UK Parliament Committee Urges Caution in Advancing Digital Pound Amidst Financial Stability and Privacy Concerns

The UK Parliament’s Treasury Committee has issued a report advising the Bank of England and HM Treasury to exercise caution in progressing with the development of a digital pound. The committee raised concerns about potential risks to financial stability and privacy associated with the proposed retail central bank digital currency (CBDC).

In their consultation, the Bank of England and Treasury outlined plans for a retail digital pound, akin to a digital banknote, but the committee highlighted significant challenges. One key apprehension is the risk of increased bank runs during financial instability, as individuals could swiftly convert bank deposits into digital pounds, potentially leading to bank failures.

To address these risks, the committee proposed lower initial limits on the value of retail digital pounds that individuals can hold, contrasting with the £10,000-£20,000 limits suggested in the consultation. The report also emphasized the importance of privacy safeguards to prevent misuse of personal data, suggesting robust regulations to protect user information.

Additionally, the committee expressed concerns over estimates indicating that the shift to digital pounds could elevate interest rates on bank loans by 0.8 percentage points or more. They recommended further analysis on the potential impact of paying interest on digital pound deposits, urging transparency in the cost-benefit analysis before any decision is made.

Chair of the Treasury Committee, Harriett Baldwin, emphasized the need for a thorough examination of whether the benefits of a retail digital pound outweigh the associated risks and costs. The report urged the Bank of England to prioritize its primary objectives of controlling inflation and maintaining financial stability amid the ongoing design work on the digital pound.

While supportive of the continued design efforts, the committee cautioned against viewing the introduction of a retail digital pound as inevitable, emphasizing the importance of clear cost-benefit analysis and transparent reporting of associated costs.

The report comes at a time when central banks globally are exploring the potential of central bank digital currencies to keep pace with technological advancements and evolving payment landscapes. The UK’s deliberations align with discussions in other regions, highlighting the complex considerations involved in the development of digital currencies by central authorities.

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