‘Central bank digital currencies: a solution in search of a problem?’ – UK hOUSE OF lORDS

The Economic Affairs Committee of the UK’s House of Lords (HoL) (the ‘upper house’ of the UK’s legislature) published a report on 13 January 2022 concluding that “there is no convincing case for why the UK needs a central bank digital currency” and that CBDCs could pose significant challenges for financial stability and privacy.

The provocative title of the HoL committee’s report doesn’t appear to be original though, as the speech by Christopher J Waller of the Board of Governors of the Federal Reserve in August 2021 used the same title, but is at odds with the recent positive utterances of the ECB on CBDCs.

The HoL report concludes:

“A CBDC could enable central banks to conduct forms of unconventional monetary policy more easily. . . . any changes to the [Bank of England’s] monetary policy toolkit should be scrutinized carefully.”

“We heard the Bank of England could ‘programme’ a CBDC to have an expiry date by which it would need to be spent, or conditions could be placed on a CBDC so that it could be
spent on certain goods only.”

“. . .technical specifications alone may be insufficient to counter public concern over the risk of state surveillance.” 

Commenting on the report the chair of the HoL committee stated that CBDCs “. . .present a lot of risk for very little reward”. Reservations mentioned in the report include foreign policy concerns, cyber-attacks (particularly as regards developments in quantum computing), anonymity facilitating illicit activity, and financial instability if depositors replace bank deposits with CBDC deposits.

However, the report acknowledges there “. . may be some benefits from the introduction of a ‘wholesale’ CBDC for use between financial institutions. While the wholesale operations of the monetary system are already efficient, a CBDC may help to further enhance efficiency in securities trading and settlement . . .”

In Ledgernomic’s view, the HoL report, while it will be criticized for being overly negative on CBDCs, raises very many legitimate concerns on CBDCs that have not yet been adequately addressed by proponents of CBDCs.

See Also

UAE Plans to Launch CBDC as Part of Drive Toward Cashless Society

Given the apparent enthusiasm for some form of CBDCs from institutions such as the Bank of International Settlements, the European Central Bank, and to a lesser degree the Federal Reserve, one wonders what impact the HoL report will have.

However, Ledgernomic believes that those working on CBDC implementation would do well to study the HoL report closely.

At 3pm on Tuesday 18 January 2022 the Lords Economic Affairs Committee is hosting an event, ‘Central Bank Digital Currencies: Plotting a Path Ahead for the UK‘.