The report published on 13 January follows an inquiry launched by the peers in September 2021, taking evidence from the Bank of England and a broad range of stakeholders.

Like over 90 other central banks worldwide, the Bank of England and HM Treasury have been actively researching the case for a retail CBDC, a form of electronic moneyFrom the Latin word moneta, nickname that was given by Romans to the goddess Juno because there was a minting workshop next to her temple. Money is any item that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular region, country or socio-economic context. Its onset dates back to the origins of humanity and its physical representation has taken on very varied forms until the appearance of metal coins. The banknote, a typical representati... More issued by the Bank of England that all could use to make everyday payments.

In mature economies, the motivations behind research on CBDC are twofold. First, digital currencies issued by Bigtech  – such as Facebook’s Libra/Diem  – could lead to excessive market power and destabilise the monetary system. Second, the decline in the use of cashMoney in physical form such as banknotes and coins. More could undermine trust in central bank moneyA liability of a central bank, including banknotes in circulation and banks’ deposits with the central bank. More.

The report concludes, “However, the introduction of a UK CBDC would have far-reaching consequences for households, businesses, and the monetary system for decades to come and may pose significant risks depending on how it is designed. These risks include state surveillance of people’s spending choices, financial instability as people convert bank deposits to CBDC during periods of economic stress, an increase in central bank power without sufficient scrutiny, and the creation of a centralised point of failure that would be a target for hostile nation-state or criminal actors.”

“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 currencyThe money used in a particular country at a particular time, like dollar, yen, euro, etc., consisting of banknotes and coins, that does not require endorsement as a medium of exchange. More. 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.” Lord Forsyth of Drumlean, Committee Chair.

An Imperfect Substitute for Cash

The report recognises that the use of cash for transactional purposes is declining in the UK but stresses that it is not apparent that the properties of CBDCs would match those of cash, which is often valued for its physical properties and the privacy that it can provide. Furthermore, the Bank of England will continue to issue cash on demand and the public need for money without default risk is covered for most savers by the availability of cash and deposit protection.

Andrew Cregan, Head of Finance Policy at the British Retail Consortium, testified to the Committee he did not think a CBDC was “in any way” a substitute for cash: “I do not envisage that individuals who have been so reticent over using card payments over the years … will jump on the CBDC bandwagon and abandon cash. People use cash either for budgetary purposes or for concerns around security or fraud. They use cash for other reasons that will not be affected by the creation of a CBDC.”

The Bank of England has recognised that a CBDC would be an imperfect substitute for cash. Its March 2020 Discussion PaperSee Banknote paper. More said, “for those in society who value the physical nature of cash, the introduction of CBDC is unlikely to affect their paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More behaviour, and so we consider that CBDC would likely act as a complement to cash rather than a substitute.”

Should the acceptance of cash continue to decline significantly, a CBDC could be a way to ensure greater financial inclusionA process by which individuals and businesses can access appropriate, affordable, and timely financial products and services. These include banking, loan, equity, and insurance products. While it is recognised that not all individuals need or want financial services, the goal of financial inclusion is to remove all barriers, both supply side and demand side. Supply side barriers stem from financial institutions themselves. They often indicate poor financial infrastructure, and include lack of ne... More as it would provide access to digital payment services that are like bank accounts. However, for some, not having a bank account is a choice, and for others, the technological requirements for CBDC transactions may exclude them from accessing it. There are likely more straightforward and targeted ways to support access to financial services than to launch a CBDC.

Risks to Financial Stability and Privacy

Finally, the report highlights several risks that could result from the creation of a retail CBDC, including a run on bank deposits if assets are converted into CBDC; controversial debates on privacy and state surveillance as CBDC could not support anonymous transactions in the same way as cash; security risks as a centralised CBDC ledger would become a target for hostile state or criminal actors.

Given the long lead times involved in scoping and developing a CBDC, the peers recommend that the Government and the Bank of England should continue to assess the rationale and technology in preparation for such a measure possibly being needed in the future and should continue to work with international partners on principles and standards while learning lessons on technical design and usage from the experiences of countries that introduce a CDBC soon.

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