That this House takes note of the Report from the Economic Affairs Committee Central bank digital currencies: a solution in search of a problem? (3rd Report, Session 2021-22, HL Paper 131).
My Lords, I am delighted to open this debate on central bank digital currencies, and in so doing I declare my interest as an adviser to, and shareholder in, Banco Santander. The words “central bank digital currencies”, or the acronym CBDC, can be met with either a blank look or a reply of, “Oh yeah, crypto and all that”. There is undeniably and understandably a lot of confusion about what a CBDC is and is not. So before I go any further, for those watching or listening who may need some clarity on this point, what we are talking about here is the creation of a digital pound or bank note that the Bank of England would issue. It is not a new currency, nor a cryptocurrency, which is privately issued and not banked by a central party.
For those who may remember it, whereas Harold Wilson talked of the “pound in your pocket”, a central bank digital currency would mean we might have digital pounds in our digital wallets, which does not quite have the same ring to it, but there we are. A number of central banks are looking at introducing a CBDC, and the Bank of England is among them. So a year ago, the Economic Affairs Committee published a report which, at its core, asked a simple question: is a central bank digital currency a solution in search of a problem?
A year on, I think that that question still needs answering. The fact that this is so shows the wisdom of the then-chairman of the committee, my noble friend Lord Forsyth, in instigating this inquiry. I thank him for and congratulate him on his chairmanship of our committee. In so doing, I also pay tribute to the Bank of England for the thorough work that it—in particular Sir Jon Cunliffe and his team—is doing on a central bank digital currency, and the transparent way in which it is doing so. I thoroughly recommend that anyone who is interested looks at their website, for as their work progresses it highlights the issues that the creation of a CBDC raises and that our report highlighted.
My Lords, I speak as a member of the Economic Affairs Committee which produced the report that we are debating. I thank the noble Lord, Lord Bridges, for his excellent introduction to the debate. I declare an interest as a consultant to Citigroup.
Central banking is not the most exciting of topics. Indeed, at the Bank, my ambition was to make it boring. But add “digital” to any title and you find a wave of enthusiasm overwhelming all those involved, with people feeling that this is the future and that we must be at the forefront of any development. The Government have said that they want the UK to be at the forefront of innovation of crypto assets and fintech, but we need to be selective and not driven by a misplaced enthusiasm for all things crypto. It is probably true that when the lemmings went over the cliff, some of the leaders said to one another, “Perhaps it wasn’t the best idea to be at the front of this particular wave.”
The first thing to say about a central bank digital currency—CBDC—is to repeat what the noble Lord, Lord Bridges, said: it is not a currency. If the Bank of England or the Federal Reserve were to issue a CBDC, it would be in sterling or dollars, respectively. CBDCs are about ways of making payments; they are not a new currency. Whether a country needs a CBDC is really about the state of its current payments system, hence the title of our report, Central Bank Digital Currencies: ASolution in Search of a Problem?
What are the problems in our payments system to which a CBDC might be the answer? The main conclusion of our report is that there are no problems to which a CBDC is the only, or even the most obvious, answer. Our payments system is more efficient than those in most other countries, certainly the United States. Most transactions are already digital, whether by tapping a card on a machine at the point of sale or making a digital payment on a computer for remote transactions. All of these are operated already by commercial banks and an increasing number of new payment vehicles.
My Lords, I thank the noble Lord, Lord Bridges, for the committee’s excellent report. Around the time it was issued, I wrote for the website of OMFIF, a think tank that I am involved with, totally rejecting and criticising this scheme. It is not so much that it does not solve a problem but that it will create one.
The most significant problem it will create is that it will deprive ordinary people of easy access to cash. We have to be honest: it may be that cash is declining in terms of total payments but larger payments are made by richer people and smaller payments are made by poorer people. As somebody in Parliament, I feel that it is my duty to care for the smaller people rather than the big people. I do not care what commercial or central banks do with each other about sending money via digital or non-digital means. What concerns me is people who are budgeting their expenditure from day to day. They value cash, access to cash and the ability to approach their bank in person to explain the problem they are in.
When I lived in Camberwell and I went to my local bank branch—that is a rarity nowadays; there are no local bank branches left, which is bad enough—I could see how people were in serious trouble and could not solve their problem unless they were face-to-face with their bank so that they could explain why they needed money and how they could have it. They needed cash. It is also true that we have numeracy problems at all age levels in this country. It is bad enough having to count cash. CBDCs will alarm people in their day-to-day behaviours. It is not a question of what problem CBDCs would solve; I am worried about the problems that they would create, which would be much more serious than the problems they would solve.
The original sin in this respect, if I may say so, is bitcoin. Because it was called a coin, people thought it was money. It is not; it is a token. I call it a “Zen token” because it has Japanese origins. It has no useful value whatever and it has a very uncertain exchange value. Only a gambler would hold bitcoin. Because bitcoin was called a coin instead of a token, lots of copies of those assets have been introduced. As we saw from the FTX debacle, a lot of money can be swindled out of ordinary people.
My Lords, I also had the privilege of sitting on the Economic Affairs Committee for the development of this report under the excellent chairmanship of the noble Lord, Lord Forsyth, who is no longer in his place, and with the expertise brought by the noble Lords, Lord King and Lord Bridges. I tend to be of their mind but I really do not think that we can have four speeches in a row that represent only the more sceptical side of the argument. I am a debater so I will try to present some of the other views because they are significant.
First, there is the issue of cross-border transactions. I say to the noble Lord, Lord King, that there may be ways in which the cost of cross-border transactions can be reduced but, boy, are they not evident at this moment in time. I constantly need to bring money from the United States because I worked over there for many years. I am really tired of paying Barclays something like 15% of every transfer; it gets you one way or another, either through manipulated currency exchange rates or fees. Yes, there are alternatives—I also use some of the fintechs—but, frankly, one is grateful to be taken for just 5% to 7% rather than 10% to 15%. It is absolutely ridiculous. It is not just the KPIs and the regulations. The institutions have seen that this is an opportunity where they can take superprofits—and they jolly well do. I would grasp at almost any mechanism that would give us an efficient and fair cross-border transfer system. As I said, I am speaking on this personally.
If we expand this out to business, we are a trading country and we say that our future is trade, so this has to be tackled and dealt with. At this point in time, to turn down looking at any solution might be rather unwise. However, a different argument, and one that I found interesting, was brought before the committee. Noble Lords will be aware that something like 114 countries are currently looking at a potential CBDC. Three Caribbean countries and one African country have already launched a CBDC in some form or another—some in quite constrained forms, but they have launched it. Various countries are running pilots and, most significantly, in China the digital yuan is being trialled now in 15 cities, with transactions surpassing 100 billion yuan, or $14 billion, to last August. You can see the attraction of the yuan. At the moment, China says it will merely be used domestically, but its potential to export this across the developing world as a reliable mechanism for payment where people are suspicious of their local banks and their Government is extremely powerful. If China does that, I think we can all guarantee that along with the digital yuan will go a great deal of political control. Quite frankly, this is something that we have to look at from that perspective as well.
I thank the noble Lord, Lord Bridges, for his introduction to this debate. He presented an elegant precis of the document. The noble Lord, Lord King, touched upon the magic word “digital”, and I think that is absolutely valid. The word is sprinkled around our society as somehow modern—digital has been around for a long time but it is hopefully modern. Both noble Lords and my noble friend Lord Desai had cynical concerns that this might take off in an uncontrolled way. My noble friend Lord Desai also brought up the issue of the smaller and poorer people. In this whole debate about money, currency and so on, they are not very well represented, so it is important that people such as my noble friend, and to some extent me, always remind us that all these schemes have a levered effect, particularly on poor people who depend on cash.
The noble Baroness, Lady Kramer, made an excellent speech, as usual, with the idea of introducing balance in something of a headwind. I take from what she said that, whether or not one thinks CBDC is a good idea, government has a duty to apply appropriate resources to understanding this area. The benefits of a central bank digital currency, CBDC, which the committee alluded to, such as providing the Bank of England with powerful new monetary policy tools, should certainly be explored, but its conclusion—that it has yet to hear a convincing case for why the UK needs a retail CBDC—seems to stand up. The report speaks to the financial stability risk. On this Government’s watch, millions of British consumers’ savings have already been put at risk by the collapse of cryptocurrencies, and crypto-related scams have hit record levels. We have an amendment to the Financial Services and Markets Bill which would compel the Government to update their decade-old national fraud strategy, and clearly digital currencies and related issues have to be considered.
Despite the real and tangible risks of private unregulated digital currencies, it seems the Government are committed to spending significant resources promoting crypto gimmicks, to great fanfare. I fear their exploration of CBDCs maybe a continuation of this pattern, wanting to innovate to distract from political turmoil over tax affairs and crumbling public services. Instead, I wish the Treasury would keep a red-hot focus on the cost of living crisis and avoid wasting precious resources on NFTs, for example, or on more consultations. What we need is action on consumer protection now.
My Lords, I apologise for the delay; I was just organising my responses to the many questions raised by a short but expert list of speakers on this debate. I thank all noble Lords who have spoken today and thank the Economic Affairs Committee for its work in producing this really valuable report. A considerable amount of ground has been covered today and I will try to address specific points raised by noble Lords in my response.
Before I do, I might speak a little about the ambitions that lie at the root of this policy. We are living through a pivotal time for the future of money and payments. Rapid innovation is bringing fresh opportunities and considerations for individuals, industry and policymakers alike. As noble Lords are aware, like many countries around the world—as pointed out by the noble Baroness, Lady Kramer—the UK is actively exploring the potential role of central bank digital currencies. The Treasury and the Bank of England are working closely together to consider our next steps.
This work is a key part of a broader government agenda to ensure that the UK remains competitive and at the forefront of payments innovation. I have to disagree with the noble Lord, Lord Tunnicliffe, in his assessment of this issue. He pointed to creating a regulatory landscape for fintech. That is what we have done and continue to do through, for example, the Financial Services and Markets Bill that most of us are also debating on Mondays and Wednesdays. This is a key part of that landscape too and we need to be future facing when it comes to this issue.
The noble Baroness, Lady Kramer, pointed to the potential benefit of a CBDC in providing a better basis for cross-border payments, and I have talked about its importance in remaining competitive and looking at payments innovation. To try and answer the first question put to me by my noble friend Lord Bridges, at its heart, the question of a CBDC is about maintaining access to central bank money. This is available through cash, but that landscape is changing.
The Minister assured us that there would be parliamentary involvement in the introduction of any CBDC. Does that mean she is assuring us that it will involve primary legislation?
I believe we need to understand better the design and shape of a CBDC, but I am trying to give the strongest possible assurance on that point while not knowing the answer to some of the questions that will be in the forthcoming consultation.
As I was saying, one of the UK’s great strengths is remaining at the forefront of innovation. The landscape is changing quickly in this area and we are open-minded as to the right way to proceed. Many of the points raised in the Select Committee’s excellent report are exactly those we want to continue to consider in a very public and open way through the forthcoming consultation, and through collaborative work between the Treasury, the Bank of England and many other public organisations, so that we can get the answers right to many of the important considerations that need to be made. I do think this work has value, and it is important to ensure that we remain at the forefront of some of these areas. I commend that position to the House.
My Lords, I thank all the speakers who have contributed to this short debate. What we have lacked in quantity we have certainly made up for in quality.
As my noble friend rose, I was wondering why the House was suddenly filling up with other noble Lords. Was there a sudden massive outbreak of interest in CBDCs? Then I remembered that of course, we are about to debate Brexit. As a captive audience is here, I ask all noble Lords to start to focus a bit more on this subject, which I think demands more parliamentary scrutiny, given the profound issues we have been hearing about from the noble Lords, Lord King, Lord Desai and Lord Tunnicliffe, the noble Baroness, Lady Kramer, and obviously the Minister. What we are talking about here could have a profound impact not just on our currency and how we pay for things, but on our wider economy.
I have three brief points to make. First, the noble Baroness, Lady Kramer, is quite right that we need to keep our critique of CBDCs balanced. We certainly need to explore this subject, and she is right that 114 countries are looking at it. Obviously, we should avoid falling into groupthink, which is I think where the noble Lord, Lord King, is coming from. But at the same time, the fact that China and particularly the EU are progressing incredibly fast in the development of central bank digital currencies could have deep geopolitical and global macroeconomic implications. So the noble Baroness is right that we need to look at the subject, and in so doing it may have spin-offs in terms of benefits and innovation.
My second point is equally important, and this is where the noble Lords, Lord King and Lord Desai, came in. As I said in my opening speech, the challenges that the creation of a central bank raises are significant. As the noble Lord, Lord Desai, put it—and he is right—the question is not just, “What problem is the CBDC trying to solve?” but, “What problems might it also create?” We need to bear that in mind. I noted down the motto that the noble Lord, Lord King, wants to have for every central bank, and which he certainly abides by: only do what you can do alone. How very true, and that should certainly be a guiding thought.
Motion agreed.
Let me turn to that main exam question that our report poses: what problem is a central bank digital currency attempting to solve?
“I start by saying—it can come across the wrong way—that we have to be very clear about what problem we are trying to solve before we get carried away with the technology and the idea. I am not convinced about some of the problems that we might be trying to solve.”
Those are not my words; they are the words of the Governor of the Bank of England himself, Mr Andrew Bailey, just a few weeks ago. He is quite right; I would actually go further. There is still no clear, simple answer to this fundamental question, nor in my mind a clear answer to the follow-up question: if there is a problem that needs solving, could it not be solved in other ways?
The Bank of England website states that it is
“considering a central bank digital currency (CBDC) because the way people are choosing to pay for things is changing.”
The argument is that a digital pound would effectively be a new payment system. Our report found that a CBDC could indeed spur competition and innovation in payments, possibly lowering costs for merchants. But we heard few significant advantages for UK consumers if there were a digital pound in their digital wallets, and the Governor himself told us that issuing a CBDC was
“a disproportionate response to that issue”
of competitiveness in the payments system.
Then there is the argument that we need a CBDC to address the decline in cash, and that we need a digital pound as an anchor of confidence. But it is not obvious that the properties of CBDCs would satisfy any residual demand for cash, which is often valued for its physical properties and the privacy that it can provide. Our committee also noted that the Bank itself has said that it would continue to issue cash. Next, and linked, is the argument that a CBDC would increase financial inclusion. Possibly, but it is not clear that a digital pound will break down the barriers currently preventing or deterring people from accessing the financial system. It is likely that there are more straightforward and targeted ways to support access to financial services than launching a CBDC.
The next argument is that CBDCs are needed to avoid the risks that new forms of private money creation, such as stablecoins, pose to financial stability. We heard that greater regulatory control over stablecoins might be sufficient to manage such risks, although there are technical and jurisdictional issues to overcome. That begs the question whether such regulation undermines the need for a digital pound or, to flip this point on its head, whether if there were to be a sterling stablecoin—that is, a stablecoin backed by sterling—that would undermine the need for a digital pound.
Finally, there is an argument that a CBDC is needed to make cross-border payments cheaper and easier. Well, CBDC payments could, in theory, bypass some of the existing frictions in the internal payments systems, with lower costs. Nevertheless, the CBDC system would still have to comply with oversight frameworks, national laws, and international technical standards, which are a long way from being agreed. Furthermore, cross-border payments are already improving as a result of innovation and competition in the fintech sector.
My first question to my noble friend the Minister is: can she summarise in a couple of sentences what problem a CBDC would solve, and why that problem cannot be solved in other ways? Given her ability and expertise, I assume that she will be able to knock that ball straight out of the park and we will get a very clear answer, so I will proceed on the basis that it is clear that we need a CBDC.
The next issue, which our report went into, is how we avoid a CBDC undermining financial stability. If a CBDC is introduced, it is inevitable that some people will transfer money out of their bank accounts and into their CBDC wallets—their digital wallets. It is unclear how much such so-called disintermediation might take place; that will ultimately depend on how the CBDC is designed. But the impact could infect the entire economy, as higher levels of disintermediation would lead to more expensive credit and tighter lending criteria. Without safeguards, CBDCs could exacerbate financial instability during periods of economic stress, as people would likely seek to replace bank deposits with CBDCs.
There are two main options for reducing the negative effects of this disintermediation. The first is to limit the amount of CBDCs that can be held or spent by an individual. The second is to disincentivise use by paying uncompetitive rates on a CBDC above a certain level of holdings. Either of these options, or a combination of both, would be likely to reduce the attractiveness of a CBDC to users, depending on their stringency. This could therefore undermine other possible objectives, such as the ones that I have mentioned: financial inclusion or crowding out privately issued stablecoins.
So, the next question for my noble friend is: what studies has the Treasury or the Bank done on this crucial issue of disintermediation over the last year? In answering that, as we unpeel this onion, I fear we get to other big issues. The first is monetary policy. I assume that the Government do not envisage CBDC wallets to be interest-bearing, and that the CBDC would not be used to implement monetary policy, but, to ask a simple question, can my noble friend rule that out?
Then there is the issue of privacy. In this entire debate, privacy is the dog that has yelped but not yet barked. We heard that any CBDC system could not support anonymous transactions in the same way that cash can be spent anonymously. For that to happen, payments data on CBDC users will exist. The question of who performs the necessary checks on when and where that data is held is a major privacy issue. The Governor of the Bank of England said that a digital ID would be needed but that it was yet to be determined what form that ID would take. So the next question for the Minister is: how has thinking on know your customer rules progressed? 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? Crucially—this is the main question—what kind of digital ID would be needed?
A retail CBDC raises many other issues which our report touches on; for example, its impact on national security and sanctions. There is also the key question of priorities: whether the Treasury and the Bank should focus more on a wholesale CBDC, which would arguably be less disruptive than a retail CBDC and have fewer economic and political risks.
However, I will end by focusing on two less technical points. Our report touched on the first one, but it needs further scrutiny: how much will the creation of a CBDC cost? Secondly, who will foot the bill? Can the Minister give us some indication on that? Thirdly and finally, there is the important issue of the role of Parliament. Given the importance of the creation of a CBDC and the issues that I have raised, can my noble friend confirm without equivocation that if the decision is taken to proceed with creating a CBDC, Parliament will be given the opportunity to scrutinise, debate and vote on primary legislation to do so, and that Parliament—not the Treasury or the Bank of England—will have the final decision on whether we press ahead and create a digital pound?
I apologise for giving my noble friend so many questions to answer. To do so is not to question the need to explore the potential that a CBDC might offer—I repeat that the Bank of England is right to do so—but before we proceed, we need clear answers to these core questions, especially the first: what is the problem that only a CBDC can solve? I beg to move.
Competition has moved us from a system that used to be based on paper cheques, which often took five days to clear, to one driven largely by digital payments, with virtually instantaneous clearing. It would be somewhat odd to try to increase competition in this area by creating a state monopoly of the payment system, as opposed to the role of a central bank in determining the value of a currency. That is a quite different function.
The Bank has played an important role in regulating and promoting the current payments system operated by private sector banks and other payment providers. There is no doubt that further improvements are possible—indeed, desirable—but none requires a CBDC. I invite noble Lords to think of the two different ways in which a digital currency might work: first, for retail customers, and, secondly, for wholesale payment providers. The Bank certainly does not want to offer bank accounts to any individual who wishes to open an account with it. The Bank has always limited the number of customers to the hundreds—not 50 million. I do not think Andrew Bailey or anyone else at the Bank wants to be on the receiving end of phone calls from Mrs Jones in Wrexham or Mr Smith in Guildford complaining that they cannot log into the website to transfer money to their grandchildren. This is not what the Bank of England is set up to do.
In countries without an effective banking system—there are some—the central bank might have to step in but that is self-evidently not true in the United Kingdom, hence the suggestion by some that a CBDC would take the form of tokens issued by commercial banks and guaranteed by the central bank. However, that is exactly the position we are in today: commercial banks issue bank deposits and they are guaranteed one way or another by government. So there is no obvious benefit to creating a duplicate arrangement that happens to have the sexy name of a “digital currency”.
The enormous risk is that, in a financial crisis, households would abruptly shift their deposits from banks to accounts with the Bank of England, forcing the latter immediately to transfer the deposits back to the banks to avoid a collapse of the system. In 2008, when the Bank, with approval from the Government, lent a large amount of money to RBS and HBOS to prevent their collapse, the operations were covert and revealed only some months later to prevent a system-wide loss of confidence. That would be impossible if households could switch without limit instantaneously from all commercial banks to the Bank of England. So a retail CBDC has risks but no obvious benefits.
As for a wholesale CBDC, we already have one in the form of reserve accounts with the Bank of England held by payment providers such as commercial banks. It has been used actively in recent years in the operation of, first, quantitative easing and, now, quantitative tightening. In evidence to our committee, the Bank of England made it clear that it saw no need for a wholesale CBDC.
Of course, there can always be improvements in our payment systems, but a CBDC is neither a necessary nor a sufficient condition for that. The major problem today concerns the cost and speed of cross-border payments but much of this results from regulation to prevent money laundering. There is certainly scope for central banks to link their payment systems together—many central banks are working on this—but that does not require, nor is it facilitated by, central banks setting up their own CBDCs.
The UK should certainly aim to be at the forefront of fintech but we need to be careful in determining the respective roles of the state on the one hand and competitive private sector players on the other. My motto for a central bank is: only do what only you can do. Central banks are important regulators of payment systems. The case for them to be direct providers of digital retail payments is yet to be made. That is why I conclude by going back to the title of our report, Central Bank Digital Currencies: A Solution in Search of a Problem?
The sooner we get away from this digital nonsense, the better off we will be—definitely in terms of people’s welfare. We have enough problems with the unequal distribution of money and so on. We certainly do not want to add to those by chasing the latest technology just because it is the latest technology and harming our own citizens. Rather than asking what the Bank of England wants to do, can the Government please say categorically that they have no intention of introducing CBDCs, which would deprive ordinary people of access to cash as they have always known it? Anything else would be deeply harmful to the body politic.
The European Union is taking a look at this issue and is expected to conclude its investigations in the autumn. The US is at a very early stage, and is probably much closer in its position to that expressed by the noble Lords, Lord King and Lord Bridges, but it has a great deal to lose if it is outmanoeuvred. Currently, the US dominates the international payment system through SWIFT, which is a major contributor to international financial stability. If China or Russia come to control a significant portion of the international payment system through CBDCs, western security, including its sanctions regimes, could be incredibly difficult to enforce and is potentially quite seriously compromised.
I have to say to the noble Lord, Lord Desai, that, back in the UK, quite a number of social justice groups that work with people who are financially excluded can see real possibilities in a CBDC. We know that all the banks, working together, have for years talked about dealing with financial exclusion and bringing people in from the cold. They have made some progress, but we still have something like 1.2 million people without a bank account because they do not trust the banks. There is a possibility that they might trust the Bank of England where they will not trust the banks that they see involved in various mis-selling scams and abusing their position of power, and where they are generally always going to be suspicious of the motives of the private banking sector. We have got to think some of that through. It interests me that so many of those groups are looking at CBDCs as a route to be able to deal with that excluded population.
The other issue that was brought to our attention, which has not been discussed, is the learning factor that comes from being so deeply engaged in digital currency, as a regulator such as the Bank of England would be if it delivered a CBDC. That becomes necessary as you start to look at the world of stablecoin and, more broadly, crypto assets. The Government issued their consultation on crypto assets yesterday. I printed it out and thought that I would read the summary section. It is absolutely impossible—you have to read the whole 42 pages; it really is a nightmare. It will be entertaining for me this weekend, because I am a geek. The reality is that there is extraordinary complexity in understanding this field and the plumbing that sits behind it; it is not just blockchain but the far more complex mechanisms for tracking, enforcement, reporting and monitoring—it is a very complex environment. It is also about dealing with the players that appear on the horizon that most of us look at and think are a Ponzi scheme by any other name.
The UK continues with its declaration. Last April, John Glen, then Economic Secretary, stated our goal to be a global hub for crypto assets. I can understand why; we are bleeding a lot of the traditional business here in UK. It was inevitable after Brexit, and it is happening slowly but steadily. We are trying to grasp the new area of green finance because it offers possibility and potential, and I hope very much we will become a leader in it. However, every time we think that crypto is bound to die now, after the latest scandal, it rises again from the dead, and we discover that billions of pounds of assets are flowing in its direction. If we want to be engaged in that world and decide that, like it or not, that is where the public are going and therefore that is where we have to be, the question is this: does it make a difference to our ability to understand, monitor and control if we have a regulator deeply embedded in the process by engaging itself in a digital currency?
I understand all the issues that have been raised—questions around why we would do this when there are other ways to do it; that all it does is upset the system; that we can have lesser innovation to make things work more effectively—but, if the public make the call that this is where they are going, that is where we also have to go. I hope very much that the Government will take all of that into account as they try to make these complex decisions in the future.
Can the Minister enlighten us on how many Treasury and Bank of England officials are working on this during this most serious cost of living crisis? Are CBDCs appropriately prioritised? If the Government want to do something in this space, how about getting serious about building a robust regulatory regime that would attract fintech companies to the UK—a regime that would allow new companies to safely harness new technologies?
I also acknowledge at this point the concerns raised by the noble Lord, Lord Desai, about the implications of this work for access to cash. Key to our considerations will be ensuring that financial inclusion is at the heart of any technical design decisions on CBDC and we will also be considering the role a CBDC could play in increasing access to digital payments. Again, the noble Baroness, Lady Kramer, highlighted some ways in which that could be the case.
We acknowledge the importance of cash to many households across the country at this time, in particular more vulnerable households or those who may be more financially excluded. That is why we have taken action to legislate to protect access to cash. Again, that is going through in the Financial Services and Markets Bill that this House is currently considering.
With all that said, we have not yet decided whether to introduce a CBDC—a digital pound—in the UK, and we will engage widely with stakeholders on the benefits, risks and practicalities of doing so. The design of any UK CBDC is subject to further work, and a forthcoming Treasury and Bank of England consultation, due in the coming weeks, will set out some of our more detailed thinking. Crucially, any future decision will be based on a rigorous assessment of the benefits and what it means for public policy objectives.
Delivering a UK CBDC will require a carefully sequenced plan of work, which will span several years. The consultation will set out the Treasury and Bank of England’s assessment of the case for a digital pound. It will also set out further detail on the “platform model” proposed in the Bank’s 2020 discussion paper. This would mean that a CBDC would exist as a complement to cash and bank deposits, leaving a substantial amount of retail-facing business to the private sector.
If there is a decision to proceed, a development phase would follow the consultation. This would include the publication by the Bank of England of a technical specification. It would involve in-depth testing of the optimal design for, and feasibility of, a UK CBDC. Following this, a decision would be taken on whether to move into a subsequent build and testing phase, with the earliest date for any launch in the second half of the decade. We believe that this is an ambitious, yet feasible, timeline towards delivery and, as I have said, extensive stakeholder engagement and consultation will be crucial in making the decision to move to each stage of the timeline towards new issuance.
To address another question from my noble friend Lord Bridges around the role of Parliament in that process, we expect Parliament to be fully engaged through any possible legislation in an open and transparent manner to ensure that there is full and proper scrutiny of any proposals in coming years. My noble friend also asked about the work the Treasury and Bank of England have done on disintermediation and whether I could rule out the digital pound being interest bearing. Those are two of several risks and questions that need consideration in the design choices. The macroeconomic effects of a CBDC will be contingent on some of those design choices. For example, an interest-bearing CBDC could allow for more effective monetary policy transmission, while a non-interest-bearing CBDC could make the zero lower bound more binding, therefore reducing the strength of monetary policy. That is something that the Government and the Bank of England have not reached a decision on yet.
As also pointed out, one of the main potential macro risks could be that of bank disintermediation. In an illustrative scenario, the Bank estimated that the cost of credit could rise as a result of consumers reallocating from commercial bank retail deposits into a CBDC. This scenario was theoretical, and the Bank maintained that it was difficult to forecast with any certainty the extent to which a CBDC could cause bank disintermediation. The design choices of a CBDC could be used to reduce some of these macroeconomic risks. Specifically, holding limits and decisions on whether a CBDC would be interest bearing are features most likely to have an impact on this. So the potential effects of a CBDC on the macro economy are broad, and we fully acknowledge that. The Bank and His Majesty’s Treasury are working closely together to gain a clearer understanding of the potential impacts.
On privacy and security, maintaining user safety and privacy is of the utmost priority as the Government and the Bank appraise the case for a CBDC. Indeed, the UK, through its G7 work, has been clear that rigorous standards of privacy, accountability and transparency on how information will be used are essential for any CBDC to command trust and confidence. Fundamentally, the Government recognise that financial innovation must be safe and secure in order to benefit and win the trust of consumers, businesses and the wider economy alike.
My noble friend Lord Bridges and the noble Lord, Lord King, mentioned the benefits of a retail CBDC versus a wholesale CBDC. The Bank and the Treasury have chosen to explore a retail CBDC in light of the potential benefits I touched on before, including providing digital access to central bank money in a digital payments environment and greater efficiency and resilience in payments. With regard to a wholesale CBDC, as the noble Lord, Lord King has pointed out, banks already have access to electronic central bank money in the form of reserves, and that has been available for decades.
We are open to exploring innovative ways in which wholesale firms can use central bank money, and HMT and the Bank are working together to continue exploring the case for new and improved ways of facilitating wholesale settlement. There are three ongoing initiatives that we consider are likely to provide similar benefits to any wholesale CBDC. First, the Bank is already renewing its wholesale payments system, the real-time gross settlement system, which will improve the efficiency and resilience of domestic wholesale payments being made as well as offering increased interoperability.
Secondly, last year the Bank of England created a new omnibus account to enable private sector innovation in wholesale payments. These new accounts were announced by the former Chancellor in Fintech Week in April 2021 and will allow firms to create innovative wholesale settlement solutions of their own, docking into the Bank’s balance sheet to provide them. Thirdly, the Treasury has proposed a new sandbox for the use of distributed ledger technology in financial market infrastructures, a measure that we are taking through the Financial Services and Markets Bill. That will support firms wanting to use new technology to provide FMI services such as the settlement of securities.
My noble friend Lord Bridges asked about the cost of a CBDC and who will pay, and the noble Lord, Lord Tunnicliffe, asked how many people are working on the current project and what it will cost. The Economic Secretary has been clear that a UK CBDC is a major national infrastructure project, so the Government acknowledge that it is a significant undertaking. It will cost money to develop, although I am not in a position today to say how much as we are still in the early R&D phase of our work. Many government innovations to modernise come with a cost, and the upcoming consultation aims to ensure that genuine public discussion has taken place on both the potential benefits and the cost. While I cannot provide the noble Lord, Lord Tunnicliffe, with specific figures—if I can, I will write to him with them—that is the point on which I would close this debate. One of the UK’s strengths is remaining at the forefront of innovation.
Whether one is sceptical about the rationale for introducing a CBDC or more persuaded of its merits, we must continue to scrutinise and debate these issues. For sceptics, too little scrutiny means that we might stumble into introducing a CBDC, which could have profound unintended consequences. For those who are more forward-leaning, a failure to progress might mean not just missing out on opportunities but getting left behind, which could have geopolitical and macroeconomic consequences.
I say for those who were not present that I bombarded my noble friend with lots of questions—I apologise—but the central question was: what problem is the CBDC trying to solve and, crucially, why can it not be solved by other means? I think my noble friend said that the reason for it is to address the decline in cash. That is obviously a reason, but I make two points. First, the Bank of England itself recognised that the CBDC would be an imperfect substitute for cash, saying two years ago:
“For those in society who value the physical nature of cash, the introduction of CBDC is unlikely to affect their payment behaviour, and so we consider that CBDC would likely act as a complement to cash rather than a substitute.”
Secondly, are there not other means to address that?
Finally, and I am grateful to the noble Lord, Lord Tunnicliffe, for raising this, we still need a much clearer and unequivocal answer to the question: will it be Parliament that votes on whether to introduce a CBDC? It could have a major impact on this country, and it is only right that Parliament takes that decision. It cannot be taken by the Bank of England and the Treasury alone. We will return to this point, but I thank my noble friend.