Earlier this year, the Bank of England and Treasury consulted on a potential future introduction of a retail Central Bank Digital Currency (digital pound).  The House of Commons Treasury Select Committee has now issued a report on it: it is safe to say that its members are somewhat sceptical of a “Britcoin”’s benefits.

The Committee accepts that a digital pound could deliver potential benefits to the UK economy. It could support innovation in domestic payments, while guarding against some risks posed by new forms of private digital money by maintaining public access to a form of central bank money. It could also support the UK’s international competitiveness in payments (and related) technologies, particularly if it is amongst the first major central banks to issue a retail CBDC. 

However, it also says that the extent of these benefits is unclear, and it is not yet clear that a digital pound is the only (or best) means of achieving them. 

The report says that it is vital that a digital pound does not increase risks to UK financial stability. If a digital pound were introduced, it could take time to realise the effect on financial stability and the wider economy in both normal and stressed times. To reduce the risk of large-scale outflows from bank deposits into digital pounds, there could be merit in a more cautious approach of a lower initial limit on individual holdings than the £10,000-£20,000 limit proposed by the Bank of England and Treasury, with a view to increasing it over time.

The Committee also recommends that the Bank of England and Treasury undertake further analysis on the monetary policy impact of paying interest on the digital pound.

Strong privacy safeguards would be vital were a digital pound to be introduced. The Committee recommends that any primary legislation used to introduce a digital pound does not allow the Government or Bank of England to use the data from a digital pound for any purposes beyond those already permitted for law enforcement. It is also concerned about potential misuse of consumers’ data digital wallet providers, especially as the commercial use of this data could form a key part of the business model for wallet providers.

Although some consumers may be happy to share their personal data with payment interface providers in exchange for digital pound wallet services, there is a risk that consumers do not fully understand how their data could be used, or the implications of doing so. It must be transparent to users how their data would be collected and used. There must also be clear, usable opt-outs for those that do not wish their data to be collected and used for commercial purposes. The Committee says that wallet providers must be robustly regulated from both a prudential and conduct perspective, with strong penalties for those that misuse customers’ data. 

The Committee also says that a digital pound must not make financial exclusion worse. A digital pound could speed up the loss of physical cash, causing difficulties for those who rely on it. The Government must work to improve digital literacy and inclusion in the UK. Future digital pound wallet providers must grant access to at least basic digital pound services for all UK adults. 

Future decision on whether to launch a digital pound

The Committee concludes that there are potential benefits to a digital pound but their extent is unclear and there are significant risks and challenges to be worked through, especially regarding privacy and financial stability. The Committee says it is not yet clear if the benefits are likely to outweigh these risks. It supports further work on the design of a digital pound so it can be launched if benefits increase, and risks are mitigated. However, the Bank of England must not be distracted from its core tasks of controlling inflation and maintaining financial stability. The Committee is also concerned about costs and says that the eventual decision on whether to launch a digital pound will need to be subject to a rigorous cost-benefit analysis. To help ensure a rigorous and balanced approach is taken towards assessing the case for launching a digital pound in future, the Committee recommends that the Government and Bank of England set out in more detail, as soon as possible, the criteria they will use to inform that final decision.

Back in 2021, the House of Lords Economic Affairs Committee carried out an inquiry about central bank digital currencies and was also sceptical. The launch of a digital pound is still some years away and with a General Election looming it will be of interest to see if legislation is taken forward by the next government.