Bank of England

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On 2 February 2023, the House of Lords is due to debate the report of the House of Lords Economic Affairs Committee, ‘Central bank digital currencies: A solution in search of a problem?’, which was published in January 2022.

The report was produced in response to a joint taskforce set up by the Bank of England (BoE) and HM Treasury in April 2021 to explore the potential for a UK central bank digital currency (CBDC) issued by the BoE.

1. Background

CBDCs are digital currencies issued and backed by a state’s central bank. They are different from cryptocurrencies such as Bitcoin, which are private, unregulated digital currencies.

At present, money is usually used in the form of cash (notes and coins) or electronically as a bank deposit which is then used for transactions. The BoE already provides a form of ‘wholesale’ CBDC to commercial banks and some other financial institutions (known as reserves) through the BoE’s real-time gross settlement system. The BoE/Treasury taskforce was established in April 2021 to explore the possibility of providing a ‘retail’ CBDC which could be used by individuals and businesses. This would be a digital form of money to complement, but not replace, BoE-issued notes and coins. The BoE has said that if a UK CBDC were to be issued it would be in denominations of pound sterling and that “£10 of a UK digital currency would always be worth the same as a £10 note”. The CBDC could be used for transactions without needing a commercial bank as an intermediary.

The BoE has said it is considering a CBDC because:

Financial technology (fintech) firms have started to offer new forms of money and new ways to pay. People are using cash less. These changes mean new opportunities and risks that we need to plan for.

In June 2021, the BoE published a summary of the responses to a discussion paper on CBDC it had published in March 2020.

In November 2021, the government made a written statement in the House of Commons setting out the timescales for the assessment of introducing a CBDC. It said that HM Treasury and the BoE would publish a “consultation in 2022”. If a decision were taken to proceed following the consultation, there would be a “development phase” followed by a “build and testing phase”. The government said that, given the “scale and national importance of such a project”, the earliest date for the launch of a UK CBDC would be “the second half of the decade”.

The consultation was not subsequently published in 2022. In a Commons written statement on 9 December 2022, the chancellor, Jeremy Hunt, said the government committed to:

Bringing forward a consultation in the coming weeks to explore the case for a central bank digital currency—a sovereign digital pound—and consult on a potential design. The Bank of England will also release a technology working paper setting out cutting-edge technology considerations informing the potential build of a digital pound.

2. Conclusions of the House of Lords Economic Affairs Committee report

The committee noted that “over 90 central banks” around the world are exploring the introduction of a CBDC. It said this was broadly in response to two motivations. First, there were concerns that a “big tech company” such as Facebook could issue its own digital currencies to its users, enabling them to accrue significant market power in competition to central banks. Second, the continued decline in the use of physical money could create the potential for a lack of confidence in the monetary system.

The committee acknowledged that a UK CBDC “could spur innovation and competition” in payment services. It said it could lead to a reduction in fees currently charged by payment processing firms, which could be passed on to consumers. However, the committee stated that “few other significant potential advantages for UK consumers were predicted” by those who had given evidence to the committee.

In response to a potential increase in the use of private cryptocurrencies, the committee questioned whether the introduction of a CBDC was a “necessary or complete response”. Instead, the committee argued that private entities that could compete with existing payment systems “can and should be regulated”.

In response to declining cash use, the committee accepted that a CBDC could “ensure greater financial inclusion”. However, it noted that the BoE had committed to “continue to issue cash on demand”. The committee stated that there were “more straightforward and targeted” ways to support access to financial services than to issue a CBDC.

The committee concluded that the introduction of a CBDC could have “far-reaching consequences” for households, businesses and the monetary system. The report said it could pose “significant risks”, which included:

  • state surveillance of people’s spending choices
  • financial instability as people convert bank deposits to CBDC during periods of economic stress
  • an increase in central bank power without sufficient scrutiny
  • the creation of a centralised point of failure that would be a target for hostile nation states or criminal actors

The committee’s overall conclusion was that it was “yet to hear a convincing case” for why the UK needs a retail CBDC. The report stated that while a CBDC “may provide some advantages”, it could present “significant challenges” for financial stability and the protection of privacy.

The committee said that parliamentary scrutiny should be an “essential part of assessing the case” for a CBDC. The report stated that if the government does decide to proceed:

Parliament should have the opportunity to vote on any final decision, along with the governance arrangements for any such system, during the passage of primary legislation.

3. Responses to the report by the government and the Bank of England

In March 2022, Boris Johnson’s government published its response to the committee’s report. Separately, the BoE also published a response.

3.1 Government response

The government response stated that “no decision has been taken” by the government or the BoE as to whether to issue a CBDC. It said a decision would be based on a “rigorous assessment” of the case for a CBDC, informed by “extensive stakeholder engagement”.

The response stated that, in considering the case for a CBDC, the government was committed to the G7 public policy principles for CBDC, published under the UK’s G7 presidency in 2021. The government stated that the G7 principles committed to international cooperation, cross-border payments functionality, and that any CBDC should be designed so that it “does no harm” to monetary and fiscal stability.

On parliamentary scrutiny, the government stated that it “expects to fully engage Parliament” in an “open and transparent manner” to ensure proper scrutiny of any future proposals for a CBDC.

On the issue of privacy, the response stated that protecting users’ privacy is a “central factor” in any decision to issue a CBDC, and “any design choices about a CBDC if introduced”.

3.2 Bank of England response

The response from the BoE welcomed the committee’s report and stated that it raised “a number of important issues”, which the BoE is considering as it assesses the case for the CBDC. The Bank reiterated that it “had not yet made a decision” on whether to introduce a CBDC. It stated that many of the issues raised by the committee would be included in the planned consultation.

The response stated that articulating a “use case” for a CBDC was a central part of the BoE’s exploratory work and it would be included in the forthcoming consultation. It said that the taskforce was exploring how a CBDC could provide:

Resilient and responsive public infrastructure with which the private sector can innovate in order to most efficiently and effectively meet user needs in a dynamic payments landscape.

On the decline in cash use, the BoE reiterated that it “does not intend to withdraw cash”. The BoE said that it understood the importance of cash for its “unique role in anchoring value and promoting confidence in the monetary system”. It argued that a CBDC could play an “important role in sustaining, and potentially expanding, retail access to central bank money”.

On the interaction between a CBDC and the Bank’s mandates, the Bank acknowledged that it had “a statutory duty to protect monetary stability”. It claimed that a “CBDC can, in principle, expand central banks’ monetary policy toolkits”. However, it stated:

At the current time, we do not consider expanding the monetary policy toolkit to be a motivation for the introduction of a CBDC.

On security issues, the BoE stated that:

Any CBDC system must be resilient against hardware, software, or telecom network failures, and must be capable of sustaining continuity of operations at all times.

It stated that all these issues would be included in the forthcoming public consultation.

4. Read more

Cover image by PeterRoe from Pixabay.