Bank of England governor doubts digital pound as EU finance ministers support euro CBDC
(Kitco News) - Representatives for the UK and the EU struck very different tones regarding central bank digital currencies (CBDC) on Monday, with European finance ministers expressing support for a retail version of the digital euro, while Bank of England (BoE) Governor Andrew Bailey expressed his doubts about the necessity of even a wholesale version of the digital pound shortly afterward.
European finance ministers issued a joint statement on Jan. 16 backing the European Central Bank’s ongoing process of development toward a digital euro project, while acknowledging some important challenges and uncertainties.
“A digital euro should first and foremost meet the retail payment needs of the euro area,” they wrote, making clear that the focus was on a consumer-level or retail CBDC rather than the less ambitious wholesale version which would be used for intra-bank settlements.
The statement claims that the design of the digital euro “will ensure privacy of personal data and payments” and that the ECB would not have access to citizens’ “holdings, their transaction histories or payment patterns.” At the same time, they write that “legislators will decide on the right balance between privacy and other public policy objectives.”
The statement also cited an ECB survey which showed the downward trend in cash usage during the pandemic intensified even after it was over, but it also showed that maintaining cash as a payment option was ‘fairly important’ or ‘very important’ to the majority of respondents in every European country excepting the Netherlands and Sweden.
The timeline shared by the finance ministers shows that the current investigation phase, including presentation of the high-level design for the digital euro in Q2 2023, will last until fall of this year, after which the decision will be made about whether to initiate the realization phase.
In the UK, BoE Governor Bailey shared a much more skeptical view, telling the British Parliament’s Treasury Select Committee on Monday that he didn’t think a wholesale CBDC version of the pound was needed right now. Bailey said that the country already has a “wholesale central bank money settlement system with a major upgrade.”
Bailey also said that there are currently no plans to abolish cash for retail use, and he does not believe retail payments need any changes at the moment. “We have to be very clear what problem we are trying to solve here before we get carried away by the technology and the idea,” he said.
A former adviser to the Bank of England also weighed in on the potential downside risks of central bank digital currencies. In an opinion piece published in the Financial Times on Monday, Tony Yates said that CBDCs are “a road that central banks should not be going down.”
The BoE’s former head of monetary policy strategy wrote that many of the motives of central banks’ CBDC plans are suspect. “I detect that some are doing it for a vague notion that CBDCs are the future. Others worry that central banks that don’t do a CBDC will lose out in global currency usage.” He argues that the supposed efficiencies of CBDCs would not outweigh the massive costs central banks would incur by building and staffing the necessary IT infrastructure and processes.
Yates said other central bankers are motivated by the rise of cryptocurrencies and the challenge they could pose to traditional money, but he finds these arguments unconvincing as well. “Cryptocurrencies are such bad candidates for money,” he wrote. “They can also be dealt with through laws and regulations, not cajoling the central bank to provide a wholly new competitor asset.”
He also said that CBDCs could actually make financial crises worse because commercial banks would have less control over their reserves. “CBDC accounts may drain money from the banks, particularly during a period of heightened financial risk,” he said. “This would force banks either to find new sources of funds, or shrink their loans. That could amplify tightening in financial conditions when the central bank is trying to loosen them.”