The House of Commons Treasury Committee stated in its The digital pound: still a solution in search of a problem? report that it is “not clear to us at this stage whether the benefits [of a CBDC] are likely to outweigh these risks.” While acknowledging some potential benefits, the Committee said “their extent is unclear.”
Introducing a digital pound could help support innovation in payments and maintain public access to central bank money. However, the report highlighted “significant risks and challenges” needing to be addressed, particularly around privacy and financial stability.
There are concerns a CBDC could accelerate cash withdrawals from commercial banks, increasing financial instability. The Bank of England and HM Treasury have proposed limits on individual CBDC holdings to mitigate this, but the Committee suggested “a more cautious approach of a lower initial limit” may be wise.
The Committee also raised alarm about the privacy implications of a CBDC enabling the tracking of spending, stating this is “dystopian.” They proposed legislation that introduces a digital pound while explicitly preventing the government or central bank from accessing data beyond the currently permitted limits. There are also concerns about potential commercial misuse of data by private sector digital pound wallet providers.
The Committee also cautioned that the eventual decision on whether to launch a digital pound would need to undergo rigorous cost-benefit analysis by the Bank of England and Treasury. They emphasized policymakers must approach this analysis neutrally rather than viewing a digital pound as an inevitable outcome of investing in further design work.
The report recommends the Bank of England increase transparency by reporting digital pound expenditures separately in its annual reports and accounts starting in 2024. Additionally, it advises the government and central bank to promptly detail the criteria they will use to determine whether or not to ultimately introduce a digital pound.
While the Bank of England and Treasury “judge that a digital pound will be needed in the future,” the Committee said some benefits could perhaps arrive through private sector innovation.
The Committee concurred “there is a risk that the introduction of a digital pound accelerates the demise of physical cash, causing difficulties for those currently reliant on it.”
Andrew Bailey, Bank of England Governor, recently said “I am not convinced about some of the problems that we might be trying to solve” with a CBDC. However, other central bankers feel very differently.
“Banking crises could be a thing of the past if central banks issue their own digital currencies,” said Miguel Ángel Fernández Ordóñez in a November 28 hearing. Whereas bank deposits simply a promise to pay Euros, a CBDC (or digital euros) would represent actual currency issued by the central bank.
This fact would increase the confidence of banks and other financial institutions, and allow the sector to radically deregulate, he said. “That deregulation would have a very important impact on growth because banking is the most protected sector.”