No ‘convincing case’ for digital Bank of England currency, says Lords committee

by | Jan 13, 2022

The Press Association’s City Reporter August Graham has reported today that the creation of an official UK digital currency could lead to a run on the banks during economic downturns, a committee of peers has warned.

The Lords Economic Affairs Committee said that the introduction of a central bank digital currency (CBDC) could pose “significant risks” in the UK.

Bank of England officials are currently among those at 90 central banks around the world who are exploring whether they should introduce their own digital currencies.

“However, the introduction of a UK CBDC would have far-reaching consequences for households, businesses, and the monetary system for decades to come and may pose significant risks depending on how it is designed,” the committee said in a report published on Thursday.

“These risks include state surveillance of people’s spending choices, financial instability as people convert bank deposits to CBDC during periods of economic stress, an increase in central bank power without sufficient scrutiny, and the creation of a centralised point of failure that would be a target for hostile nation state or criminal actors.”

The committee said that none of the witnesses who came before it were able to make a “convincing case” for why the UK needs a retail central bank digital currency.

The witnesses included Bank of England Governor Andrew Bailey and his deputy Sir John Cunliffe, economic secretary to the Treasury John Glen and senior Treasury official Charles Roxburgh, and other experts.

“While a CBDC may provide some advantages, it could present significant challenges for financial stability and the protection of privacy,” the report reads.

However, the peers said that it recognised it is important to investigate the details of a digital currency, and encouraged the Bank of England’s taskforce to continue to look into it.

“We recognise that consumer payment preferences, technological developments and the choices of other countries may enhance the case for a UK CBDC in the future,” it said.

Thomas Cattee, head of white-collar crime at Gherson Solicitors comments:

“Whilst some countries are well on the way to actually implementing a central bank digital currency (“CBDC”), and despite there being some talk of a Britcoin in the UK, it is positive to now see the UK is taking a cautious and measured approach.   For the implementation of a UK CBDC could have far-reaching consequences; not least the potential for increased state surveillance on individual spending and encroachment on individual privacy.  It is reassuring to now see these specific concerns being raised and debated.  However, the UK is also sensibly taking a pragmatic approach and not closing the door to this initiative and has appreciated that there might be a case for a UK CBDC in the future.”

Laith Khalaf, head of investment analysis at AJ Bell, comments: 

“It seems the Lords Economic Affairs Committee is not too keen on the idea of Britcoin, but that won’t stop the Bank of England looking into it. The Lords committee is right to highlight the risks of introducing a digital currency, but if the Bank of England doesn’t create a digital pound, the private sector might.

“The best known cryptocurrencies like Bitcoin are currently too volatile to provide a functional means of exchange, but more recently developed stable coins, pegged to traditional currencies, could open up a new financial frontier. In theory that might wrestle some control of the UK monetary system away from the central bank, which could pose its own dangers. Not to mention the risk that other countries which introduce digital currencies could find themselves with a leg up in the technological arms race.

“Britcoin is best thought of as a digital version of a bank note, which is a token that carries a certain value in pounds sterling. People don’t hold large sums in paper money because it’s more convenient and secure to hold cash with commercial banks, but unlike a stack of tenners, Britcoin would be both easy to manage and safe to store. That’s because rather than residing in your wallet or under a mattress, digital pounds would sit in an account with the Bank of England.

“It’s true that a digital pound could cause widespread disruption in the banking sector if it is introduced, as well as increasing the chance of a run on commercial banks in times of financial stress. If consumers were to adopt Britcoin in large numbers, that could mean a big shift of money out of deposit accounts, which are a key source of funding for commercial banks to lend into the economy. In order to persuade customers to stick with them, banks might have to increase the interest rates on offer on deposits, which would then be passed onto borrowers like mortgage holders, in order to preserve bank margins. Or they may have to end free banking, and start charging for basic services in order to make up for lost profitability. Or the lower availability of funding could mean less appetite by banks to issue loans, which could restrain economic growth.

“The central bank could choose to pay no interest on Britcoin, in order to limit its appeal and dissuade savers from switching their bank deposits across. However, balances would be held directly by consumers with the central bank, and so wouldn’t be subject to the risk of a commercial bank going bust, and being unable to return their deposits. That extra security means savers would be willing to accept a lower amount of interest, a bit like they might with NS&I products. So in a low interest rate environment, even if Britcoin pays no interest, savers might still flock to it because the added security would be worth more than the measly interest they could get from their current account. That’s particularly the case for individuals with large amounts of cash that exceed the £85,000 compensation limit in the event of a UK bank default.

“In times of financial stress, the availability of a secure store for pounds and pence with the central bank could in an extreme case facilitate a run on commercial banks. During the financial crisis, huge queues formed outside Northern Rock, as account holders rushed to withdraw their cash balances as banknotes, despite the risk associated with stuffing cash under the mattress. If savers could simply switch money into a secure digital account with the Bank of England, with just a few taps on their mobile device, that could mean huge sums fleeing high street banks at the first whiff of trouble in the sector. Such a run on deposits would increase the chance of a bank collapsing, and could undermine financial stability in the UK. The Bank of England could limit the amount of digital pounds individuals could hold in order to mitigate this problem.

“There are definitely some potential benefits to Britcoin, for instance facilitating cross border payments, without the eye-watering fees often levied by high street banks. The digital currency would also almost certainly require a supporting infrastructure from the private sector in its interaction with customers, which would be an opportunity for fintech firms. It could also offer an alternative to card payments for online retailers, reducing the risk of provider outages and delays in receiving payment.

“A digital currency could also facilitate micropayments, which could become more economical if the digital currency is successful in driving down transaction charges. This could be useful for low value commercial transactions, opening up the potential for customers to pay small amounts of money for a fleeting service, like reading a solitary news article instead of paying a monthly subscription. A digital pound could also allow money to be programmable, so that transactions occur if certain conditions are met. This could in theory include smart electric meters automatically settling bills based on usage, the automatic payment of taxes at the point of a transaction, or taxpayers claiming immediate tax refunds on pension contributions.

“However, these potential benefits do need to be weighed up against the risks. Particularly when you also consider that any sweeping financial innovation is likely to be a rallying cry for scammers, who will flock to the scene of any confusion to misappropriate funds wherever possible. A digital pound certainly looks worth investigating, and could ultimately deliver considerable benefits to consumers, but the central bank needs to tread very carefully indeed.”


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