The next steps in the development of a potential UK central bank digital currency (CBDC), including increasing ‘structured engagement’ with external experts and the launch of what is a billed as a ‘national conversation’ on a potential digital pound, have been set out by the Bank of England (BoE) and HM Treasury (HMT).
The authorities’ plans are detailed in a 72-page response, published this week (25 January), to a CBDC consultation – launched almost 12 months ago and which closed to responses at the end of June 2023 – that attracted 51,529 responses.
Emphasising that a decision has yet to be made as to whether to actually implement a digital pound, they explain how an ongoing ‘design phase’ aims to establish a ‘clear proposition’ for a digital pound, including the product and technology proposition that would be proposed for a ‘build phase’. If proceeding, there would be a further consultation on legislation.
Feedback from consultation respondents was ‘largely supportive’ of the proposed public-private operational model set out in consultation paper. But the authorities acknowledge that respondents raised concerns about the implications of a digital pound for access to cash, users’ privacy and control of their money. Many expressed what are described inas ‘strong feelings’ on payments data privacy.
Before the launch of a digital pound – dubbed ‘Britcoin’ in a tweet by then-chancellor (now prime minister) Rishi Sunak in April 2021 – the government has committed to introducing primary legislation. This means that a digital pound would only be introduced once both Houses of Parliament had passed the relevant legislation. ‘This would guarantee users’ privacy and control,’ the authorities state this week, adding that the government and BoE would ‘not have access to any personal data and users would have freedom in how they spent their digital pounds’.
RELATED ARTICLE Digital pound ‘likely to be needed in future’: UK CBDC consultation launches – our news story (7 February 2023) on consultation getting underway, as well as the publication of a technology working paper
Design phase: four workstreams
The original ‘The digital pound: a new form of money for households and businesses?’ consultation paper analysed the public policy case for a CBDC and set out elements of the proposed digital pound design. The BoE would provide the central public infrastructure in the form of a ‘core ledger’ – a fast, resilient, secure technology platform – which would provide the minimum necessary functionality. Private firms would then use this infrastructure to design innovative, user-friendly services and handle customer-facing interactions.
After the design phase, a decision about whether to launch a digital pound is likely to be taken ‘around the middle of the decade’. If a decision was taken to move to the build phase, a prototype digital pound would be developed, first in a simulated environment and then in live pilot tests. The earliest launch timing is likely be the latter half of 2025-2029.
The design phase has four workstreams: experimentation and development of proofs-of-concept working alongside ‘innovative’ companies; the development of a ‘blueprint’ of a ‘comprehensive description of the digital pound architecture, should a decision be taken to proceed to build it’; the launch of the ‘national conversation’ – described as ‘a programme of engagement by the Bank and HM Treasury with the public, businesses and wider stakeholders to ensure that work on a digital pound takes account of all views’ and that will aim to ‘build public understanding of a digital pound and user needs’; and an ‘assessment’ – described as a ‘framework to evaluate the costs and benefits of a digital pound, to inform the decision on whether to proceed to the build phase’.
A digital pound working group dedicated to privacy issues is to be established. ‘This will involve an open call for information to ensure the working group is represented by a diverse group of individuals and organisations,’ the consultation response states. Digital pound working groups already exist on offline payments and retailer needs.
“We are at an exciting time of innovation in money and payments, and we want to ensure the UK is ready should a decision to build a digital pound be taken in the future. This is the latest stage in our national conversation on the future of our money – and it is far from the last,” said Bim Afolami, who was appointed economic secretary to the Treasury in November last year, in the authorities’ update. “We will always ensure people’s privacy is paramount in any design, and any rollout would be alongside, not instead of, traditional cash.”
BoE deputy governor for financial stability Sarah Breeden said: “Trust in all forms of money is an absolute necessity. We know the decision on whether or not to introduce a digital pound in the UK will be a major one for the future of money. It is essential that we build that trust and have the support of the public and businesses who would be using it if introduced.”
‘£10,000-£20,000’ holdings limits (initially)
A UK CBDC would be accessed through digital wallets offered to the public and businesses by the private sector through smartphones or smartcards. It would be intended for payments made online, in-store, and between individuals, rather than for savings, and it would not pay interest.
The consultation paper proposed setting limits on holdings of digital pounds, at least during an introductory period. These limits are intended to manage risks to financial and monetary stability associated with outflows from bank deposits ‘at a level that supports the usability of a digital pound’. For individuals, a limit of between £10,000 (about $12,720) and £20,000 (about $25,440) was proposed. ‘In light of the feedback received and the absence of any materially new analysis, the Bank and HM Treasury are minded to proceed at this stage with a proposed holding limit in the range of £10,000 to £20,000, at least during the introductory period,’ the authorities state in their consultation response.
Corporates would also be limited in their holdings of digital pounds, but the limit would be significantly higher than for individuals. ‘During the design phase, the Bank will further explore what degree of access and level of holding limits would be most appropriate for corporates,’ the authorities state this week, adding that this work out be ‘in part’ informed by the retailer needs working group.
The vast majority of the authorities’ update focuses on retail CBDC (also known as ‘general purpose’ CBDC, meaning a CBDC for everyday consumer or business use). But wholesale CBDC (for interbank use) does receive a brief mention in the consultation response. ‘The Bank will […] continue to engage closely with the experiments being conducted internationally on technologies associated with wholesale CBDC (including establishing new platforms),’ it states.
‘The Bank currently enables wholesale settlement through its RTGS [real-time gross settlement] service,’ it continues. ‘The Bank has been improving this service through a transformational initiative that will deliver an enhanced core settlement engine that is more flexible, efficient and with more open standards, starting this year. The Bank and HM Treasury’s current assessment is that the benefits of new technologies for wholesale settlement would be delivered in the quickest timeframe via the renewed RTGS rather than a new wholesale CBDC platform’.
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‘Clear articulation’ of CBDCs’ benefits needed
In the UK, as in all nations, the concept of a CBDC faces scepticism for various reasons and from various quarters. The BoE/HMT consultation stated that a UK CBDC was ‘likely to be needed in the future’. But a House of Lords economic affairs committee report, ‘Central bank digital currencies: a solution in search of a problem?’, published two years ago concluded that there was ‘no convincing case’ for a digital pound.
Just a handful of nations – including the Bahamas, Jamaica and Nigeria – have to date formally issued a CBDC. But China’s authorities continue to progress the rollout of a digital yuan, India is moving towards issuance of a digital rupee and the European Central Bank has entered a ‘preparation phase’ for a potential digital euro. Canada is among the nations that are significantly more cautious.
Donald Trump earlier this month vowed to stop the launch of a US CBDC if he wins this year’s presidential election, slamming a potential digital dollar as a ‘dangerous threat to freedom’. He told a crowd of supporters that ‘such a currency would give the federal government – our federal government – the absolute control over your money. They could take your money, you wouldn’t even know it was gone. This would be a dangerous threat to freedom – and I will stop it from coming to America.’
‘The Bank and HM Treasury acknowledge the importance of clearly articulating to the public why a digital pound might be necessary in the future,’ the UK authorities note in this week’s consultation response.
The authorities also reiterate their commitment to protect access to cash, even if a CBDC were introduced. The government legislated last year to give the Financial Conduct Authority (FCA) powers to protect access to cash. The FCA is currently consulting on how it plans to protect access to cash and expects to finalise rules between July and September 2024.
RELATED ARTICLE Attack versus defence: central bank digital currencies and cybersecurity threats – a write-up of a recent Global Government Fintech webinar (14 November 2023) featuring representatives from Brazil’s central bank, the International Monetary Fund (IMF) and University College London
‘Conversation on use cases must be broadened’
The case for introducing a CBDC would be helped by greater awareness and visibility of tangible use cases.
‘The Bank and HM Treasury do not seek to prescribe or determine what future use cases for a digital pound might be, although there needs to be confidence that they will emerge,’ the authorities state this week. ‘In addition, the conversation on use cases must be broadened out to consider the specific and applied benefits that a digital pound would bring to consumers, intermediaries and merchants.’
The consultation response states that ‘a few fintech respondents [to the consultation] saw a strong use case for micropayments, which are payments of extremely low value’.
‘Micropayments could enable new business models, for example paying a small amount to read a single newspaper article, rather than having to pay for a whole subscription,’ the consultation response notes. ‘While in principle possible today, the financial effort required is rarely worth it for the provider. A small number of respondents from civil society and the technology sector saw a strong use case for a digital pound to support “Internet of Things” (IoT) services, which refer to physical devices that are embedded with sensors or software to connect and exchange data with other devices and systems over the internet. A digital pound could therefore enable machine-to-machine payments, e.g. a connected vehicle paying for fuel, electricity or parking.’
The Digital Pound Foundation, which describes itself as an ‘independent organisation working with a variety of stakeholders and participants towards the implementation of a well-designed digital pound and an effective and diverse ecosystem for new forms of digital money’, has a working group focused on CBDC use cases. It produced an article a couple of months ago titled ‘From NFTs to Smart Contracts: The Digital Pound’s Role in Modernising Car Purchases’ (where ‘NFTs’ are non-fungible tokens).
RELATED ARTICLE Central bank digital currencies: checking out conditions for take-off – write-up of a breakout session on CBDCs at the Global Government Fintech Lab 2023 (18 May) that featured Katie Fortune, senior manager in the BoE’s CBDC unit, among the panel
External engagement to date
The BoE and HMT already have numerous mechanisms through which they are engaging externally on CBDC.
They recently announced the make-up of a newly formed advisory group of 19 academics, including representatives from academic institutions located outside the UK, including Bocconi University (Milan, Italy), Trinity College Dublin (Ireland) and Massachusetts Institute of Technology (MIT – USA). The CBDC Academic Advisory Group (AAG) is being co-chaired by Neeraj Patel, a deputy director in HMT’s Financial Services Group, and Nick McLaren, who is the BoE’s Future of Money Division head, making the total group-size 21 people.
This is running alongside a pre-existing ‘CBDC Engagement Forum’ and ‘CBDC Technology Forum’, set up more than two years ago. Both these groups’ membership has been ‘refreshed’ in recent months, the authorities state in their consultation response.
The BoE has also already engaged various external partners on CBDC assignments – see boxout.
Bank of England CBDC external contracts
(Global Government Fintech lists the contracts by value)
*Kin + Carta: £186,504 (‘CBDC sample wallet proof-of-concept and research’; Feb-July 2023)
*Consult Hyperion: £121,825 (point-of-sale proof-of-concept prototype; ran to March 2023)
*Consult Hyperion: £113,650 (e-commerce/CNP transactions feasibility study; ran to March 2023)
*Thales UK: £100,620 (‘CBDC proof-of-concept and research of offline payments; Jan-May 2023)
*Frontier Economics Ltd: £100,000 (‘targeted analysis of the microeconomics of a CBDC’; Jan-Mar 2023)
*MIT Media Lab DCI (USA): £75,000 (research; ran to 31 Jan 2023)
*Consult Hyperion: £48,900 (feasibility study; Feb 2022-Apr 2022)
*Oliver Wyman: £32,000 (research; ran to 1 July 2023)
Source: Global Government Fintech research using UK government Contracts Finder website (this boxout was first published by Global Government Fintech on 2 June 2023; an earlier version was also published on 10 January 2023)
The figures above are small beer relative to the planned spending by the European Central Bank, which kicked off 2024 by publishing five calls for applications – carrying a total estimated spend of €432.1m (about £373m) and a potential maximum spend of more than €1bn (more than £862m) – to set up framework agreements with potential providers of digital euro ‘components and related services’.
RELATED ARTICLE ECB kicks off 2024 with hunt for digital euro ‘components and related services’ providers – our news story (4 January 2024) on the Frankfurt-headquartered ECB issuing ‘calls for applications for digital euro component providers’ (five fields of potential business include the development of a digital euro app and ‘offline services’)
Technology working paper response
At the same time as publishing the consultation the BoE also published a technology working paper setting out ‘cutting-edge technology considerations informing the potential build of a digital pound’. This 86-page paper summarised a series of design principles relating to privacy, performance, security, resilience, extensibility and energy usage that will be applicable to the digital pound.
After receiving 391 responses, the central bank has this week published a 33-page ‘Response to the digital pound technology working paper.’
Of the 51,529 responses to the main HMT/BoE consultation, 40,885 were received via online questionnaires; 10,603 by email; and 41 by letter.
Bank of Canada recently published new CBDC exploration priorities alongside a report summarising often-hostile feedback from a public consultation about a potential digital Canadian dollar. Its online questionnaire attracted 89,423 responses. Respondents were largely opposed to a Canadian CBDC, as well as to the Bank of Canada actually researching the topic. They were also ‘doubtful that the Bank of Canada would consider public feedback on this matter’.
Canadians value their right to privacy, with many respondents ‘expressing concerns that a digital dollar could compromise that right’, the central bank stated.
Privacy has consistently ranked at or near the top of potential CBDC users’ concerns in other jurisdictions, for example in surveys conducted by the European Central Bank.