Development of a Bank of England retail digital pound should ‘proceed with caution’, MPs warn

2 December 2023

The Treasury Committee urges the Bank of England and HM Treasury to address data privacy and financial stability concerns before considering the implementation of a retail Central Bank Digital Currency (CBDC) or ‘digital pound’.

The Bank of England and HM Treasury have set out their proposed design for a retail digital pound – a new, electronic form of money supplied by the Bank of England and available to households and businesses to make payments, akin to a digital banknote. This differs from a wholesale CBDC which would be used for payments between financial institutions, for example to settle foreign exchange or securities transactions.

In their consultation, the Bank of England and HM Treasury judge it is 'likely that the digital pound will be needed in the future’.

Unlike a wholesale CBDC, which would represent more of an evolution from the current payments landscape, the Committee expresses concerns about the new risks a retail CBDC or digital pound could pose to the UK’s financial stability without careful management. For instance, the UK economy may be more susceptible to bank runs if people are able to switch large amounts of bank deposits into digital pounds quickly in times of market turmoil, increasing the risk of bank failures.

It also registered concerns regarding estimates that a steady switching of some bank deposits into retail digital pounds could increase the interest rates on bank loans by 0.8 percentage points or more.

To mitigate these risks, members suggest a smaller limit on the value of retail digital pounds each individual is initially allowed to hold than the £10,000-£20,000 limit currently mooted by the Bank of England and Treasury in their consultation.

MPs urge the government to alleviate privacy concerns that organisations or the Government could misuse personal data generated by the introduction of a retail digital pound, for example to monitor or control how users spend their money. These concerns could be mitigated through robust regulation and legislated protections related to the ability of any future government to access people’s data.

In the report, members of the committee highlight the importance of ensuring a retail digital pound doesn’t exacerbate financial exclusion by accelerating the demise of physical cash which many in the UK still rely upon.

The Treasury Committee notes that the next stage of work on a retail digital pound could incur significant costs and urges both the Bank of England and Treasury to be transparent about these costs through annual reporting.

The Treasury Committee is supportive of the further design work being undertaken by the Bank of England but emphasises that this project must not distract the institution from its primary objectives of controlling inflation and maintaining financial stability. Investing further in this project must not result in the introduction of a retail digital pound becoming viewed as inevitable – it must be underpinned by clear cost-benefit analysis.

Chair's comment

Chair of the Treasury Committee, Harriett Baldwin, said:

“It’s important that the Bank of England and Treasury are open to modernising the use of money in a way which keeps pace with technology while preserving economic stability and individual security.

It must be clearly evidenced that a retail digital pound will provide benefits to the UK economy without increasing risks or leading to unmanageable costs before any decision is taken to introduce it into our financial system.

We must also keep a close eye on ensuring that any retail digital pound does not worsen financial exclusion for those reliant on physical cash. The digitisation of money can’t, in any way, leave those people behind.

While we support the Bank of England's plan to continue working on the design of a potential retail digital pound, I would urge them to proceed with caution and maintain a genuinely open mind as to whether one is actually needed.”

Further information

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