UK Parliament Committee Sees More Risks Than Benefits in CBDCs

The Economic Affairs Committee at the U.K. House of Lords published a report on January 13 casting doubts about the benefits of creating a retail Central Bank Digital Currency (CBDC) in the U.K. and sending a message to the Bank of England (BoE) that any proposal would need parliamentary approval. 

The committee acknowledged that a CBDC could have some benefits for consumers, though not many, but the risks associated with bank disintermediation or cybersecurity outweighed those benefits. “We have yet to hear a convincing case for why the U.K. needs a retail CBDC,” said the committee in its report. 

The title of the report already indicated the Lords’ view — “CBDCs: a solution in search of a problem?” The report raises questions like, “To what problem is a CBDC the answer? What is the precise threat posed by privately issued digital currencies? How can a CBDC ensure strong privacy safeguards while also meeting financial compliance rules?” These questions are addressed to the Joint Taskforce, formed by the BoE and The Treasury, as it is exploring the potential of a retail CBDC. 

Over 90 central banks are exploring CBDCs, and in the view of the committee, they have two common motivations. First, central banks are concerned that big tech companies could issue their own digital currencies to the users of their networks, enabling them to accrue excessive market power. Second, central banks are concerned by the decline in the use of physical cash, which some have said anchors public confidence in the monetary system. However, the Lords don’t seem to have found compelling reasons to justify that the creation of a CBDC is the best way to tackle these concerns. 

See Also: More Central Banks Announce CBDC Plans to Defend Monetary Home Turf vs Cryptos 

In addition, the lords said that the introduction of a CBDC in the U.K. would have far-reaching consequences for households, businesses and the monetary system, including state surveillance of people’s spending habits, banking disintermediation and the creation of a centralized system that would be the target of cyber-attacks. 

The report doesn’t go as far as suggesting that the U.K. shouldn’t have a retail CBDC, but it raises significant questions about the motivations behind this initiative. One by one, the report is dismantling all the arguments that are usually made by central banks to work on the issuance of CBDCs. For instance, while there is a risk that big tech companies create private money, the Lords suggest that regulating these entities is a better option than creating a CBDC.  

One of the questions raised is currently a discussion in many countries: how any CBDC system would balance the traceability of each transaction with the right of privacy for individuals, preserving the anonymity that cash offered. Although some technical specifications could provide certain anonymity, a CBDC would likely offer the BoE access to consumers’ spending habits, and this information could potentially be used for monetary policy. “While the Governor of the Bank of England told us that he did not see CBDC as a way to implement monetary policy, we note his successors may disagree. Such measures may increase the Bank of England’s role and influence in the economy, and any changes to the Bank’s monetary policy toolkit should be scrutinized carefully,” says the report. 

The committee has a slightly more positive view on “wholesale” CBDC. Unlike retail CBDCs, the wholesale would only be used in transactions between financial institutions, and in the view of the committee this could support the U.K.’s competitiveness as an international center. 

See Also: Bank of England to Ramp Up Talks on Crypto Rules as Data is Elusive 

Overall, the report lays down the questions and doubts that any policymaker should have around the creation of CBDCs as a countermeasure to private stablecoins. The report doesn’t provide many answers, but it urges the Joint Taskforce to include all these points in a public consultation that will be launched in 2022. As a last message, since this report comes from Parliament, there is a reminder to the BoE and the government that any proposal should be scrutinized by Parliament in due course.