Digital Pound – Impact on UK Financial & Monetary system

The House of Lords Economic Affairs Committee has published its report on the issue whether UK requires Central Bank Digital Currency (CBDC). In the report titled ‘Central bank digital currencies: a solution in search of a problem’, the Economic Affairs Committee has made conclusion that there has to be convincing case for adoption of CBDC and the committee does not find it convincing. Though adoption of CBDC has some advantage but it poses a significant challenge for financial stability as well as privacy.

Chair of the Economic Affairs  Committee,  Lord Forsyth of Drumlean has said that adoption of CBDC will bring very little reward for UK but on the other hand will present a significant risk for the system. Adoption will have far reaching consequences and will impact monetary systems including people and businesses. Chair said that none of the witnesses whom Committee spoke could provide a compelling reason as to why UK should adopt CBDC.  

It becomes imperative to look at the key risk identified by the House of Lords Economic Affairs Committee, at a time when Globally many Central Banks are moving ahead with the Idea of CBDC. These questions have to be answered by any Central Banker who wish to take implementation decision in this regard. The first risk is around the level and quality of Cyber Security for protecting the individual accounts from being compromised due to weakness in the systems.

The Second Risk is much bigger. Systems holding the National database or ledger of CBDC will be a key National Infrastructure which needs to be guarded against the Cyber Attacks from enemy state as well as non-state actors. Any compromise of CBDC infrastructure can melt the Financial Stability of the Nation. Today the financial systems comprise of Central Banks, Financial Institution, Intermediaries and Account Holders. In a full fledge CBDC scenario, their may be a possibility that Central Bank may itself emerge as a Retail banker as the technology permits decentralisation and enables peer to peer transaction. In such a scenario the intermediary banks may cease to exist and all the data of Accounts Holders and other details will be on the National CBDC ledger platform or database. It is beyond comprehension to ascertain the damages arising from any attack on such platform. But one thing is certain that any such attempt will be equivalent to war. According to the Committee, CBDC systems will have to adapt to emerging security threats and will have to adopt advance technologies quantum computing.

Committee is of the view that CBDC can further improve the wholesale lending operations and interbank transfer. Securities trading and settlement is another areas where CBDC can play a vital role. UK Government and Bank of England has to take action for shaping Global Standard related to privacy and security in line with the Country’s value.

World is shaping faster than we can think and implementation of CBDC is going to be one such event. It is not surprising that Committee has recognised that Introduction of CBDC by Competing states may have deep consequences on Western Foreign Policy and Financial Systems. China is determined to implement CBDC. This may pose a serious threat to SWIFT messaging system which is the existing back bone of Global Cross Border Payment and helps Washington in implementing economic sanctions.

Bureau Galactik Views

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