The House of Lords Economic Affairs Committee recently published its report on a UK central bank digital currency (CBDC). The report, called “Central Bank Digital Currencies: A Solution in Search of Problem?”, broadly concludes that there is no “convincing case” for a British retail CBDC. Or, as I said in my evidence to the committee, “we do not have what you might call a burning platform”.
The fact that there is no burning platform, however, doesn’t mean that we should ignore the topic. Quite the contrary. It means that we have time to think the issue through and to make sure that when we do have a digital currency backed by Bank of England reserves, it will work to the benefit of all stakeholders. And for a variety of reasons, that is more difficult to achieve that it might seem at first glance.
Retail CBDC
There’s one particular aspect of CBDC that I think should propel us forward. The Committee said that is recognised that consumer preferences, changing technology and “the choices of other countries” may shift their view in the future and so given that it will take forever to sort out the demands of the various stakeholders, the Bank of England and Treasury Joint Taskforce should continue their preparations for some future retail CBDC. While I agree with the Committee that there is no immediate requirement, as noted, I think that work should nevertheless press ahead with some urgency: not because of what consumers want or what other countries want, but because I think that the need for some sort of “Britcoin” is primarily to drive new products and services.
Other witnesses agreed on the potential for a CBDC to foster private-sector innovation. David Birch, an adviser and commentator on digital financial
services, said this was the best single reason for introducing a CBDC and the Atlantic Council said a CBDC could help level the playing field for new
market entrants. Innovate Finance thought CBDC would help the UK to develop world leading expertise.
I think this is an important element of the calculation about when to introduce a UK CBDC.
We also heard that a CBDC could help increase the overall resilience of the payments system, which was another potential advantage set out by the Bank of England. David Birch said a CBDC should be “constructed as a parallel system” to the existing payments system so that overall resilience increased.”
Indeed I did and I stand by it.
Professor Eswar Prasad, Senior Professor of Trade Policy and Professor of Economics at Cornell University, New York, agreed that the UK has an
effective payments system and said there was not a strong consumer case for introducing a CBDC: “One could still make the user case in terms of the
CBDC catalysing additional innovation…
That innovation agenda is important, and it dovetails with the new five-year (ie, to 2027) strategic plan set out by the UK’s Payment Systems Regulator (PSR). This four strategic priorities: ensure access, consumer protection, promote competition and “foster innovation and competition” in payments. This gives us a sensible timescale, I think. The Bank of England have already said that the introduction of retail CBDC will be sometime beyond 2025 and the Federal Reserve exhibit similar caution. The Federal Reserve’s report on a digital dollar has just been released but it is not any sort of blueprint, more of “an exercise in asking questions” about how the digital dollar should work.
But the Fed emphasized it would not create one without a clear directive from Congress and the White House
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Wholesale CBDC
The report also covered the issue of wholesale CBDC, noting that prioritising a wholesale CBDC (irrespective of retail CBDC timescales) would have advantages. UK Finance, for example, are quoted say that “an initial pilot of a CBDC for wholesale use cases could provide the opportunity for the industry and regulators to test and learn ahead of a retail roll out”. I disagree somewhat with this, since I think retail and wholesale CBDCs are not correlated, but I take the point that learning about the technologies may be helpful. I am in favour of moving ahead in this direction and am not aware of any particular cause for caution here.
David Birch, an adviser and commentator on digital financial services, said that what makes the City of London attractive is the cost of doing business, and “a significant way to reduce the cost of financial intermediation is through the use of wholesale digital currencies, which allow people to exchange financial instruments without the clearing and settlement risks associated with it.” He said the Bank of England and the private sector had already started work in this area.
John Glen MP [ex-Accenture Economic Secretary to the Treasury] told us that he is confident that the Bank of England’s ongoing work to improve the RTGS wholesale system is “moving forward in the right direction.” He said he did not think the UK would gain any significant competitive advantage by being an early adopter of a wholesale CBDC.
Sir Jon Cunliffe [Deputy Governor of the Bank of England] said it was not quite right to say the Bank was not examining CBDC technology for wholesale purposes: “The Bank published a paper on omnibus accounts, which would enable the banks that currently have access to central bank digital wholesale to use a digital coin between themselves and then the omnibus account would settle with the Bank of England.”
If you are interested in omnibus accounts and the like, here’s something I wrote about it last year: https://www.forbes.com/sites/davidbirch/2021/08/02/a-post-industrial-economy-needs-post-industrial-money/
Digital ID
Finally, one of the most important and least-discussed points made made by the Committee was nothing to do with payments or money at all.
“Witnesses said a CBDC would need to be attached to a digital identification system as the only reliable way to ensure that payments were legally compliant”.
Those witnesses, including me, were wholly correct to point out that an appropriate digital identity infrastructure is a precursor to a functional CBDC.
Andrew Bailey said a digital ID would be needed but it was to be determined whether it would be unique to a platform or “broader in terms of your identity”. This is clearly correct and an obvious priority. However, the Bank of England’s Discussion Paper mentioned the possibility of digital ID only in passing and the Department for Digital, Culture, Media and Sport’s recent consultation on digital ID does not mention CBDCs at all.
In fact what I told the committee at the beginning of my evidence was that “I would be against rushing into retail digital currency. I am a very strong supporter of retail digital currency, but I am acutely aware of the potential for a colossal privacy catastrophe”.
So, in
Snippings 