The UK Parliament’s Treasury Committee urged the Bank of England and HM Treasury to ‘proceed with caution’ in its work on a retail central bank digital currency (CBDC). and published a paper on the topic. It requests the potential holding limits for a digital pound to be lower than the £10,000-£20,000 currently proposed. It made other recommendations on privacy, financial inclusion and monetary policy.
“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,” said the Chair of the Treasury Committee, Harriet Baldwin.
“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.”
Maintaining access to central bank money as cash usage declines is a key motivation as well as innovation. The report states “There are significant risks and challenges to be worked through, particularly in relation to privacy and financial stability. It is not clear to us at this stage whether the benefits are likely to outweigh these risks.”
Digital pound risks
The financial stability risks relate to money moving out of the banking system. They estimate lending costs will increase by 0.8% as a result, and urge lower holding limits. However, the limits could rise over time.
While the Bank of England doesn’t plan the digital pound to offer interest, the Committee would like it researched. It wants to know about the CBDC’s potential usage offering interest and the impact on monetary policy.
Regarding privacy, they want to ensure that legislation prevents the government or Bank of England from using private payment data for any purposes other than those already permitted for law enforcement. A government “may in future be tempted to try to make use of such a powerful source of information.” Additionally, they are concerned about the potential use of private payment information by wallet providers.
The Committee would like to see a cost benefit analysis before the issuance of a potential digital pound. It’s concerned about how much the current research is costing. It also wants to know the criteria for a launch decision.
Meanwhile, the paper also briefly discussed a wholesale CBDC saying that’s more of an evolution. The Bank of England is currently upgrading the RTGS and while not designed for a CBDC it will support DLT settlements.
Some members visited the United States to discuss the topic. They noted they heard evidence of the potential benefits of a wholesale CBDC for reducing settlement risks. When it came to a retail CBDC they said there is no U.S. urgency in developing a retail CBDC.