The UK's expedition into releasing a digital pound has triggered a strong debate among policymakers and finance experts. The House of Commons Treasury Committee has shown concerns, cautioning that bringing a central bank digital currency (CBDC) in the UK could lead to major risks to personal privacy and financial stability.
While HM Treasury and Bank of England are conducting their investigations into a digital pound, experts are suggesting to be on alert, underscoring the potential threats and downfalls of such a step. This blog will provide a comprehensive guide to explain how digital pound can threaten financial stability.
Worries about data privacy and stability
One of the main issues around the digital pound is the consequences it can have on traditional banking systems. Experts are worried that during times of financial crisis, individuals might quickly transfer large amounts of money to digital pounds from conventional bank accounts.
If that becomes the case, it can result in increased vulnerability to bank runs, triggering imbalances in the financial system. Besides these, there are major concerns about how authorities would use the personal data of digital pound users. The chances of government surveillance and abuse of financial transaction data have raised concerns over individual privacy rights.
This worry is underscored by the push to make a universally accepted, risk-free electronic alternative to physical cash that would function through smartphone wallets, likely providing government authorities unlimited access to personal financial transactions.
Balancing risk and innovation
Additionally, the transition to a digital currency might raise interest rates on bank loans, with estimates hinting at a possible rise of 0.8 percentage points or more if major bank deposits are transferred into digital pounds.
To minimize these threats, the committee advised considering a lower limit on individual holdings of digital pounds than the Bank of England's suggested €10,000-€20,000 ceiling, taking lessons from the European Central Bank's talk regarding a €3,000 limit per individual for a digital euro.
Experts also emphasize the need for robust privacy measures to make sure that the government doesn't spy on digital pound users' privacy. Besides this, there's a rising concern that a step towards a digital currency could trigger financial exclusion by pacing the fall in cash use.
The bringing in of a digital pound in the UK shows a complex balancing step between minimizing financial threats.
The concerned labeled out by the Treasury Committee highlights the need for a safer approach towards implementing a digital currency.
As the UK keeps exploring this digital onset, the task at hand remains to make sure that any possible digital currency complements the present financial system while keeping the basic norms of financial inclusion and privacy.
The Bank of England and Treasury have recognized these threats and are expected to formally work on the committee's report's recommendations, highlighting the future measures in the digital pound's voyage.