Central Bank Digital Currencies (Economic Affairs Committee Report)
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The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
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.
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.
Lord Tunnicliffe (Lab)
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?
Baroness Penn (Con)
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.