Lawmakers have warned that Rishi Sunak’s proposed central bank digital currency (CBDC), commonly referred to as Britcoin, could be detrimental for the UK economy and people’s privacy.
The Chancellor of the Exchequer first proposed that Britain would introduce a CBDC last summer. Unlike decentralised cryptocurrencies such as Bitcoin or Ethereum, the e-pound would be run by the Bank of England and be tied to pound sterling, meaning it wouldn’t fluctuate in price like decentralised digital currencies.
In November, the Bank of England and the British finance ministry said they would hold a consultation in 2022 into whether the plans to introduce the CBDC should move forward. If approved, it would not be introduced before 2025.
The proposal was met with a mixed reception. Some pundits applauded the proposals, saying that Britcoin would enable the UK government to give the economy a power-boost when needed. For instance, the central bank could use the e-pound to easily put money straight into people’s accounts, thus strengthening their spending power. Others suggested that it would make digital payments and transactions smoother as well as cutting bank costs for small firms.
However, the proposals also drew criticism from some people who were worried that Britcoin could destabilise the UK economy. They feared the CBDC could make it harder for banks to introduce regulatory measures like interest rates. Britcoin could also cut the amount of money available at banks to loan, meaning the costs of loans could explode.
Committee claims introducing Britcoin in the UK is risky
Some of that criticism has now been repeated in a new report from the Economic Affairs Committee.
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“The introduction of a UK central bank digital currency would have far-reaching consequences for households, businesses, and the monetary system,” said Michael Forsyth, chair of the House of Lords Economic Affairs Committee. “We found the potential benefits of a digital pound, as set out by the Bank of England, to be overstated or achievable through less risky alternatives.
“We took evidence from a variety of witnesses and none of them were able to give us a compelling reason for why the UK needed a central bank digital currency. The concept seems to present a lot of risk for very little reward. We concluded that the idea was a solution in search of a problem.”
The committee also warned that introducing Britcoin could also raise privacy concerns. In short, their argument is that any centralised currecny should avoid one of the biggest pitfalls of decentralised cryptocurrencies: that they are often used by criminals to launder their money and obfuscate their tracks for law enforcement agencies. For instance, Bitcoin is the preferred payment method in ransomware attacks.
The committee argues that if Britcoin supports anonymous transactions, then it would run the risk of being used for similar purposes. On the other hand, if the Bank of England would put in safeguards against Britcoin being used by criminals, then it would risk “being drawn into controversial debates on privacy.”
Market stakeholders have welcomed the report, saying it’s vital that lawmakers carefully consider the ramifications of introducing digital currencies at the same time as the use of physical money is declining.
“It is crucial for governments to have this conversation now, before their hand is forced,” Richard Gendal Brown, CTO of enterprise software company R3 and member of the Bank of England CBDC Technology Forum, tells Verdict.
“The Lords report correctly observes that these questions risk drawing Central Banks into controversial debates about privacy, but such debate may nevertheless become unavoidable. What we know for sure is that whatever form a given CBDC takes, it is the technical requirements that should dictate its implementation.”
Pavel Matveev, CEO of Wirex, adds: “Lawmakers have the right approach on this matter. There are already so many digital currencies available in the market – and it makes sense for the government to properly assess how or even if a Britcoin is beneficial to the UK and the people it’s meant to serve.”
Britain is not alone in looking into CBDCs
While the notion of introducing Britcoin is contested in the UK, the nation is hardly alone in looking into launching a CBDC.
As noted in a recent thematic research report from GlobalData, China is set to become the first country to introduce a CBDC. The digital Yuan is already being trialled in several cities, reportedly with hopes to expand nationally ahead of the 2022 Beijing Olympics.
Earlier this week it was reported that tech giants Alibaba and Tencent will support the digital currency run by the People’s Bank of China. The Bahamas, Cambodia and Sweden are some of the other countries exploring CBDCs. Experts believe more nations are set to follow.
“The world can no longer ignore that digital currencies are fast becoming a reality and may want to act to avoid losing out,” Gendal Brown says. “Institutions such as the ECB exploring a digital currency means that the world is now paying close attention – other countries will want to ensure their own CBDC projects are interoperable with a currency as important as the Euro.”
Crypto community split about CBDC
Unsurprisingly, the cryptocurrency community is divided when it comes to central bank-run digital currencies. One camp, for instance, believes it’s the logical next step for countries.
“Digitising currency makes perfect sense; physical money is a relic of the past and is increasingly outmoded as almost all retail payment has shifted away from cash to electronic payments post Covid,” Katharine Wooller, MD at crypto wealth platform Dacxi, tells Verdict. “Having a digital currency is not only physically cleaner, it is also cheaper to store and administer.”
Others believe CBDCs are just a bad idea.
“Rather than providing consumers with more financial freedom and flexibility, central bank issued stablecoins tighten the money monopoly that works against savers in society,” Cameron Parry, founder and CEO of Tally, tells Verdict. “It’s the worst of both worlds – coupling the arbitrary devaluation of fiat currency with a crypto currency layer of complexity. ”
Parry also echoes the committee’s privacy concerns, saying: “The threat to privacy, as a government agency would be able to see every single transaction an individual makes, and the state’s control over the individual, as it would give these agencies the power to simply turn off an individual’s access to their money. For example, if a person was under suspicion, or as a way of coercing public behaviour.”