Digital pound has ‘risks but no obvious benefits’, says ex-Bank of England chief

Creating a digital pound has “risks but no obvious benefits”, a former Bank of England governor has warned.

Noting the Government’s ambition for the UK to be at the forefront of financial innovation, Lord King of Lothbury stressed the need to be selective and “not driven by a misplaced enthusiasm for all things crypto”.

Given the existing commercially-operated payments system, he cautioned against the creation of duplicate arrangements just because it had the “sexy name of a digital currency”.

The independent crossbencher also doubted the central bank’s current governor Andrew Bailey or his colleagues would want to take phone calls from irate customers unable to login to the website.

Lord King made his sceptical remarks as the BoE and the Treasury explore the possibility of introducing a so-called central bank digital currency (CBDC).

Ministers insist no decision has been taken and they remain “open-minded”.

Lord King said: “The Government has said that it wants the UK to be at the forefront of innovation, crypto-assets and fintech. But we need to be selective and not driven by a misplaced enthusiasm for all things crypto.”

He was a member of the Lords Economic Affairs Committee, which carried out an inquiry into central bank digital currencies.

Lord King told peers: “CBDCs are about ways of making payments. Not a new currency.

“So whether a country needs a CBDC is really all about the state of its current payment system.

“So what are the problems in our payments system to which a CBDC might be an answer? The main conclusion of our report is that there are no problems to which a CBDC is the only or even the most obvious answer.”

He pointed out most transactions were already digital, with the system operated by commercial banks and other new payment vehicles.

“No doubt further improvements are possible, even desirable, but none require a CBDC,” said Lord King.

Questioning the practicalities, he told peers: “The Bank certainly doesn’t want to offer bank accounts to any individual who wishes to open an account with it. The Bank has always limited the number of customers to the hundreds not 50 million.

“I don’t think Andrew Bailey or anyone else at the bank wants to be on the receiving end of phone calls from Mrs Jones in Wrexham or Mr Smith in Guildford complaining that they can’t log into the website to transfer money to their grandchildren. This is not a system which the Bank of England is set up to do.

“In countries without an effective banking system, and there are some, the central bank may have to step in. But that is self-evidently not true in the United Kingdom.

“So there’s no obvious benefit from creating a duplicate arrangement which happens to have the sexy name of a digital currency.

“And the enormous risk is that in a financial crisis, households would abruptly shift their deposits from banks to accounts with the Bank of England forcing the latter to immediately transfer the deposits back to banks in order to avoid a collapse of the system.

“So a retail CBDC has risks but no obvious benefits.”

Lord King added: “The UK should certainly aim to be at the forefront of fintech, but we need to be careful in determining the respective roles of the state on the one hand and the role of competitive private sector players on the other.

“My motto for a central bank is ‘only do what only you can do’.

“Central banks are important regulators of payment systems. The case for them to be direct providers of digital retail payments has yet to be made.”

Responding, Treasury minister Baroness Penn said: “We have not yet made a decision whether to introduce a CBDC in the UK – a digital pound.

“Crucially any further decision will be based on a rigorous assessment of the benefits and what it means for public policy objectives.”

Lady Penn added: “We are open-minded as to the right way to proceed.”