Central Bank Digital Currencies (Economic Affairs Committee Report)

Baroness Kramer Excerpts

Thursday 2nd February 2023 Lords Chamber

[Baroness Kramer (LD)]

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.

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.