The House of Lords report warns that home-grown British digital currency could undermine the economy

The creation of an official UK digital currency could undermine the country’s financial stability and lead to a run on banks during economic downturns, a parliamentary report has warned.

The rapidly growing market for digital currencies such as Bitcoin and Ethereum could threaten the economic system because they are unregulated.

As a result, central banks such as the Bank of England (BoE) are investigating whether they can launch their own digital currencies or CBDCs.

It is currently working with the US Federal Reserve, the European Central Bank and the central banks of Canada, Japan, Sweden and Switzerland on a digital currency design.

BoE warns digitization transforms national and international payment systems, and governments must consider how to respond.

However, a report from the all-party The upper house The Finance Committee said the introduction of a central bank’s digital currency (CBDC) could pose “significant risks” in the UK.

It could pose risks to UK households, businesses and the monetary system in the coming decades, the report said.

The report stated: “These risks include government monitoring of people’s consumer choices, financial instability as people convert bank deposits to the CBDC during periods of economic stress, an increase in central bank power without adequate control and a centralized fault point that would be a target for hostile nation states or criminals. actors.”

Digital Currencies: What Are They?

The best known cryptocurrencies are probably bitcoin or ethereum. They are digital assets that can be transferred electronically between users without intermediaries or supervision of banks and governments.

How do you know how much is in your account?

Transactions are usually stored on a decentralized ledger known as a “blockchain”. It allows users to verify and record transactions so assets can be tracked. Unlike conventional banking, there is no need for a central clearing body.

Can you use it as cash?

No. Pound is a widely accepted medium of exchange. A store of value as well as a unit of account. Cryptocurrencies are often traded as speculative assets instead of being used to make payments.

What about stack coins?

These are said to bridge the gap between cryptocurrencies and ordinary currencies. They are designed to be used more easily to buy goods and services, and their market value is pegged to a currency, usually the US dollar. Examples include Tether and USD Coin. Some are popular ways to shop digitally.

Are these different from ‘digital banknotes’?

A central bank’s digital currency (CBDC) differs from the privately issued Bitcoin in that it will be backed by a central bank. A CBDC would be a form of electronic central bank money that can be used to make daily payments. The UK government has not yet decided whether to introduce a CBDC, but others have already, including the Bahamian sand dollar and Nigeria’s e-Naira.

They said none of the witnesses who testified, including Bank of England Governor Andrew Bailey and his deputy Sir John Cunliffe, were able to make a “convincing case” as to why Britain needs a digital retail currency.

“While a CBDC may provide some benefits, it can present significant challenges to financial stability and privacy,” the report found.

“We recognize that consumer payment preferences, technological developments and other countries’ choices may improve the situation in the future,” it said.

Central banks are concerned that large technology companies may issue their own digital currencies, which may compete with central banks and their control over monetary systems.

Facebook has already announced plans to launch a digital currency called Libra.

Finance Minister Rishi Sunak told the committee that the Facebook Libra project prompted the government to ask: “What do we think of a global stablecoin over which we have no control? What does it mean? How should we regulate it? Should we worry about it? financial stability? ” He said it catalyzed the work around a UK version of digital currency.

More about Cryptocurrency

In December 2020, Libra was renamed Diem and its ambitions were scaled down. But Olaf Scholz, then Germany’s finance minister, described Diem as a “wolf in sheep’s clothing”.

Once established, privately issued digital currencies can enable large technology companies to exercise excessive market power and reshape how payments are made, affecting the functioning of the monetary system.

Lords said such risks were real, but Britain’s own digital currency “may not be a necessary or complete answer.”

Private corporations or companies that are large enough “to compete with existing payment systems can and should be regulated,” it states.

The rapid technological change is driving central banks’ interest in CBDCs, according to the report. In the last 10 years, a dramatic increase in new forms of electronic payment with the result that established banks and payment operators face a challenge in terms of market share.

An early study by the BoE suggested that among the reasons for adopting CBDCs were avoiding the risks of new forms of private money creation, increased competition, efficiency and innovation in payments, as well as meeting future payment needs in a digital economy and addressing a rejection in cash.

Lords argued that a decline in the use of cases and the increased use of debit and credit cards – trends accelerated by the pandemic – still did not justify the introduction of a digital banknote. They argue that there are better ways to improve payment systems with fewer risks.

Once established, privately issued digital currencies can enable large technology companies to exercise excessive market power and reshape how payments are made, affecting the functioning of the monetary system.

The introduction of CBDCs by the UK’s strategic competitors could have implications for Western foreign policy. For example, the SWIFT messaging system improves the United States’ ability to implement sanctions. However, there is political will in some countries, such as China, to create alternatives to the existing international payment system using CBDC technology.

Lord Forsyth of Drumlean, Chairman of the Lords Committee, said: “The introduction of a British central bank’s digital currency would have far-reaching consequences for households, businesses and the monetary system. We found that the potential benefits of a digital pound, as described by Bank of England, were overvalued or obtainable through less risky alternatives.

“We took evidence from a number of witnesses, and none of them were able to give us a convincing reason why Britain needed a central bank’s digital currency. The concept seems to pose a great risk of very little reward. “We concluded that the idea was a solution to the problem.”

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