Why the Lords rejected the digital pound
Hopes surrounding a new ‘Britcoin’ currency for the UK hang in the balance after the House of Lords decided that was “no convincing case” for a British digital currency.1
The Bank of England is one of many central banks across the world that are trying to decide whether they need a digital currency, but the Lords report, from its Economic Affairs Committee, makes the introduction of a UK-wide digital currency less likely.
But some believe that a Central Bank Digital Currency (CBDC), widely dubbed ‘Britcoin’, would make a positive difference to how we manage our finances and believe that it should be introduced.
It is possible that Britcoin could bring down some of the unseen costs that come with banking in the UK, as well as reducing the risks of commercial bank failure to customers’ cash.
With Britcoin, savers and spenders would have a direct relationship with the Bank of England when we spend money electronically, rather than using money ‘created’ by high street banks and their challengers when we spend on our cards. These banks settle up with each other at the end of the day, using the Central Bank of England to do so.
We could also all use the Bank of England’s money directly, cutting out the middleman altogether, and this might reduce fees. It would also mean that we could hold money electronically without it being at risk of bank failure, the electronic equivalent of stashing stacks of £50 notes under our beds.
The Bank of England’s consultation document on the possibility of a CBDC mentioned other benefits too, including the ability to make better and cheaper crossborder payments and meeting the future needs of a digital currency.2
The Lords’ reservations
Despite these benefits, the Lords’ committee concluded that there were “significant risks”. These include a privacy risk from giving the central bank the power to monitor its citizens’ spending so closely. The committee also warned that large numbers of people transferring money out of their bank accounts into digital wallets could destabilise the banking industry, making it vulnerable during periods of economic stress. A successful digital currency could also be targeted by cybercriminals, the report warned.
Lord Forsyth of Drumlean, who chairs the committee, said that the potential benefits of a digital pound, as set out by the Bank of England, were “overstated or achievable through less risky alternatives”.
“We took evidence from a variety of witnesses and none of them were able to give us a compelling reason for why the UK needed a central bank digital currency. The concept seems to present a lot of risk for very little reward. We concluded that the idea was a solution in search of a problem,” he added.
What happens next?
Despite the rejection of the digital currency by the Lords, this decision is unlikely to be the end of the matter. Many central banks are considering a digital currency, and the Lords acknowledged that such a currency may be needed in the future.
“While there appear to be no significant advantages for the UK in being an early adopter of CBDCs, we recognise that consumer payment preferences, technological developments and the choices of other countries may enhance the case for a UK CBDC in the future,” the Lords concluded.
The committee says that the Government and Bank of England should continue to work on the principles of a digital currency and look at the companies that are planning to introduce one in the near future.
For those looking to bypass bank accounts, looking for the ultimate security for their money (especially if they are holding deposits over the £85,000 threshold for the Financial Services Compensation Scheme), or for those who wish to make cheaper and easier payments abroad, developments with Britcoin are still worth watching. As digital currencies become more mainstream across the world, the UK may have little choice but to introduce one too.