The prospects for the UK getting its own central-bank issued digital currency were dampened when the Lords Economic Affairs Committee recently concluded it was unnecessary. In fact, the report says, it is a solution seeking a problem.
Given the interest and excitement in digital currencies, the conclusion is perhaps surprising. And it bucks the trend that is currently sweeping the world. The report notes how there are around 90 countries that are considering CBDCs, and seven countries have already done so – such as the Bahamas and its Sand Dollar and Nigeria’s e-Naira. Meanwhile there are 17 other countries, including China and South Korea, that are piloting digital versions of their currency.
So why would the UK argue that it is not necessary when the rest of the world seems to be chasing this digital currency nirvana? The main gripes are with financial stability and privacy.
“If a CBDC is introduced, it is inevitable that some people will transfer money out of their bank accounts and into CBDC wallets. Without safeguards, such as limits on the amount of CBDC individuals can hold, financial instability could be exacerbated during periods of economic stress as people seek to replace bank deposits with CBDC which may be perceived as safer,” the report stated.
Regarding privacy, if the CBDC is effectively a digital banknote that is issued by the central bank, it wouldn’t be possible to give the digital currency the same anonymity that cash has because of the need to prevent large-scale crime. The report explained the implications of this: “While there are design options that would provide some privacy safeguards, technical specifications alone may be insufficient to counter public concern over the risk of state surveillance. The Bank of England risks being drawn into controversial debates on privacy.”
Remarking on the findings of the report, Lord Forsyth of Drumlean, who chaired the committee, said, “The concept seems to present a lot of risk for very little reward. We concluded that the idea was a solution in search of a problem.”
The report considered the problems that a CBDC were meant to solve, but it concluded there are other ways to address them. There are seven ways a CBDC could help the UK: creating resilience in payments; avoiding the risks of private companies creating digital money; supporting payments innovation; supporting a digital economy; improving the availability of central bank money; an alternative to declining cash; and enabling more efficient cross-border payments. However, the report concluded that a CBDC would unlikely address all seven of these benefits equally well and there are “likely to be alternative solutions for enhancing the payments systems with fewer risks”.
And the UK is already working on those alternative payments systems. The UK government has yet to formally decide whether it will issue a CBDC, but it certainly isn’t high on the agenda with the Payment Systems Regulator, which recently spelled out its strategy. There is no mention of a central bank digital currency, and instead it highlights other focus areas, which are in line with the issues that a CBDC would address.
The payments regulator has four main outcomes, which are ensuring that payment systems meet people’s needs; that users are protected; there is effective competition, and that the payment systems are efficient. And the priority action areas are access and choice; protection; competition and unlocking account-to-account payments. With this focus on account-to-account payments, the regulator aims to ensure that the interbank systems provide the infrastructure, rules and incentives to foster innovation and competition in payments. In line with this vision is the development of the New Payments Architecture – an upgrade to the existing systems that will create the next-generation infrastructure for the UK – which is what the payments industry is likely to be focused on instead of a CBDC in the years ahead.