The British parliament and not the Bank of England must decide whether to introduce a state-backed digital currency because the move would have “far-reaching consequences”, an influential committee of the House of Lords warned on Thursday.
Dismissing many of the potential advantages of a digital currency issued by the central bank, a report by the House of Lords Economics Affairs Committee said the proposal had potentially serious implications, including privacy issues. It described the concept as “a solution in search of a problem”.
The BoE, which set up a joint task force with the Treasury last year to evaluate the costs and benefits of its own digital currency, is one of more than 90 central banks worldwide exploring the concept.
The idea is to create the equivalent of a digital banknote for people to buy goods and receive payments, linked directly to the central bank. It would compete with commercial banks, which already allow people to make digital payments via credit and debit card transactions, and other forms of electronic payment, such as PayPal.
The BoE has said a central bank digital currency could improve the efficiency of transactions and lower costs.
But the report by the committee, of which former BoE governor Mervyn King is also a member, found few compelling reasons for such a currency. “We have yet to hear a convincing case for why the UK needs a retail [central bank digital currency].”
It warned that any state digital currency — especially one that involved individuals accounts held at the BoE — had “far-reaching consequences for households, businesses and the monetary system for decades to come and may pose significant risks depending on how it is designed”.
The report expressed concern that such a currency could be used by the state to spy on people’s spending habits and used to charge people to hold money, even though Andrew Bailey, BoE governor, had told the committee that was not the purpose.
“The application of monetary policy should not be a motivation for introducing a central bank digital currency,” the report said.
It said there were potential implications for national security, citing vulnerability to interference by hostile powers and the stability of the rest of the financial system.
For all those reasons, the report said any move to mirror other digital currencies by the state must involve assent from both houses of parliament via primary legislation.
“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 Forsyth, the Conservative peer and chair of the committee, told the FT.
“When the Treasury minister gave evidence, he didn’t really assuage our concerns that this could be something that was just cooked up by the Treasury and the Bank of England and be treated as being in the [BoE]’s bailiwick,” he added.
Central bankers have regularly said that launching their own digital currencies would see off the threat of privately-backed ones launched by companies such as Meta, formerly Facebook. The report said officials had failed to sufficiently outline what threat they posed.
The BoE declined to comment on the report.