MNI INTERVIEW: UK Lawmakers Wary As BOE Looks At Digital Pound

A future UK central bank digital currency could undermine the financial sector and allow the Bank of England to expand its monetary policy powers without legislative sanction, a member of the House of Lords Economic Affairs Committee told MNI, highlighting disquiet among lawmakers about the lack of obvious benefits from the creation of a virtual pound.

“What we have yet to find out is what problem is it that CBDCs are trying to solve,” Lord Bridges said in an interview, though he acknowledged that his Committee would have criticised the BOE, which is looking into the possible creation of a CBDC in collaboration with the UK Treasury, had it failed to examine an area being explored by other major central banks.

Interest paid on a CBDC could attract funds away from commercial bank deposits, with the appeal of holding money at the ultra-safe central bank increasing in times of financial stress, potentially causing more instability, the Lords Committee said in a report published Jan. 13.

“It is a question, again, that needs an answer almost irrespective of the design of the CBDC,” said Bridges, who is also an adviser to Santander Group Executive Chairman Ana Botin, noting that the central bank would effectively be competing with banks for deposits while also regulating them.

“There is an inherent tension within the concept of the CBDC which I have yet to see resolved," he said.

POTENTIAL FOR EXPANDING MONETARY TOOLKIT

While BOE Governor Andrew Bailey has told the Committee that he does not envision a CBDC being used to make it easier to cut rates below zero or to provide helicopter money, Bridges observed that once a digital currency has been created future governors or governments could take a different view on whether it could enhance the power of monetary policy.

"I don't know how you would legislate to prevent that from ever happening. You could try, but parliament is sovereign so it could change the legislation," Bridges said.

"The other point we kept coming up against was 'Are there not existing regulatory tools that the Bank can use to address the challenges and issues that the CBDC is meant to be solving’?"

The Lords Committee also highlighted concerns over privacy.

“I am really interested in how a central bank digital currency could work in such a way that you are safeguarding financial compliance and money laundering rules whilst at the same time ensuring that the privacy of the individual is fully maintained,” Bridges said.

Speaking to the Treasury Select Committee this week, Bailey conceded that the case for a CBDC needed to be established.