In an evidence session on the crypto-asset industry today (February 28), the Treasury committee heard from the deputy governor on the reasons for a central bank digital currency (CBDC).
A key area of focus was around the purpose of a CBDC – which the Bank and Treasury call a ‘digital pound’.
This followed a recent consultation from the Treasury and the BoE which found that a digital pound will likely be needed in the future, and would be designed for everyday payments by households and businesses, akin to a ‘digital banknote’.
MPs asked Cunliffe whether the UK needs a digital pound, issues around consumer privacy, financial inclusion and how best to tackle potential new forms of fraud that could arise were a digital pound introduced.
Cunliffe said: “The first point is that actually CBDC has financial stability benefits, because it provides another payment system in terms of resilience, but it also means that if we ever have to deal with failed banks, again, there is another asset that people could go into.”
He explained that one of the reasons the BoE had to bail out the banks in 2008, wasn't because of the supply of credit to the economy, but simply because had they failed, 60 per cent of people's money was locked up because their money was commercial bank deposits.
“So there are I think there are financial stability benefits in this area as well but there are clearly risks, and there are risks about damage to the banking system,” he said.
Over time, one would want the banking system to adjust to a new reality, Cunliffe explained.
“It's done that throughout its life. I came across a great speech for the 1890s about why banks should not lend against any property.
I just came back from India actually and there's a lot of things that are happening in the emerging market economies that have gone much further
“It was to deal with a New South Wales banking collapse and a very senior British banker said this is because colonials allowed banks to loan for property. So views about what banks do have changed over time, but we have to be kind of alive to that risk.”
He was also asked whether a digital pound might accelerate the demise of physical cash.
The CDBC would be interchangeable with cash and bank deposits, accessible through digital wallets provided by the private sector, and its value would be pegged to the pound.