The UK Treasury Committee recently released a report on December 2nd, offering advice to the Bank of England regarding the implementation of a retail digital pound. The report expressed concerns that the introduction of a digital currency could potentially lead to bank runs and destabilize the financial system. The committee, comprised of MPs from different political parties, urged the central bank to impose strict limits on individual holdings of the digital currency to mitigate these risks.
The Risks and Precautions
In their report, the Treasury Committee emphasized the need for caution and careful consideration when it comes to introducing a central bank digital currency (CBDC) or digital pound. While acknowledging the potential benefits such a currency could bring to the economy, the committee stressed that these advantages must outweigh any potential risks to financial stability.
“Lower thresholds on individual holdings of a digital currency can help reduce the likelihood of large-scale outflows from commercial bank deposits. It is important to consider the risk of bank failures during times of economic stress,” warned the committee.
The report proposed setting maximum individual holdings below the proposed limits of £10,000 to £20,000. This would allow authorities to monitor the impact on commercial bank funding and lending rates over time. The thresholds could then be gradually increased if deemed necessary.
Privacy Protections and Legal Parameters
The Treasury Committee also emphasized the importance of robust privacy protections within any digital pound framework. They highlighted the need for primary legislation that explicitly prohibits the government or central bank from accessing data for any purpose beyond law enforcement requirements. While the Bank of England has stated its intention not to use transaction data for policy or regulatory purposes, the committee argued that clear legal parameters are essential.
“Solid evidence of clear economic benefits must be gathered before deciding to introduce a digital pound. Policymakers must be confident that associated risks can be effectively managed,” concluded the committee.
The report advised the Bank of England to maintain an open mind regarding the necessity of a retail digital pound. It emphasized the importance of a cautious and thorough approach to the development of a digital pound. The Bank of England is currently in the design phase, carefully analyzing the complex considerations surrounding a potential CBDC. Final decisions are not expected until the latter half of the decade, indicating a slow and deliberate progression toward a retail digital pound.
