A bank run during economic downturns is a realistic scenario if an official British digital currency were to be created, 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 this morning.
“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.”
“While a CBDC may provide some advantages, it could present significant challenges for financial stability and the protection of privacy.”House of Lords report
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.
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.
Laith Khalaf, head of investment analysis at AJ Bell in London, said this morning that “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.
He said it is “right” that the Lords committee highlights the risks of introducing a digital currency, but “if the Bank of England doesn’t create a digital pound, the private sector might,” Khalaf added.
“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.”Laith Khalaf of AJ Bell in London this morning
“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,” he said.
“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,” Khalaf noted.
“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,” Khalaf concluded.