by one all the arguments that central banks typically make for working on digital central bank currencies. For example, while there is a risk that big tech companies will create private money, Lords suggest that regulating these entities is a better option than creating a central bank digital currency.
One of the questions currently under discussion in many countries is how a central bank digital currency system can balance the traceability of every transaction with the right to privacy for individuals, while maintaining the anonymity that cash offers. Although some technical specifications can provide some anonymity, it is possible that a central bank digital currency will provide access to the Bank of England to the spending habits of consumers, and this information can be used in monetary policy. “While the Governor of the Bank of England has told us that he does not see the CBDC as a means to implement monetary policy, we note that his successors may disagree. Such actions may increase the BoE’s role and influence in the economy, and any changes to the Bank’s monetary policy toolkit should be carefully examined,” he said. says the report.
The committee has a slightly more positive view of “wholesale” central bank digital currency. In contrast to retail digital central bank currencies, wholesale will only be used for transactions between financial institutions, and in the opinion of the committee this could support the UK’s competitiveness as an international hub.
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Overall, the report sets out the questions and doubts that any policy maker should ask about creating crypto-currency-based digital currencies (CBDCs) as a countermeasure to private stablecoins. The report does not provide many answers, but it urges the joint task force to include all these points in the public consultation that will be launched in 2022. As a final message, as this report comes from Parliament, there is a reminder to the BoE and the government that any proposal must be made. Examined by Parliament in due course.