UK lawmakers wary of launching retail CBDC due to privacy, financial stability concerns

The U.K. Parliamentary Treasury Committee issued a stern warning about the development of a retail central bank digital currency (CBDC), or ‘digital pound,’ and its potential hazards to financial stability.

Lawmakers urged the Bank of England and H.M. Treasury to thoroughly consider data privacy and financial stability issues before advancing with the implementation of this new form of currency.

The proposed retail digital pound, designed to be distinct from the wholesale CBDC used for financial institution transactions, was envisioned as an electronic equivalent of fiat money that would be accessible to both individuals and businesses for payment purposes.

While the Bank of England and H.M. Treasury have both acknowledged the future need for a digital pound, members of the parliament remain cautious.

Key Concerns

Key concerns centered on the risks a retail CBDC might pose to the U.K.’s financial stability. The Committee highlighted fears of increased bank runs, where rapid transfers from bank deposits to digital pounds during market turmoil could amplify the risk of bank failures.

Additionally, concerns were raised about the potential rise in interest rates on bank loans, possibly by 0.8 percentage points or more, due to a gradual shift from bank deposits to digital pounds.

To mitigate these risks, the Committee suggested implementing a smaller holding limit on retail digital pounds per individual than the initially proposed £10,000 to £20,000 range.

The M.P.s also urged the government to “alleviate privacy concerns” and ensure that regulators and other entities would not be able to misuse personal and financial data generated by the introduction of a CBDC.

The lawmakers also highlighted that the government should not be able to control how people spend their money.

Cost-benefit analysis

The Committee recommended the establishment of stringent regulations and legislated protections for data access. It emphasized the importance of ensuring that introducing a digital pound did not hasten the decline of physical cash.

According to the lawmakers, cash remains a vital financial resource for many in the U.K., and replacing it would exacerbate financial exclusion.

The Committee raised concerns about the significant cost of developing and introducing a CBDC. It urged the Bank of England and Treasury to maintain transparency regarding these costs through annual reporting.

The Treasury Committee said it supports the Bank of England’s ongoing efforts to design a potential retail CBDC. Still, it stressed that the project should not detract from the institution’s primary objectives of controlling inflation and maintaining financial stability.

The lawmakers added that introducing a retail digital pound should not be seen as inevitable, and a detailed cost-benefit analysis must back its development.