April 19, 2024
EU-U.K. Divide: Lawmakers Clash Over Interest Earning for CBDCs
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U.K. Lawmakers Push for Digital Pound Reform, Stress Interest Earning Potential

Lawmakers in the U.K. are urging the government to consider reducing the maximum limits for a potential digital pound and ensuring that its structure doesn’t prevent the option of earning interest. They echo concerns about the U.K.’s plans for a central bank digital currency (CBDC) expressed during a February consultation by the Treasury Committee of the House of Commons. The government has acknowledged the probable necessity of a digital pound in the future, aligning with global interest in CBDCs to enhance financial transactions and embrace digital finance.

While the U.S. remains indecisive about a digital dollar, the U.K. and the European Union (EU) are actively proposing plans for CBDCs for private retail payments, although with differing views. The EU’s proposed digital euro has faced criticism from its lawmakers. At the same time, U.K. legislators seem to agree with some aspects of the EU’s proposals but disagree with the notion of denying CBDCs the ability to earn interest, treating them similar to cash.

The U.K. lawmakers recommended further analysis on the impact of paying interest on the digital pound, emphasizing the need to ensure that the current design doesn’t rule out this possibility. They cautioned against the suggested holding limit and proposed a lower threshold akin to the one the EU’s European Central Bank proposed to prevent significant outflows from bank deposits into digital pounds, suggesting a gradual increase over time. Similar to the concerns of EU lawmakers, the U.K. Treasury Committee also highlighted uncertainties about the benefits versus the risks of a digital pound and warned against potential privacy breaches and threats to financial stability through data collection beyond legal bounds.

Nonetheless, the committee expressed support for additional consultation and design work on the digital pound’s structure, with the condition that benefits grow while risks to privacy and financial stability are reduced. They called for clear criteria from the government and the Bank of England to inform the final decision on issuing a digital pound.

Pending the decision to issue a CBDC, lawmakers emphasize the need for government accountability regarding the expenses incurred in studying and designing a digital pound. They suggest the Bank of England should separately report expenditure on the digital pound in its annual accounts starting in 2024 to ensure transparency. The U.K. Treasury is expected to release its response to the consultation on the proposed digital pound model, followed by a phase of experimentation and design before any decision on its issuance.

Image by pixabay

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