UK Lawmakers are urging the government to consider reducing holding limits for a looming digital pound and ensuring its design doesn’t obstruct the option of earning interest.
The UK and its neighbours, the European Union, have detailed in a proposal that digital currencies should not be allowed to earn interest like in the case of bank deposits.
In a recent report, members of the Treasury Committee in the House of Commons, the lower chamber of the UK Parliament, shared their apprehensions regarding the country’s proposals for a central bank digital currency (CBDC) during a February consultation. The government has indicated that a digital pound is deemed “likely needed” in the future. Is a state-backed CBDC really necessary?
As it stands, countries across the globe are considering CBDCs as a way to improve payment processes and make central banks embrace digital finance further. While the US is still in limbo regarding adopting a digital dollar, all eyes are on Europe, where the UK and European Union are looking into actualising CBDCs for private retail payments.
Lawmakers in the EU have faced criticism for their plans to introduce a digital version of the euro. While British legislators support the EU’s suggestion of implementing a lower individual holding limit for the digital euro to prevent customers from leaving traditional banks, they disagree with the notion of treating central bank digital currencies like cash by not allowing them to earn interest.
The UK lawmakers recommended, “We suggest that the Bank of England and Treasury conduct further analysis on the monetary policy implications of paying interest on the digital pound. Meanwhile, they should ensure that their design efforts do not rule out the possibility of allowing the digital pound to earn interest.”
At the same time, the digital pound plans outlined by the UK Treasury highlight that, like cash and many standard current accounts, no interest would be offered on a digital pound. Its primary purpose is everyday transactions, not designed or intended for savings.
The lawmakers also put a caution on the proposed GBP 10,000-20,000 ($12.663- $25,320) holding limit and instead pushed for a lower limit close to the €3,000 cap presented by the EU’s European Central Bank. This is in an effort to reduce the risk of large-scale cash outflows from bank deposits to digital pounds but still with a view of amending over time.
Contemplating a degree of scepticism akin to that of EU lawmakers, the UK Treasury Committee report highlighted uncertainty regarding whether the advantages of a digital pound outweigh potential risks. The report cautioned that legislation concerning the digital pound should not grant the government the authority to collect user data from payments beyond what is permitted by law enforcement.
Nevertheless, the report expressed support for the Bank of England and Treasury to engage in further consultative efforts on designing a digital pound. This approach aims to facilitate its launch if the benefits increase and the risks to privacy and financial stability are effectively addressed. They want the Bank of England to report expenditure on the digital pound as a separate item in its annual accounting reports from 2024 henceforth. The Committee asked the Bank of England and the UK government to stipulate details of the design and methods the digital pound will adopt upon issuance. The decision to issue CBDCs comes at a cost; lawmakers also want the Bank of England to bear the cost 100%, keeping track of all expenses that will be incurred.
There is anticipation that the UK Treasury will release its response to the consultation on the proposed model for a digital pound in the near future. Subsequently, a phase will be dedicated to experimentation and design before a final decision on whether to proceed with its issuance is reached.
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Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
