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Lords warn on Bank of England digital currency

The economic affairs committee pours cold water on state-backed digital currency idea
Lords warn on Bank of England digital currency
  • Committee wants Parliament to have final say on any digital currency
  • BoE is one of over 90 central banks looking at the issue

The introduction of a state-backed digital currency by the Bank of England (BoE) poses “significant risks” and should be voted on by Parliament if plans are brought forward, a committee of the House of Lords has warned.

A report from the House of Lords economic affairs committee, which includes former BoE governor Mervyn King as a member, found the arguments for a UK central bank digital currency to be unconvincing.

It highlighted risks around state surveillance of consumer spending, financial stability, central bank power and “the creation of a centralised point of failure that would be a target for hostile nation states or criminal actors”.

A joint taskforce between the BoE and HM Treasury was set up last April to examine the potential creation of a central bank digital currency (CBDC). There are more than 90 central banks currently looking at the issue.

A CBDC is different from cryptocurrencies such as Bitcoin and Elysium, which are issued through private mechanisms and not backed by a central authority. The BoE would issue and back CBDC as a form of electronic money, not as a new currency, which consumers and companies could use for purchases – it would function like a ‘digital banknote’.

The BoE has said that a CBDC could help with payment system resilience and competitiveness, and would be safer for users than new instruments such as stablecoins.

Central banks have also argued that one of the main benefits of launching CBDCs would be to combat currency risks from the technology giants. There are concerns from bankers that companies like Meta Platforms (US:FB) will introduce their own digital currencies, with uncertain results for financial systems given their market power.

Meta announced plans in 2019 for a currency called Libra, now known as Diem, but it is yet to get off the ground.

The Lords found this argument to be lacking, though. While they agreed that companies launching digital currencies is a risk, the report said that CBDCs “may not be a necessary or complete response” to the threat.

A UK CBDC “would have far-reaching consequences for households, businesses and the monetary system for decades to come”, the report said. It argued that there are many key questions that the joint taskforce still needs to answer before any move towards a CBDC is made.

It was concluded by the committee that the UK Parliament must be allowed to scrutinise and vote on any state-backed digital currency proposals, including on issues around governance and costs.