On 13 January 2022, the House of Lords’ Economic Affairs Committee (Committee) published a report ‘Central bank digital currencies: a solution in search of a problem?’. The report states that their Lordships have yet to hear a convincing case for why the UK needs a retail central bank digital currency (CBDC). The Committee found that while a CBDC provides advantages, it could present challenges for financial stability and the protection of privacy.

Among other things the Committee notes two main security risks posed by a CBDC. First, individual accounts could be compromised through weaknesses in cyber security. Second, the centralised CBDC ledger, which would be a critical piece of national infrastructure, would be a target for attack from hostile state and non-state actors. While no design can guarantee absolute security, any CBDC system will need to be adaptable to emerging security threats and technological change, including fast-developing quantum computing.

The Committee states that before deciding on whether to proceed the HM Treasury and Bank of England Joint Taskforce exploring the potential of a retail CBDC should answer the following questions:

  • To what problem is a CBDC the answer?
  • What is the precise threat posed by privately issued digital currencies, what it is that a CBDC could do to offset any threat, and what is the role of regulation?
  • How can a CBDC be a competitive payments option without causing a level of banking sector disintermediation that would have negative consequences for credit allocation and financial stability?
  • What additional monetary policy options would a CBDC provide to the Bank of England, and would these be proportionate to the Bank’s current mandate for monetary and financial stability?
  • How can a CBDC ensure strong privacy safeguards while also meeting financial compliance rules? Which organisations will be able to access sensitive CBDC payments data, and for what purpose will that data be used?
  • What are the main international and national security risks that arise from a CBDC, and how can these be managed? How can a CBDC be made secure against current and future threats without sacrificing useability?

At 3pm 18 January 2022, the Committee is hosting an event, ‘Central Bank Digital Currencies: Plotting a Path Ahead for the UK’. Click here for more information.