MPs from Treasury Committee warn retail digital pound could increase risk of bank runs, while posing privacy and interest rate risks
MPs have warned that the creation of a “digital pound” should not be considered until the government and the Bank of England have addressed the considerable risks of such a project, which include data privacy issues and an increased risk of bank runs.
The Treasury select committee said a central bank digital currency could increase innovation and competition in the fintech sector, such benefits may not outweigh the risks and costs.
Some twenty-one countries including China, Australia and South Africa are piloting an official digital currency, while 11 including Jamaica and Nigeria have launched one and about 130 countries are exploring the potential of such a system, according to the think tank Atlantic Council.
In announcing they were considering a digital pound in February the Treasury and the Bank of England said they wanted to ensure the Bank of England retained control over the UK’s core financial infrastructure, eliminating the danger that a private group could take the lead with a closed system.
Financial stability risk
In its report the Treasury committee said an official digital pound could pose risks to the UK’s financial stability without careful management.
If customers were able to easily switch their bank deposits to digital pounds – which would be held directly by the Bank of England – this could “increase the risk of bank failures” in times of stress or panic, the commitee said.
Even in normal times, a trusted digital currency could mean higher interest rates on commercial loans as lenders would need a way to replace funding that would otherwise have come from deposits with funding raised through wholesale markets.
“It must be clearly evidenced that a retail digital pound will provide benefits to the UK economy without increasing risks or leading to unmanageable costs before any decision is taken to introduce it into our financial system,” said commitee chair Harriett Baldwin.
MPs also said the government must “alleviate privacy concerns” that the government or private third parties could misuse increased data collected on users.
“These concerns could be mitigated through robust regulation and legislated protections related to the ability of any future government to access people’s data,” the report said.
Baldwin said attention must also be paid to whether such a project would hasten the demise of physical cash, upon which many people rely.
“The digitisation of money can’t, in any way, leave those people behind,” she said.
‘Proceed with caution’
“While we support the Bank of England’s plan to continue working on the design of a potential retail digital pound, I would urge them to proceed with caution and maintain a genuinely open mind as to whether one is actually needed,” Baldwin said.
The Bank and Treasury are currently in the “design phase” for a potential currency, but a final decision on whether to launch one may not come until the second half of the decade.
The Bank and Treasury said in a joint statement they would respond in due course and would also “shortly” publish the response to its consultation paper setting out further steps.
“We have always been clear a digital pound would only ever be introduced alongside cash, and that protecting individual privacy is paramount in any design,” the organisations said.