MPs have expressed concerns that the Bank of England’s proposal to launch a digital pound might heighten the likelihood of bank runs.
According to a Treasury Select Committee report, a digital currency could lead to quicker withdrawals of deposits during financial crises, potentially triggering more bank failures.
The Bank of England and the Treasury have proposed a new electronic currency for transactions by individuals and businesses.
In a February consultation, the Bank indicated it hasn’t made a final decision on introducing a digital pound, but it seems probable.
The committee has advised the Bank and the Treasury to consider the potential impacts on financial stability before moving forward with a retail central bank digital currency (CBDC).
The MPs cautioned that the ease of converting to digital pounds during financial stress could hasten deposit withdrawals from banks, increasing the likelihood of ‘bank runs’ and subsequent bank collapses.
The report also highlighted that a digital pound could lead to higher borrowing costs. Banks might need to raise loan interest rates for all customers due to increased funding costs associated with a digital currency.
UK Finance’s analysis suggested that if 20% of bank deposits shifted to digital currencies, loan interest rates could rise by up to 1.1 percentage points, adding £110 annually to the cost of a £10,000 loan.
However, the Bank of England estimates a smaller increase in interest rates, ranging from 0.2 to 0.8 percentage points.
The chair of the committee, Conservative MP Harriett Baldwin, emphasized that the introduction of a retail digital pound into the UK’s financial system should only proceed if it is proven to benefit the economy without escalating risks or incurring excessive costs.
MPs have called on the Government to address potential misuses of personal data that could arise from a digital pound, particularly regarding how individuals spend their money. They insist on legislation to limit future government access to this data.
The committee also highlighted the importance of ensuring that the transition to a digital pound does not exacerbate financial exclusion, particularly for those dependent on physical cash. Ms. Baldwin stressed the need to ensure that the digitization of money does not leave behind those who rely on cash.
Furthermore, the committee cautioned that the Bank of England’s focus on developing a digital currency should not detract from its primary responsibilities of controlling inflation and maintaining financial stability. This follows a report from the House of Lords’ economic affairs committee, which suggested that the Bank’s emphasis on net zero goals might be undermining its efforts to control inflation.
In response, HM Treasury and the Bank of England issued a joint statement, acknowledging the Treasury select committee’s report on CBDC. They promised a formal response to the report and announced an upcoming publication detailing the next steps following their consultation paper.
They reaffirmed their commitment to introducing a digital pound only in conjunction with cash and emphasized the utmost importance of protecting individual privacy in any proposed design.
