A solution in search of a problem? House of Lords Committee gives feedback on CBDCs

The House of Lords Economic Affairs Committee has published a report on central bank digital currencies. The Committee concluded that they were not presented with “a convincing case for why the UK needs a retail CBDC”.

Significant challenges

The report noted that, while there are some advantages to CBDCs, including in relation to the speed of settlement and cost of cross-border payments, CBDCs raise significant challenges, including chiefly with respect to:

1. privacy, the Committee raised concerns about the potential for surveillance of the spending habits of individuals; and
   
   
2. financial stability arising out of the possible disintermediation of mainstream financial institutions, such as banks, as individuals move their money from bank accounts to CBDC wallets registered with the Bank of England.

A number of remaining questions

The Committee considered that there are a number of questions remaining for the HM Treasury and Bank of England Joint Taskforce to consider before making any decisions on issuing a CBDC, including:

• To what problem is a CBDC the answer?
• How can a CBDC be a competitive payments option without having adverse consequences for financial stability?
• What is the role of regulation in offsetting the risks posed by private issuers of cryptocurrencies?
• How can a CBDC system ensure sufficient regard for individuals’ privacy?

What's next?

We know from previous papers discussing a UK CBDC that these are questions that HM Treasury and Bank of England have been considering in their exploratory work in this area. Later this year the Joint Taskforce will set out their case for introducing a CBDC in the UK with a view to launch no earlier than 2025.

In his evidence to the Committee, Andrew Bailey (Governor of the Bank of England) said that he understood it was possible to introduce a CBDC without legislation, but that it would nevertheless “probably” be required to ensure the system was “sufficiently robust”.

In its report, the Committee concluded that “Parliamentary scrutiny should be an essential part of assessing the case for a CBDC and if the Government decides to process, Parliament should have the opportunity to vote on any decision, along with the governance arrangements for any such system, during the passage of primary legislation.”

Financial institutions and other crypto markets participants can expect further developments from the HM Treasury and Bank of England Taskforce as the questions above are answered. Whatever landing is reached with respect to a UK CBDC, it appears that legislation will be required for its possible implementation and therefore Parliament will have the final say on its substance and form.

Michael Munk (Managing Associate) and Elena Cucuz (Trainee Solicitor), London