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The Bank of England must consider data privacy and financial stability concerns within its proposed design for a “digital pound”, the Treasury Committee has said in a report.
In 2020, the Bank of England said it was considering the introduction of an electronic form of central bank money that could be used by households and businesses to make payments, alongside cash and money held in bank accounts.
It began formal consulting on the proposal in February, with its first use case probably being the settlement of wholesale financial transactions.
The Committee expressed concerns about the new risks a digital pound could pose to the UK’s financial stability without careful management. For instance, the UK economy may be more susceptible to bank runs if people can switch large amounts of bank deposits into digital pounds quickly in times of market turmoil. This could increase the risk of bank failures, it said.
It also expressed concern that a steady switching of some bank deposits into retail digital pounds could increase the interest rates on bank loans by 0.8 percentage points or more.
To mitigate these risks, members of the Committee suggested a smaller limit on the value of retail digital pounds – under the current consultation, each individual could be allowed to hold up to £20,000.
The MPs also urged the government to alleviate concerns that organisations or the government could misuse personal data generated by the introduction of a digital pound – for example, to monitor or control how users spend their money.
They called for “robust regulation” to prevent future governments from accessing people’s data.
In the report, members of the committee said efforts should be made to ensure that a retail digital pound doesn’t “exacerbate financial exclusion” by further accelerating the demise of physical cash.
In 2021, the number of payments made with cash in the UK plummeted by 50 per cent as consumers were encouraged to use contactless in the wake of the pandemic.
“It’s important that the Bank of England and Treasury are open to modernising the use of money in a way that keeps pace with technology while preserving economic stability and individual security,” said Harriett Baldwin, the Committee’s chair.
“It must be clearly evidenced that a retail digital pound will provide benefits to the UK economy without increasing risks or leading to unmanageable costs before any decision is taken to introduce it into our financial system.
“We must also keep a close eye on ensuring that any retail digital pound does not worsen financial exclusion for those reliant on physical cash. The digitisation of money can’t, in any way, leave those people behind.
“While we support the Bank of England’s plan to continue working on the design of a potential retail digital pound, I would urge them to proceed with caution and maintain a genuinely open mind as to whether one is actually needed.”
