The idea of creating a digital pound should not even be considered until the UK government and Bank of England address concerns over data privacy and the increased risk of bank runs, a parliamentary committee has warned.
MPs on the Treasury select committee said that while it was true that the rollout of a central bank digital currency could trigger fresh innovation and competition in the payments sector, serious questions remained about whether the positive effects outweighed the risks and costs.
The MPs said in a report they were worried that creating an electronic form of currency – held directly with the Bank of England rather than commercial lenders such as Barclays, NatWest or Santander – could pose risks to the UK’s financial stability without careful management.
That includes the increased risk of bank runs, if customers were able to quickly and easily switch their bank deposits into digital pounds, particularly during times of financial stress or panic. Rapidly withdrawing their bank deposits from commercial lenders into digital pound accounts at the Bank could “increase the risk of bank failures”, the MPs said.
However, switching to digital pounds could cause problems in normal times by fuelling higher interest rates on bank loans, given that lenders would need to replace funding that would otherwise come from deposits with more expensive funding raised through wholesale markets. The Bank estimated that if 20% of bank deposits turned digital, it could result in a corresponding 20 basis point rise in interest rates on commercial loans.
“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 the committee’s Conservative chair, Harriett Baldwin.
MPs said ministers also needed to “alleviate privacy concerns” that the government or third parties could misuse personal data, by either tracking or controlling how users spend their digital funds. “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 committee said.
While the Bank and Treasury have been consulting on, and are now in the “design phase” of a potential digital pound, a final decision on whether to launch the project may not come until the second half of this decade.
In the interim, Baldwin said additional attention should be paid to access to physical cash. “We must also keep a close eye on ensuring that any retail digital pound does not worsen financial exclusion for those reliant on physical cash. The digitisation of money can’t, in any way, leave those people behind,” he added.
“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.”
The Bank and Treasury said in a joint statement that they welcomed the report and would respond in due course: “We will also shortly publish the response to our consultation paper setting out the next 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.”
