A group of MPs have highlighted privacy and financial stability concerns over the UK’s potential adoption of a digital pound.

The Treasury Committee said in a new report that without careful management a central bank digital currency (CBDC) may make the UK economy more susceptible to bank runs if people are able to switch large amounts of deposits into digital pounds quickly in times of market turmoil, which it warned could increase the risk of bank failures.

The committee also raised concerns over estimates that a steady switching of some bank deposits into retail digital pounds could increase the interest rates on bank loans by 0.8 percentage points or more.

To mitigate these risks, the group suggest a smaller limit on the value of retail digital pounds each individual is initially allowed to hold than the £10,000 to £20,000 limit under consideration in the Bank of England and treasury’s own digital pound consultation.

“It’s important that the Bank of England and treasury are open to modernising the use of money in a way which keeps pace with technology while preserving economic stability and individual security,” said Treasury Committee chair Harriet Baldwin. “It must be clearly evidenced that a retail digital pound will provide benefits to the UK economy without increasing risks or leading to unmanageable costs before any decision is taken to introduce it into our financial system.”

The committee added that a “close eye” must be kept on ensuring that any retail digital pound does not worsen financial exclusion for those reliant on physical cash.

Despite its concerns, the Treasury Committee also conceded there were some potential benefits to a digital pound, including its potential to support innovation in domestic payments while guarding against some of the risks posed by new forms of private digital money by maintaining public access to a form of central bank money.

In her closing remarks, Harriet Baldwin said: “While we support the Bank of England's plan to continue working on the design of a potential retail digital pound, I would urge them to proceed with caution and maintain a genuinely open mind as to whether one is actually needed.”

The Treasury Committee’s warnings come at a time where many countries and organisations have begun testing the potential of CBDCs.

The European Central Bank recently took its next steps towards the creation of a digital euro, announcing that it would move on to ‘the preparation phase’ of its potential implementation on 1 November.

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