MPs have called on the government to ensure that a digital pound does not ‘exacerbate financial exclusion’, as the UK moves towards launching a Central Bank Digital Currency (CBDC) issued by the Bank of England.
Members of the parliamentary Treasury Committee were responding to a consultation initiated by the Bank, alongside HM Treasury, which had come to the conclusion that it is ‘likely that the digital pound will be needed in the future’.
Launching a UK digital currency, however, would need to meet certain criteria and factor in certain risks, the MPs argue, such as the potential for a CBDC to accelerate the ‘demise of physical cash’. This is a process which has been occurring for a number of years, and which was particularly sped up during the pandemic.
MPs shared concerns that further acceleration of this process could lead to greater financial exclusion in the UK. Additionally, an estimation that bank loan interest rates could rise by 0.8% or more due to the switching of bank deposits into retail digital pounds was also highlighted.
Under the Bank of England’s current proposals, a hold limit of £10,000-£20,000 in digital currency has been suggested – MPs argue that this should be smaller to minimise the risk of rising interest rates.
Also citing potential economic concerns, legislators stressed that the Bank and Treasury should regularly and transparently report on financial costs of developing and launching a UK CBDC.
Chair of the Treasury Committee, Harriett Baldwin MP, said: “It’s important that the Bank of England and Treasury are open to modernising the use of money in a way which keeps pace with technology while preserving economic stability and individual security.
“It must be clearly evidenced that a retail digital pound will provide benefits to the UK economy without increasing risks or leading to unmanageable costs before any decision is taken to introduce it into our financial system.
“We must also keep a close eye on ensuring that any retail digital pound does not worsen financial exclusion for those reliant on physical cash. The digitisation of money can’t, in any way, leave those people behind.”
The Bank of England first issued its consultation on CBDC adoption in February last year, and it seems that eventual launch of the digital currency is a key long-term priority for the institution.
In August, the Bank sought to add expertise and inform its CDBC strategy by forming the Academic Advisory Group (AAG), bringing together specialists on monetary policy, finance and competition economics.
Additionally, the Bank is also a notable supporter of greater crypto-regulation, having issued a call for authorities to make progress in this area following the collapse of FTX earlier this year.
MPs’ feedback on the CBDC consultation comes shortly after the publication of the UK Autumn Budget, which saw the government pledge £500m to support technological development, as well as the publication of the Payments Review, the latter of which focused chiefly on Open Banking adoption.
What is clear however is that the UK government under PM Rishi Sunak is keen to see the UK fintech sector move forward. This is an area Sunak has been a vocal proponent of since his days as Chancellor of the Exchequer.
The Bank of England and Treasury’s plans to launch a CBDC certainly fall within the scope of this strategy. However, in its report the Treasury Committee has called into question views that CBDC adoption is ‘inevitable’, asserting in response that digital currency must be ‘underpinned by clear cost-benefit analysis’.
Baldwin said: “While we support the Bank of England’s plan to continue working on the design of a potential retail digital pound, I would urge them to proceed with caution and maintain a genuinely open mind as to whether one is actually needed.”