Due to privacy and financial stability concerns, UK lawmakers are cautious about launching a retail CBDC

By Assad Jafri, cryptoslate, translated by 0xjs@ Golden Finance

The UK Parliament’s Finance Committee has issued a stern warning about the development of retail central bank digital currencies (CBDCs) or “digital pounds” and their potential harm to financial stability.

Lawmakers are urging the Bank of England and H.M. Treasury to thoroughly consider data privacy and financial stability issues before moving forward with the implementation of this new form of money.

The proposed retail digital pound sterling is intended to be distinguished from wholesale CBDCs used for transactions by financial institutions, and is envisaged as an electronic equivalent of fiat currency that can be used by both individuals and businesses for payment purposes.

Although both the Bank of England and the H.M. Treasury acknowledged the need for a digital pound in the future, members of Parliament remained cautious.

Key Concerns

The main focus is on the risks that retail CBDCs may pose to the UK’s financial stability. The Committee highlighted concerns about increased bank runs, with rapid transfers from bank deposits to digital pounds likely to increase the risk of bank failures during market turmoil.

In addition, there are concerns that bank lending rates could rise by 0.8 percentage points or more due to the gradual shift in bank deposits to the digital pound.

In order to mitigate these risks, the Commission proposes to impose a smaller holding limit on the individual retail digital pound than the originally proposed range of £10,000 to £20,000.

Lawmakers also urged the government to “alleviate privacy concerns” and ensure that regulators and other entities do not misuse personal and financial data generated through the introduction of CBDCs.

The parliamentarians also stressed that the government should not control how people spend their money.

Cost-benefit analysis

The Committee recommends that strict regulations and legislative protections be put in place for data access. It highlighted that ensuring that the introduction of a digital pound would not accelerate the decline in the importance of physical cash.

According to lawmakers, cash remains a vital financial resource for many in the UK, and replacing it would exacerbate financial exclusion.

The Committee is concerned about the significant cost of developing and introducing capacity-based development. It urged the Bank of England and the Treasury to maintain transparency on these costs through annual reports.

The Finance Committee said it supported the Bank of England’s ongoing efforts to design a potential retail CBDC. It stressed, however, that the project should not detract from the Agency’s main objectives of controlling inflation and maintaining financial stability.

The lawmaker added that the introduction of a retail digital pound should not be seen as inevitable and must be supported by a detailed cost-benefit analysis.

Source: Golden Finance