The House of Lords Economic Affairs Committee has decided that central bank digital currencies (CBDCs) are really not worth all the trouble.
The UK parliament has published a report from the Economic Affairs Committee called ‘Central bank digital currencies: a solution in search of a problem?’ which explores the advantages and disadvantages of a CBDC in the UK.
Lord Forsyth of Drumlean, Chair of the House of Lords Economic Affairs Committee, states: “We took evidence from a variety of witnesses, and none of them were able to give us a compelling reason for why the UK needed a CBDC. The concept seems to present a lot of risk for very little reward.”
The government is still determining whether to implement a CBDC within the UK as a form of central bank electronic money to exist alongside cash and bank deposits. This assessment state has been ongoing for the past couple of years, and officials have yet to reach a conclusion.
As eWeek UK reported in November, HM Treasury and the Bank of England (BoE) said they will launch a consultation this year to assess the case for a CBDC.
In terms of the key findings from the Economic Affairs Committee, the report determined that a CBDC could create security risks for individual accounts, businesses and the monetary system as a whole. For example, weak cybersecurity could lead to compromised accounts and theft for individual users.
The centralised CBDC ledger could experience security breaches from hostile state and non-state actors. Therefore, a CBDC system would need to adapt to security threats and be scalable with technological changes, but even still, no design could guarantee that a CBDC system would be completely secure.
At this time, a CBDC system cannot support transactions made anonymously. This lack of anonymity in CBDC transactions may be intended to prevent criminal use. However, this has caused concern from the public over the lack of privacy and the risk of surveillance. Another cause for concern is the argument that a CBDC could allow banks to implement unconventional monetary policy on their users. The validity of this claim is still being determined.
A CBDC may also be risky for individuals who transfer funds into CBDC wallets rather than their bank accounts. Using wallets without safeguards limiting their CBDC use could increase financial instability for individuals who choose to use CBDC in place of bank deposits – especially during times of economic struggle.
Advantages to CBDC implementation within the UK could occur with regards to ‘wholesale’ CBDC use among financial establishments. This could improve efficiency in securities trading and settlement for wholesale processes. However, this is not a guarantee at this time, as more evidence is necessary.
In response to these findings, the government and the BoE may benefit from holding off on CBDC implementation and instead place focus on improving security and operational standards in the meantime.
