Introduction
The House of Lords has recently weighed into the continuing debate over the relevance or development of a central bank digital currency.
In January 2022, the House of Lords Economic Affairs Committee released its Report entitled ‘Central bank digital currencies: a solution in search of a problem?’ which you can access here.
In summary, the Committee says that the benefits of the UK adopting a “digital Pound Sterling” are ‘overstated’ and are ‘achievable through less risky alternatives.’ The Report concludes that despite some advantages, there is ‘no convincing case’ for a digital pound in the UK, even though digital currencies supported by central banks (such as the Bank of England in the UK) may have their uses in relation to securities trading and settlement between financial institutions.
The CBDC concept
CBDCs have in the last two years started to emerge, with many countries thought to be looking to develop them and a few (albeit typically smaller states) even implementing them into their financial systems. The premise is that the digital currency is pegged to the value of the given country’s fiat currency and acts as a digital token, similar to a cryptocurrency, but which is issued and therefore underwritten by that country’s central bank.
The Report
The Committee began its enquiry in September 2021 to explore how a CBDC for the UK – a “digital Pound” – might affect the role of the Bank of England, monetary policy, and the financial sector. It expressed concerns that there would need to be safeguards, such as placing limits on the amount of the digital Pound that individuals would be allowed to hold. A paramount concern was that if the Pound as a currency were to experience instability in the currency markets – if there were to be a “run” on the Pound – this might (if not checked by the system) lead to holders of Sterling creating significant further instability by seeking to move from the fiat version to the ostensibly more dependable digital version.
Among its primary findings, the Report stated that the introduction of a digital Pound for the UK poses two main security risks: firstly, that individual retail accounts are inherently subject to cyber-security weaknesses, threatening the privacy of the account holders and, indeed, the value of the currency they hold; and secondly, that the necessary centralised CBDC ledger could itself become a target for attack from ‘hostile state and non-state actors.’
Whilst concluding that currently a CBDC does not suit the UK’s financial values and interests, the Report refers to potential use for a CBDC in the future for the UK.
So, the Committee has not ruled out CBDC entirely. Specifically, the Report refers to potential benefits such as enhanced efficiency in securities trading and settlement between financial institutions. To this end, the Committee recommended that a Joint Taskforce consult on the potential use case alongside its already planned 2022 retail CBDC consultation process.
Commentary
The House of Lords and its Committee, per se, probably carry less overall weight in this debate than do the Treasury and financial entities such as the Bank of England itself. However, this analysis is of some interest in determining where the UK positions itself in the developing international discussion over the use and development of digital currencies. To date, most of the interest in the crypto sector rests with the non-state currencies that have emerged in numbers since the creation of Bitcoin. The argument goes that these tools of decentralised finance are gaining such strength that state central finance institutions must emulate them in order to catch up and to retain a measure of control over their own currencies for the purposes of international financial stability.
Well, perhaps not so – or at least not yet so, in the eyes of this particular Committee. Digital currencies are still not that well understood. More work needs to be done on their perils alongside their perceived utilities, before an economy the size and importance of the UK’s takes what would be an irreversible decision to move a substantial amount of its emphasis into the digital arena. Enabling the Pound in one’s pocket (to use the age-old metaphor) to physically disappear and become a digital alternative is greatly more radical than the credit card revolution of the 1970s or even the emergence of electronic money some 15 years ago. The change would affect everyone (not just the currency traders and their commercial clients) and would likely need a significant degree of public education. And the point – which the Committee teased out with its findings on what happens if Sterling moves into instability – is that there would effectively become two parallel versions of the Pound, at risk of divergence as Gresham’s Law, recast for the digital age, takes effect. Governments and central banks may be able to manage this as a macro-level money supply issue; but the general public for sure cannot be expected to do so. So perhaps the Committee is wise for now to take a cautious approach.
We can help
Are you looking at the emerging world of crypto and considering how it affects your business? Have you launched a currency or created NFTs, or are you considering doing so? Do you need to understand more about the legal issues behind crypto, NFTs or the technology, including regulation, tax, or intellectual property? Have you encountered any difficulties and are looking for advice or redress?
We have specialists across the firm looking at all these areas and others related to them. We operate under the Rosenblatt brand in relation to all litigation and dispute resolution matters and the Memery Crystal brand for non-contentious legal advice. Please come and talk to us.
Contact us
Should you have any questions or wish to discuss any issues raised in this article, please get in touch with your usual contact at either Rosenblatt or Memery Crystal, or the authors named below.
Authors
Laura Clatworthy, Partner (Laura.Clatworthy@rosenblatt-law.co.uk)
Daniel Tunkel, Partner (Daniel.Tunkel@memerycrystal.com)
James Bateman, Trainee Solicitor (James.Bateman@rosenblatt-law.co.uk)
We at RBG Holdings/Rosenblatt support and encourage free/independent thinking in relation to issues which are sometimes considered to be controversial subject matters. However, the views and opinions of the authors of articles published on our website/s do not necessarily reflect the opinions, views, practices, and policies of RBG Holdings/Rosenblatt.
