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A solution without a problem? The ‘digital pound’ may be dead in the water

A House of Lords report has criticised Bank of England plans for a central bank digital currency for the UK. Will a 'digital pound' ever come to fruition?

By Matthew Gooding

A House of Lords report has criticised plans for a central bank digital currency (CBDC) in the UK, or ‘digital pound’, as a solution in search of a problem, and says it could harm the country’s economic stability. One expert told Tech Monitor that many of the committee’s concerns are justified, and questioned whether is a CBDC is needed in an economy like the UK’s.

UK CBDC


The digital pound could become a new form of payment in the UK. (Photo by Zedelle/iStock)

Released on Thursday, the report is based on evidence provided to the committee from a wide range of sources in the tech and finance communities. “We have yet to hear a convincing case for why the UK needs a retail CBDC,” it concludes. “While a CBDC may provide some advantages, it could present significant challenges for financial stability and the protection of privacy.”

A digital pound could exacerbate financial instability “during periods of economic stress as people seek to replace bank deposits with CBDC which may be perceived as safer,” the committee found, and endanger privacy. Benefits for businesses and consumers would, in the opinion of the witnesses it heard from, be limited.

The Bank of England (BofE) announced in November that it planned to hold a consultation on the introduction of a CDBC. This is due to take place this year.

Does the UK need a CBDC?

A CBDC is a digital currency issued directly by a central bank. Speaking to Tech Monitor in November, Fernando Fernández Méndez de Andes, economist and professor at IE Business School, explained: “A CBDC is a complement to notes and coins, to cash. It is legal money issued by the central bank, a liability of the central bank, fully redeemed in cash and legal notes and coins with no exchange risk, nor any additional cost.” This means CBDC’s differ from cryptocurrencies as their value remains much more stable.

Central banks around the world have been investigating the use of CBDCs, but so far the only country to launch one is Nigeria with its eNaira, according to research from The Atlantic Council.

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CBDCs are seen as a way to bolster financial inclusion in countries with large unbanked populations. But for developed economies like the UK, the benefits are more limited, argues Zach Meyers, senior research fellow at the Centre for European Reform thinktank.

"A lot of debate focuses on the potential harm digital currencies could do to macroeconomic stability, but an alarmingly small amount of time has been spent considering why we're actually doing this," he says. "It's assumed a digital pound is going to be something really exciting and new, and it could be, but what most central banks, including the Bank of England, are looking at isn't very radical."

Meyers says what is being proposed amounts to a new system of payment, rather than a big change to the financial system. "The only real difference between a digital currency and the money that you've got online in a bank account today, is that [the CBDC] would be directly backed by the central bank," he explains. "But most businesses and consumers are not going to care because they have deposit insurance. So it doesn't make any difference because if the bank goes bust, you are still protected."

He says the interest in central banks in CBDCs is largely driven by fear of missing out, particularly since China became the first major economy to trial a digital currency, the e-CNY, in April 2020. "None of them want to be seen as falling behind," he says. "They look at what's happening in China and think 'we need to have that as well'."

Are there benefits to a UK CBDC?

Not everyone agrees with the findings of the Lords report. The Digital Pound Foundation, which describes itself as an independent organisation promoting the development of a digital pound (it is backed by tech companies including Accenture and CGI, as well as online payment provider Ripple) expressed its frustration at the tone of the report.

Meyers says a UK CBDC could bring some benefits. "I think the cost of issuing money would be dramatically reduced because making coins and banknotes is actually rather more expensive than you expect," he says. "So if you could just do that by getting money onto people's ledgers electronically, that would be a reasonable benefit."

Some economists argue there are macroeconomic benefits, he adds, particularly if the government is issuing money to stimulate the economy in a time of recession. "You could stipulate that such money had to be spent within a month, and have an extra level of control," Meyers says. "But I would say that more economists argue you don't need these kind of controls on top of what is available right now."

The European Central Bank is also pursuing a CBDC, pledging last year to launch a 'digital euro'. Meyers says this is largely for geopolitical reasons, which may also apply to a lesser extent for the UK. "We rely on Visa and Mastercard for an increasing amount of online payments," he says. "And there are some worries that having American companies so deeply embedded [in the financial system] amounts to a loss of sovereignty." But, he says, "there are better ways to deal with that than setting up an entire new, publicly owned digital currency and associated payment system."

Will the UK CBDC happen?

A Treasury spokesman told Reuters no decision has been made on the introduction of a UK CBDC, and Meyers says he expects the BofE to continue with its consultation. "The Bank of England has been more cautious about this than the ECB, which has already said 'we're doing this'," he says. "I don't think anything in this report will radically change that position, and it will keep working on the project."

The BofE has yet to launch its consultation which, it says, "will evaluate the main issues at hand, consider the high-level design features, possible benefits and implications for users and businesses, and considerations for further work". Meyers adds that businesses will not be receiving payments in digital pounds for some time to come. "We shouldn't expect to see anything rolled out anytime soon, certainly not in the next two years," he says.

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