Home Payments BoE publishes findings on point-of-sale testing for digital pound payments

BoE publishes findings on point-of-sale testing for digital pound payments

Bank of England: Global Government Fintech broke the news of Consult Hyperion’s appointment almost 18 months ago | Main photo credit: Ahmad Ardity (Pixabay)

Findings of an experiment to test the technical feasibility of using point-of-sale (POS) hardware, as currently used in the UK, for potential central bank digital currency (CBDC) payments have been published by the Bank of England (BoE).

A decision has yet to be taken on whether or not to launch a UK CBDC – a ‘digital pound’. But the central bank is experimenting and developing proofs-of-concept (PoC) alongside private companies and other external parties as part of a ‘design phase’.

The ‘Point-of-sale proof of concept: digital pound experiment report’ details how existing POS terminals in the UK could, in principle, be used to initiate digital pound payments, and that those terminals do not appear to require modification to do so.

The experiment also found that it is technically feasible to implement offline payments functionality at points of sale using existing POS terminals but that ‘this functionality might require that an offline payments application be deployed to those terminals in order to store offline balances’.

‘Therefore, while existing POS terminals may not need to be modified to make online digital pound payments, they might need to be modified for offline payments,’ the report concludes. Offline payments are typically seen as one of the most challenging areas of CBDC implementation, so such a finding will likely interest those following CBDC developments globally.

RELATED ARTICLE No ‘one-size-fits-all’ solution for offline CBDC payments: BIS handbook – a news article (11 May 2023) on a 119-page handbook produced by the Bank for International Settlements (BIS) Innovation Hub in partnership with Consult Hyperion (the same UK-headquartered company engaged by the BoE for this POS experimentation see below)

Existing POS terminals ‘familiar’

The POS explorations spanned two phases. First, the BoE commissioned a feasibility study to explore how CBDC payments could be made using existing POS infrastructure. The study concluded that it would be feasible, from a technology perspective, to use existing POS hardware to make digital pound payments, and highlighted different payment flows that could be used to deliver this. The report focuses on the second phase – a PoC that aimed to validate the feasibility study’s findings.

The report explains that the PoC used what are known as ‘EMV standards’ – a set of technical specifications that enable card-based payments to be consistently accepted across different payment schemes (where ‘EMV’ stands for Europay, Mastercard and Visa) – to send payment instructions from smart cards to POS devices, and then to an application programming interface (the ‘BoE API’).

‘Today, in-store card payments are enabled through the sending of payment instructions from the merchant’s POS terminal to the payer’s card issuer. This is facilitated by the merchant’s acquirer and the payment scheme associated with the payer’s card,’ the 22-page report explains.

‘If a digital pound were to utilise existing POS terminals, this would reduce, or potentially even eliminate the need for merchants to invest in new hardware. Existing POS terminals have wide adoption in the UK, and merchants often maintain the same terminals for several years without changing them. Those terminals are also familiar to merchants, their staff and consumers, delivering a consistent user experience.’

Authorities designing a potential digital pound were urged by UK commercial bank representatives in March to avoid creating ‘expensive infrastructure that no-one uses’ if a digital pound were to be introduced.

RELATED ARTICLE UK CBDC architects warned against creating ‘expensive infrastructure that no-one uses’ – a report (21 March 2024) from a panel session titled ‘Stablecoins and CBDCs – what will be their impact on the payments industry?’ at the ‘Pay360’ conference in London

‘Fingerprint-enabled smart cards’ used

The BoE’s private sector partner for the project was Consult Hyperion, a company whose head office is located in the Surrey town of Guildford. Global Government Fintech broke the news of Consult Hyperion’s engagement almost 18 months ago.

Among the more technical details of the experimentation, the report states that those involved enabled two verification mechanisms for user authentication: CDCVM (which stands for ‘Consumer Device Cardholder Verification Method’) and Online PIN. CDCVM enables users to be authenticated on their own devices rather then on a merchant’s POS device.

CDCVM was enabled via a fingerprint sensor on the smart cards. ‘Although not widely adopted, fingerprint-enabled smart cards have been around for many years and are available today for POS payments,’ the report notes. It states in a footnote that smart cards rather than smartphones were used ‘in order to test providing strong customer authentication to users who do not have, or choose not to use, a smartphone.’

Online PIN verification was implemented through the exchange of cryptographic keys between the merchant’s POS terminal, the payer’s Payment Interface Provider (PIP), the merchant’s PIP and the BoE API, the report explains. ‘This process ensured that, similar to card payments and automated teller machine (ATM) transactions in the UK, the user’s PIN was transferred securely. The BoE API held a shared key with the merchant’s PIP (merchant PIP working key) and with the payer’s PIP (payer PIP working key),’ the report adds.

RELATED ARTICLE UK authorities set out next steps towards potential digital pound – a news story (26 January 2024) on the BoE and HM Treasury’s 72-page response to a CBDC consultation

Labour ‘fully supports’ CBDC work

In a two-paragraph ‘Reflection and next steps’ summary section, the BoE describes the project as ‘useful in developing the Bank’s understanding of the requirements for initiating digital pound payments at POS, both online and offline.’

It adds that the PoC made several assumptions about design choices for a digital pound, including what POS hardware to use, whether there would be cards and what type, where balance is stored and the ‘applicable PIN translation mechanism’. No such design choices have yet been made. More broadly, there are several other factors, such as operational, legal and commercial considerations, that will impact design choices around digital pound payments at points of sale. Those factors were not tested in this experiment.

Consult Hyperion’s contract – fully described as the ‘provision of consultancy services to deliver a point-of-sale proof-of-concept prototype’ – was valued at £121,825 (about $149,000) and ran from 7 October 2022 to 6 March 2023, according to the award notice (published on 5 January 2023). The same company has also been used by the BoE on other CBDC assignments, including for a ‘feasibility study on the e-commerce of CBDC’ (valued at £113,650). This award notice was published on 6 January 2023.

The BoE decided in October 2022 to bring in external expertise for a project focused on offline CBDC payments. A contract valued at £100,620 was awarded to Thales UK and ran from 9 January 2023 to 8 May 2023 (according to a ‘CBDC Proof of Concept and Research of Offline Payments’ contract award notice published on 26 April 2023). The opportunity notice described offline payments as ‘one of the most complicated elements of a potential UK CBDC’ that ‘require thoughtful consideration and design’.

A UK general election is due to take place on 4 July. Polls suggest that the Labour Party will secure an overall majority, ending 14 years of Conservative Party-led government. In ‘Financing Growth: Labour’s Plan for Financial Services’, published earlier this year, the party stated that it ‘recognises the growing case for a state-backed digital pound to protect the integrity and sovereignty of the Bank of England, and the UK’s financial and monetary system’. Labour, it stated, ‘fully supports the Bank of England’s work in this area, and wants to ensure that issues such as threats to privacy, financial inclusion and stability are effectively mitigated in the design of a central bank digital currency’.