A CBDC has some advantages, but it holds significant challenges for financial stability and privacy, says the House of Lords Economic Affairs Committee, UK, in its third report “Central Bank Digital Currencies: A Solution In Search Of A Problem?” of session 2021-22. It said central banks are driven by two common factors for CBDCs. The first is that they are concerned about big tech companies introducing their own digital currencies to the users in their vast networks. The second is the decline in the use of physical money.
The report has noted risks associated with CBDCs. The risks mainly are state surveillance of people’s spending choices, financial instability and an increase in the central bank’s power. Moreover, it would bring about a centralized point of failure. As such, it said the UK is yet to hear a convincing case for the need of a retail CBDC. The House of Lords acknowledged that the market for stablecoins and crypto assets is growing quickly.
But the digital assets are unregulated and are regarded as a risk to financial stability. Central banks fear that the big tech could use a similar technology to make their own digital currencies. It could gain popularity and compete with the digital currencies issued by the central banks. The report highlighted that introducing a CBDC may not be an ideal response. It said private entities that can rival the existing payments systems should be regulated.
The report noted that if the CBDCs were to be issued, people will transfer it to their CBDC wallets. This will in turn fuel financial instability and affect the country’s monetary system. And periods of economic stress would make it worse as people will replace bank deposits with CBDCs.
Furthermore, there is the additional risk of criminals turning to CBDCs to hoard their money. The report said technical specifications would not be sufficient to counter public concerns about state surveillance.