A House of Commons committee has cast doubt on the value of a UK central bank digital currency, saying any advantages are “unclear”.
In a report published on December 2, the Treasury select committee said a UK CBDC could have “some potential benefits to the UK economy”. It could ensure the availability of a central bank-backed currency if cash falls out of use, support financial inclusion and encourage innovation in financial technology.
“The extent of these benefits is unclear, however,” the committee found. “Nor is it yet clear that a digital pound is the only (or best) means of achieving them.”
The Bank of England and the UK Treasury have been working jointly on CBDC since 2021. In February 2023, they began work on designing a digital pound and published a consultation document and a working paper, though no decision is expected on whether to issue a UK digital currency before 2025.
In its report, the committee expressed concerns that CBDC could cause depositors to flee banks for the safety of a digital currency. This process, called financial disintermediation, could significantly raise market interest rates.
At the beginning of the design phase, the BoE and Treasury proposed capping CBDC holdings at £10,000–20,000 ($12,600–25,000) to avoid disintermediation. The committee counselled this might be too generous, saying, “there could be merit in a more cautious approach of a lower initial limit on individual holdings”. Authorities could increase this cap later, the report adds.
The committee urged the central bank and Treasury not to rule out providing interest on CBDC. The two agencies currently plan not to offer interest on the grounds that the digital pound would be a means of payment, not of savings, like cash.
The report also touched on the issue of user privacy. The BoE and Treasury have said the digital currency would not be anonymous, but could only be legally accessed by law enforcement agencies under certain conditions. MPs said this provision should be included in the statute providing for the digital pound.
MPs also worried that a CBDC might drive physical cash out of the economy. “It is vital efforts continue to be made to support those reliant on physical cash,” legislators stressed. The Financial Services and Markets Act 2023 requires the Financial Conduct Authority to ensure access to physical cash.
The report concludes by urging the BoE and the government to detail “the criteria they will use to inform that final decision” on adopting a CBDC. It also urged the BoE to detail its CBDC spending separately, and noted the central bank had budgeted £8 million for CBDC work this year.
The CBDC report is the second in the Treasury select committee’s series of reports on crypto assets. In its first report, the committee advised that “unbacked crypto assets” be regulated like the gaming industry. The UK Treasury did not accept these recommendations.
In late October, departing Bank of England deputy governor Jon Cunliffe forecast the UK would need a CBDC by the end of this decade.
Cunliffe said policy-makers would not need to determine a specific use for a digital pound beforehand, arguing that current technologies are a poor basis for predicting future needs. He referenced Henry Ford’s statement that his contemporaries’ idea of progress was “faster horses”.
In January 2022, the House of Lords economic affairs committee issued its report on CBDC, concluding it had “yet to hear a convincing case for why the UK needs a retail CBDC”.
The committee warned a digital pound could attract deposits from commercial banks and pose questions about consumer privacy. Digital currency could also “enable central banks to conduct forms of unconventional monetary policy more easily”.
Cunliffe said in late February that he did not expect the BoE would use the digital pound as a monetary policy instrument.
