CBDCs Could Present Financial Stability and Privacy Challenges

CBDCs Could Present Financial Stability and Privacy Challenges

Central banks in various parts of the world are either developing their CBDCs or working on the best method to do so. However, a Digital Pound Sterling has not gained widespread acceptance in the United Kingdom.

House of Lords Committee Believes There are Challenges Related to a CBDC

The House of Lord Committee has concluded that there is no convincing use case for a central bank digital currency (CBDC) at the moment. This latest development could dent the development of a CBDC by the Bank of England (BoE).

The committee said, “While a CBDC may provide some advantages, it could present significant challenges for financial stability and the protection of privacy.”

The Economic Affairs Committee of the House of Lords initiated an inquiry in September 2021. The inquiry was to explore how a central bank digital currency might affect the role of the Bank of England, its monetary policies and the broader financial sector.

However, the report is not in favor of the development of a CBDC in the United Kingdom at the moment. The committee said the availability of a CBDC will ultimately see consumers transfer money from their bank accounts into CBDC wallets.

The committee added that there need to be limitations on the amount of CBDC individuals could hold.

BoE to Hold a CBDC Consultation Session This Year

The Bank of England and Britain’s finance ministry announced on November 9, 2021, that they would hold a formal consultation next year on whether to move forward on a possible CBDC this year. However, no formal date for the consultation has been announced.

In November, BoE governor Andrew Bailey commented that a fifth of commercial bank deposits could disappear if the apex bank develops a CBDC.

At the time, deputy governor for financial stability Jon Cunliffe said, “Banks would need to adapt. They would lose a revenue stream from payments.”

Central banks are developing their CBDCs as the use of Bitcoin, and other cryptocurrencies continue to increase. The emergence and increasing adoption of stablecoins is also a concern for financial institutions.

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