The UK Parliamentary Treasury Committee has published a severe warning on the development of a retail central bank digital currency (CBDC), or “digital ledger”, and its potential dangers for financial stability.
Lawmakers urged the Bank of England and the UK Treasury to carefully consider issues of data privacy and financial stability before proceeding with the implementation of this new form of currency.
The proposed retail digital pound, designed to be distinct from the wholesale CBDC used for financial institution transactions, was envisioned as an electronic equivalent of fiat currency that would be accessible to individuals and businesses for payment purposes.
Although the Bank of England and the UK Treasury have both recognized the future need for a digital pound, members of Parliament remain cautious.
The main concerns were about the risks that a retail CBDC could pose to the financial stability of the UK. The Committee highlighted fears of an increase in bank runs, where rapid transfers of bank deposits to digital ledgers during times of market turmoil could amplify the risk of bank failure.
Additionally, concerns have been raised that interest rates on bank loans could potentially rise, possibly by 0.8 percentage points or more, due to a gradual shift from bank deposits to digital ledgers.
To mitigate these risks, the Committee suggested implementing a lower per-person retail e-book holding limit than the initially proposed range of £10,000 to £20,000.
MPs also urged the government to “mitigate privacy concerns” and ensure that regulators and other entities cannot misuse personal and financial data generated by the introduction of a CBDC.
Lawmakers also stressed that the government should not be able to control how people spend their money.
The Committee recommended establishing strict regulations and legislative protections for data access. He stressed the importance of ensuring that the introduction of a digital pound does not accelerate the decline of cash.
Lawmakers say cash remains a vital financial resource for many people in the UK, and replacing it would worsen financial exclusion.
The Committee expressed concern about the significant cost of developing and introducing a CBDC. He urged the Bank of England and the Treasury to maintain transparency regarding these costs through annual reporting.
The Treasury Committee said it supported the Bank of England’s continued efforts to design a potential retail CBDC. He nevertheless emphasizes that the project must not undermine the primary objectives of the institution, namely controlling inflation and maintaining financial stability.
Lawmakers added that the introduction of a retail digital pound should not be seen as inevitable and that a detailed cost-benefit analysis must support its development.