By Huw Jones
LONDON (Reuters) -A digital pound should not be available in large sums initially to avoid the risk of bank runs, British lawmakers said in a report on Saturday that also highlighted the need to safeguard cash and user privacy.
The Bank of England and finance ministry have said an electronic form of the pound is likely in the second half of the decade, as 130 countries consider similar moves to keep abreast of technological advances in payments.
But lawmakers on the Treasury Select Committee said in their report that while a digital pound might bring benefits in terms of boosting innovation, the BoE and Treasury should keep an open mind on whether it is actually needed, given the costs involved.
"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," committee chair Harriett Baldwin said.
People and businesses could use a digital pound to make payments, with the BoE suggesting a limit of up to 20,000 pounds for digital wallets provided by banks, far higher than the 3,000 euros discussed by the European Central Bank for a digital euro.
The committee's "The digital pound: still a solution in search of a problem?" report said there should be a smaller limit initially to mitigate a bank run triggered by a switch in large amounts of deposits into digital wallets in times of market turmoil - and risk bumping up the cost of loans.
The prospect of a digital pound, now in the design phase, has raised concerns that it would allow authorities to spy on how people spend and that it could spell the end of cash.
"We recommend that any primary legislation used to introduce a digital pound does not allow the Government or Bank of England to use the data from a digital pound for any purposes beyond those already permitted for law enforcement," the report said.
The BoE has said interest should not be payable on digital pound deposits, but the committee said this position should be reviewed.
The Treasury and the BoE said in a joint statement that they would formally respond to the committee's report in due course and would set out the next steps in a consultation paper.
"We have always been clear a digital pound would only ever be introduced alongside cash, and that protecting individual privacy is paramount in any design," they said.