The potential benefits of a British central bank digital currency (CBDC) are ‘overstated or achievable through less risky alternatives’, according to a House of Lords report.
The UK upper house’s economic affairs committee’s report, ‘Central bank digital currencies: a solution in search of a problem?’, concludes that there is ‘no convincing case’ for why a digital pound is needed. It states that while a CBDC may provide some advantages, it could present significant challenges for financial stability and users’ privacy protection.
The committee’s chairman, Lord Forsyth, said that no-one who provided oral evidence to the committee had provided a “compelling reason” why the UK needed a CBDC.
“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,” Forsyth said.
The 52-page report does, however, provide at least nuggets of cheer for those championing the merits of CBDCs. For example, a wholesale CBDC (a CBDC for use between financial institutions) ‘may help to further enhance efficiency in securities trading and settlement’; and, more broadly, the committee states that while there appear to be no significant advantages for the UK in being an early adopter, consumer payment preferences, technological developments and other countries’ decisions ‘may enhance the case for a UK CBDC in the future’.
CBDC consultation on the way
The publication of the report, whose downbeat title was also the title of a speech delivered last August by the US Federal Reserve System’s Chris Waller, arrives at the start of a year during which UK authorities plan to launch a consultation into CBDC.
HM Treasury (HMT) and the Bank of England (BoE) announced the next steps of their explorations into a potential digital pound a couple of months ago, describing a UK CBDC – should it get the go-ahead – as constituting a ‘major national infrastructure project’. The earliest issuance date would be in the ‘second half of the decade’ – so, after 2025.
HMT and the BoE announced a CBDC taskforce to ‘co-ordinate the exploration’ of a potential digital pound in April last year and the line-ups for two discussion groups – the ‘CBDC Engagement Forum’ and ‘CBDC Technology Forum’ – in September (the former comprises 32 people focused on policy considerations and functional requirements and the latter, which comprises 26 members, is considering issues including ledger design and data security).
Among its key findings, the Lords’ report states that a CBDC poses two main security risks: first, that individual accounts could be compromised through cyber-security weaknesses; and, second, that a centralised CBDC ledger could be a target for attack from ‘hostile state and non-state actors’. It adds that while no system design can guarantee absolute security, any CBDC system ‘will need to be adaptable to emerging security threats and technological change, including fast-developing quantum computing’.
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 Lords also warn. The BoE ‘risks being drawn into controversial debates on privacy’, the report points out.
It also states that the introduction of CBDCs by the UK’s ‘strategic competitors’ may have consequences for ‘western foreign policy’. It states that the global SWIFT messaging system enhances the US’s ability to implement sanctions. ‘However, there is political will in certain countries, such as China, to create alternatives to the existing international payments system using CBDC technology’, the report notes.
CBDC security risks in the spotlight
Committee member Lord King, who was the BoE’s governor from 2003 to 2013, was among the panellists at an event in London on 18 January focused on the report. The ‘Central Bank Digital Currencies: Plotting a Path Ahead for the UK’ event was hosted by the Royal United Services Institute (RUSI)’s Centre for Financial Crime and Security Studies.
King used the opportunity to highlight questions posed to the UK authorities in the committee’s report. These questions include: ‘which organisations will be able to access sensitive CBDC payments data, and for what purpose will that data be used?’; and ‘what are the main international and national security risks that arise from a CBDC, and how can these be managed?’.
“The committee argues that if there were to be a CBDC, then the proposals for it should be put before Parliament and not introduced as some sort of technical measure without legislation,” he told the audience.
Dr Jason Shepherd of Thomson Reuters Special Services International was also a panellist at the RUSI event. He described the report as being “rightly quite sceptical in tone”, adding that the many design options for a CBDC “each create a different set of opportunities and risks”.
A small number of nations have already gone live with a CBDC: for example, the Bahamas launched its ‘Sand Dollar’ in 2020 and Eastern Caribbean nations began to roll out blockchain-based digital currency ‘DCash’ nine months ago.
“There are some very, very good reasons to develop CBDCs or more digitisation of central bank currency that don’t apply here [in the UK] but do apply in other countries [for example] inclusion and opening up the payments system to [greater] competition,” Shepherd said. “They are going to skip forward two or three generations in technology.”
CBDC proponents respond
CBDC enthusiasts were naturally largely disappointed with the report.
Jannah Patchay, originating member at the Digital Pound Foundation, which launched last year and was among the organisations that gave written evidence to the Lords’ review, told Global Government Fintech: “The report suggests that CBDCs are a solution to a problem that doesn’t exist. This is a very narrow view of innovation – it is not only about solving problems but also about creating new opportunities. There is a well-catalogued set of use cases and applications for CBDCs, including the potential for more effective policy delivery in the public sector.”
“CBDCs are one of the key building blocks that will enable the UK’s transition to a more sustainable, inclusive digital economy,” Patchay continued. “A well-designed CBDC has the potential to deliver benefits that extend far beyond greater payments efficiencies. Having one that offers competitive and attractive features in its design and supporting market infrastructure can also create a platform for innovation across all sectors of the economy, and open up opportunities for the UK on the global stage.”
*** Separately, a Crypto and Digital Assets All-Party Parliamentary Group has launched in Westminster. Chaired by Scottish National Party MP Lisa Cameron and with four vice-chairs, the group’s secretariat is being provided by trade body CryptoUK.
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