Only parliament can decide on state-backed digital currencies, colleagues say

The British Parliament, not the Bank of England, must decide on the introduction of a state-backed digital currency because the move would have “far-reaching consequences,” an influential House of Lords committee warned on Thursday.

A report by the House of Lords economic affairs committee dismissed many of the potential benefits of a central bank-issued digital currency and said the proposal had potentially serious implications, including privacy issues. It described the concept as “a solution in search of a problem.”

The BoE, which last year set up a joint task force with the Treasury to assess the costs and benefits of its own digital currency, is one of more than 90 central banks worldwide studying the concept.

The idea is to create the equivalent of a digital banknote that people can use to buy goods and receive payments linked directly to the central bank. It would compete with commercial banks that already allow people to make digital payments through credit and debit card transactions and other electronic payment methods such as PayPal.

The BoE said a central bank digital currency could improve the efficiency of transactions and reduce costs.

But the report by the committee, which includes former BoE governor Mervyn King, found few compelling reasons for such a currency. “We have not yet heard a convincing argument as to why the UK needs a retail [central bank digital currency].”

It warned that any government digital currency – particularly one that included private accounts at the BoE – “may have far-reaching consequences for households, businesses and the monetary system for decades to come and, depending on its design, pose significant risks.”

The report expressed concern that such a currency could be used by the state to spy on people's spending habits and charge people to hold money, although BoE Governor Andrew Bailey had told the committee that was not the purpose.

“The application of monetary policy should not be a motivation for the introduction of a central bank digital currency,” the report says.

There were potential implications for national security, citing vulnerability to interference by hostile powers and the stability of the rest of the financial system.

For all these reasons, the report states that any move by the state to mirror other digital currencies must require the approval of both houses of Parliament via primary legislation.

“We were really concerned and, frankly, I was a little disappointed by the Treasury's statements on this issue about Parliament's role in introducing a [central bank digital currency],” Lord Michael Forsyth, the Conservative peer and chairman of the committee, told the FT.

"When the Chancellor of the Exchequer gave evidence, he didn't really allay our concerns that this could be something just made up by the Treasury and the Bank of England and considered to be in the [BoE]'s bailiwick," he added.

Central bankers have regularly said that launching their own digital currencies would stave off the threat of privately funded currencies launched by companies like Meta, formerly Facebook. The report said officers failed to adequately explain what threat they posed.

The BoE declined to comment on the report.