The creation of an official digital currency in Britain could increase the risk of a run on the banks in an economic downturn, an influential House of Lords committee has found.
The committee, whose members include Lord King of Lothbury, the former Bank of England governor, expressed serious reservations about the introduction of a central bank digital currency, or CBDC, dubbed “Britcoin” by Rishi Sunak, the chancellor.
The Bank has overstated the benefits of such a currency, the report by the Lords’ economic affairs committee found, while the risks are considerable. It concluded that there was “no convincing case” for Britcoin, while potential dangers included the risk of bank runs, privacy issues and the possibility of making the UK vulnerable to attack by hostile governments.
The Bank and the Treasury are conducting a formal consultation into a digital currency this year after a report from the Bank last year laid out seven potential benefits.
These included making the payments system more resilient, speeding up payments and providing a better, state-backed alternative to digital currencies linked to the pound than might otherwise be developed by the private sector.
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They envisaged a digital currency that would sit alongside cash and bank deposits. Pegged to sterling, it could be used to make everyday payments.
Lord Forsyth of Drumlean, chairman of the committee, said that such a currency “would have far-reaching consequences for households, businesses and the monetary system”.
He added: “We found the potential benefits of a digital pound, as set out by the Bank of England, to be overstated or achievable through less risky alternatives”.
He said that the Bank and the Treasury were “barking up the wrong tree” if they envisaged Britcoin “as a defence mechanism” against rival cryptocurrencies proposed by giant technology companies. It was better simply to regulate them, he said.
Facebook is one of the leaders in preparations for so-called stablecoins — digital currencies operating on a blockchain platform pegged to traditional currencies such as the dollar or the pound.
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The report, Central Bank Digital Currencies: A Solution in Search of a Problem?, is the second time the committee has questioned Bank policy. Last July it expressed serious doubts about quantitative easing — the stimulus policy of electronically creating money and using it to buy government bonds — calling it “a dangerous addiction”.
In a list of potential drawbacks to a digital currency, the committee said there was a danger that in periods of financial uncertainty, ordinary depositors would convert conventional pounds into their digital equivalents to protect against possible bank failures, increasing the pressure on them.
“Without safeguards, such as limits on the amount of CBDCs individuals can hold, financial instability could be exacerbated during periods of economic stress as people seek to replace bank deposits with CBDCs, which may be perceived as safer,” it said.
It also warned about privacy issues, saying that to guard against large-scale criminal activity there would have to be safeguards against anonymous transactions. That could expose the government and the Bank to accusations of using the new currency as “an instrument of state surveillance”. Also the centralised digital ledger needed could become “a target for attack from hostile states and non-state actors”.
The committee identified some potential advantages of a “Britcoin”, such as it being a spur to innovation and competition in the payments system. For example, in theory a digital pound could be set to be spent by a deadline or on particular products or services. A CBDC could help to make cross-border payments quicker and cheaper. A pared-back currency available for financial institutions only might also address some of the difficulties.
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However, Lord Forsyth concluded: “We took evidence from a variety of witnesses and none were able to give us a compelling reason why the UK needed a CBDC. It seems to present a lot of risk for very little reward.”
More than 90 central banks are exploring the potential of CBCDs. Seven nations, including the Bahamas and Nigeria, have launched digital currencies.
Behind the story
It’s hard to say who has discomfited the world’s central bankers more — Xi Jinping or Mark Zuckerberg.
The Chinese president is charging ahead with plans for a central bank digital currency. The Winter Olympic Games in Beijing next month are expected to be used as a platform to showcase the People’s Bank of China’s innovative digital yuan, accessed through its
eCNY wallet. Meanwhile, the Facebook chief has raised the spectre of a private sector digital currency, or “stablecoin”, that could challenge the existing order and change the way the world thinks about money. Talk about Facebook’s “libra”, now renamed “diem”, has quietened in recent months, but the perceived threat remains.
It was the possibility of a widely used currency outside its control that likely spurred Beijing into action. Losing control of the money supply is unthinkable for authorities in any country, let alone a one-party state.
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Doing nothing makes other central banks look complacent, Luddite dinosaurs about to be made irrelevant by new technology. Having lost control of inflation in some parts of the world, the duty to do a good job of overseeing the world’s financial plumbing is even more important.
At least 90 central banks, including the Bank of England, are rushing to explore digital currencies of various sorts, most pegged to their traditional currencies. These are very different from privately promoted cryptocurrencies such as bitcoin. Yet, as the Lords’ economic affairs committee points out, the benefits seem to be outweighed by potential risks. It believes everyone is getting so carried away with the whizzy technology that they’ve forgotten whether there is a problem to solve.
As for the likes of Zuckerberg and diem, the better option may be to regulate them rigorously, not try to out-compete them.
