Lawmakers in the UK are urging the government to reevaluate the proposed limits for a potential digital pound and to ensure that its design allows for the possibility of paying interest. This development comes as both the UK and the European Union have expressed their reservations about retail digital currencies earning interest, similar to traditional bank deposits.
Concerns raised by the Treasury Committee
In a recent report published by the Treasury Committee of the House of Commons, UK legislators expressed their concerns regarding the country’s plans for a central bank digital currency (CBDC), which were outlined in a February consultation. While the government has indicated that a digital pound might be necessary in the future, the lawmakers are seeking adjustments to its framework.
Countries worldwide are exploring CBDCs as a means to enhance payment systems and embrace digital finance. While the United States remains undecided about the prospect of a digital dollar, Europe has taken the lead, with both the UK and the EU proposing concrete plans for CBDCs geared towards private retail payments.
Diverging views on interest-earning CBDCs
While UK lawmakers appear to align with the EU’s proposal to impose lower individual holding limits for digital euros to prevent mass withdrawals from traditional banks, they are at odds with the idea of prohibiting CBDCs from earning interest, effectively treating them as cash. The legislators recommended further analysis of the monetary policy impact of paying interest on the digital pound.
The UK Treasury’s initial plans explicitly stated that a digital pound, like cash and many current accounts, would not accrue interest, making it suitable for everyday transactions but unsuitable for savings.
Additionally, lawmakers cautioned against the proposed £10,000 to £20,000 holding limit for digital pounds and suggested a lower limit in line with the European Central Bank’s €3,000 cap. Their aim is to minimize the risk of a massive shift of funds from bank deposits into digital pounds, with the possibility of increasing the limit over time.
Similar to their European counterparts, UK legislators also expressed skepticism about the overall benefits of a digital pound compared to potential risks. They emphasized that digital pound legislation should not grant the government access to user payment data beyond what is permitted for law enforcement purposes.
Call for transparency and accountability
Nonetheless, the committee expressed support for further consultative work on the digital pound’s design, provided that potential benefits are demonstrated, and concerns related to privacy and financial stability are adequately addressed. The government and the Bank of England have been urged to outline the criteria that will inform their final decision to issue a digital pound as soon as possible.
In addition to these recommendations, lawmakers want the government to be accountable for the costs associated with researching and designing a digital pound. They are calling for the Bank of England and the Treasury to track and report digital pound-related expenditures as a separate line item in their annual reports and accounts starting from 2024.
As the decision to issue a CBDC remains pending, it is anticipated that the UK Treasury will release its response to the consultation on the proposed digital pound model in the near future. Following this, an experimentation and design phase will be undertaken before a final decision on issuance is reached.
