Duncan ScottThe Treasury Select Committee (the Committee) has commented on Bank of England (BoE) and HM Treasury proposals for a retail ‘Central Bank Digital Currency’ (CBDC) or ‘digital pound’.
Such a retail digital pound would represent a new, electronic form of money supplied by BoE and available to households and businesses to make payments, akin to a digital banknote. This differs from a wholesale CBDC which would be used for payments between financial institutions, for example to settle foreign exchange or securities transactions.
The Committee has highlighted that where a wholesale CBDC might realistically be seen as a gradual evolution of the existing payments landscape, the proposed digital pound could pose new risks to the UK’s financial stability without careful management. The Committee gave the example of an increased susceptibility to bank runs if people are able to switch large amounts of bank deposits into digital pounds quickly in times of market turmoil, increasing the risk of bank failures.
Further concerns were registered regarding estimates that a steady switching of some bank deposits into retail digital pounds could increase the interest rates on bank loans by 0.8 percentage points or more.
By way of mitigation, the Committee suggested that the value of retail digital pounds each individual is initially allowed to hold is limited to a sum smaller than the £10,000-£20,000 limit currently mooted by the BoE and Treasury in their consultation.
Further concerns were raised around the data privacy issues a digital pound could pose and suggestions were made as to how the ability of government to access people’s data might be constrained. The Committee was also keen to ensure that the development of a digital pound would not exacerbate existing issues around financial inclusion.
Overall, the Committee was supportive of the BoE continuing its work on the digital pound provided that this does not come at the expense of its primary objectives of controlling inflation and maintaining financial stability.