Central Bank Digital Currencies (Economic Affairs Committee Report)

Lord King of Lothbury Excerpts

Thursday 2nd February 2023 Lords Chamber

[Lord King of Lothbury (CB)]

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: A Solution 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.

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?