A recent report from the Financial Times shows that the British Parliament should be involved to decide whether a Central Bank Digital Currency (CBDC) should be introduced to the UK as a recent report from the House of Lords Economic Affairs Committee said that the move to a completely digital currency.
“We were really concerned and, frankly, I was a little disappointed by the evidence from the Treasury on this issue about parliament’s role in the introduction of a Central Bank Digital Currency,” Lord Michael Forysth, the Conservative peer and chair of the committee.
The committee expressed their worries on whether the digital currency would and could be used to spy on British households despite the Bank’s governor, Andrew Bailey, telling the committee that this would not be the case. Although this spying would be rather effective at tracking payments to potentially criminal actions, the Bank of England has shown no evidence of wanting to pursue such a purpose for a completely digital currency as doing so would violate the freedoms and privacy of British households.
Despite this, the House of Lord’s believes it just for the matter to be handed over to the British Parliament, perhaps as doing so would allow the British people's views to be somewhat consolidated in the matter as democratically elected representatives, the MP’s, should, in theory, represent the views that their constituents have regarding a digital currency.
This of course is theory as in the real world politicians are much better at discussing identity politics and playing a slinging match against the opposing party rather than focusing on actual economics, and, unfortunately for them, this is not the concern of this article.
The concern of this article is regarding the benefits and potential risks associated with a CBDC, and, whilst the previously illustrated risk of spying could manifest, the more pressing issues are the potential vulnerabilities a completely digital system could have to interference by hostile third parties.
In short, if a completely digital currency were to be introduced, then there would be potential risks of cyber attacks from external organisations such as terrorist groups, which, could threaten the long-term stability of the UK’s financial system, yet, although such fears are warranted, if proper measures are taken, then the risks should be low and the costs are unlikely to materialise.
At the same time, such risks go for any other financial system. Programs such as Visa and Paypal are based digitally, yet, policymakers and the common consumer raises little concern over the possibility that such services could be targeted by malicious organisations. What we’re getting at here is that although such criticisms are welcome, and maybe even needed to ensure that the Bank of England handles the management of a CBDC correctly, perhaps in some cases the fears of a public body attempting to do something maybe exacerbated due to one's ideology.
Another problem that a CBDC may pose is its effect on confidence within the UK’s economy, a former Bank of England governor, Mervyn King, is also a member of the committee, who found few reasons to warrant a change to a completely digital currency.
“We have yet to hear a convincing case for why the UK needs a retail [central bank digital currency],” once again, the issue of privacy was expressed as a system that involved accounts of individuals being managed by the Bank of England could have “far-reaching consequences for households, businesses, and the monetary system for decades to come and may pose significant risk depending on how it is designed.”
These concerns essentially boil down to how quickly should a CBDC be developed and rolled out as the Bank of England must be vigilant in the development of a CBDC, not doing so could in fact spell doom for the UK’s financial system. A rollout that is too hasty could result in confidence falling in the British Pound, especially if a CBDC does manifest these undesired consequences.
Furthermore, perhaps it is still better to wait, or, to perform a slow rollout as there are still many in the UK who use plain cash. Perhaps an even more digitally integrated future must come along before a CBDC could be truly considered, yet, it is unlikely that it will take long for this day to occur as online payment methods are becoming more popular amongst consumers.
This brings us to the benefits of a CBDC, such an online currency would allow for a faster and cheaper way to perform monetary transactions as a purely digital pound would also cater for the increasing demand for online services that we are seeing post-pandemic. This is already something that the Bank and the Treasury have thought about as a CBDC will still be able to be used alongside services such as Visa and Paypal.
Furthermore, with the CBDC being centrally controlled by the Bank of England, having such a tool could expand how the body manages the economy through its use of Monetary Policy as a digital banknote linked directly to the Bank of England that is owned by individuals could be manipulated much more freely by the Bank of England if doing so would be essential to the financial and monetary stability of the UK economy.
A CBDC could even unlock new tools for the Bank of England, having direct access to one's balance through a CBDC could allow the Bank to do more direct cash transfers to individuals within an economy, perhaps changing how Quantitative easing, which typically favours larger firms, works. The possibilities of this tool could be endless, yet, it is important to be vigilant as the expressed damages could manifest under the Bank of England’s noses.
Written by Hubert Kucharski
Research compiled by Louis-Daniel Oloyede