Home Digital Currencies UK CBDC architects warned against creating ‘expensive infrastructure that no-one uses’

UK CBDC architects warned against creating ‘expensive infrastructure that no-one uses’

Panel (L-R): Ryan Browne (technology correspondent, CNBC: moderator), Nilixa Devlukia (Payments Association), Will Lovell (Bank of England), Lee McNabb (NatWest) and Paul Horlock (Santander) | Credit: Payments Association / Pay360

Authorities designing a potential digital pound have been urged to avoid creating ‘expensive infrastructure that no-one uses’ if they launch a central bank digital currency (CBDC).

The Bank of England (BoE) and HM Treasury (HMT) recently embarked on a ‘design phase’ for a potential UK CBDC. They aim 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.

Speaking at a payments industry conference in London this week, commercial bank representatives gave their views on the prospect of a CBDC, including how what has been described as a ‘major national infrastructure project’ would be funded and the consumer communications challenge.

“The commercial consideration is vitally important now – at the outset,” urged Lee McNabb, head of payments strategy and research at NatWest, drawing a parallel with the UK’s development of open banking (in the private sector) over the past eight years. “Open banking was almost a mandate driven without the commercial or kind of customer experience really at the forefront,” he said. “We can’t be having a similar conversation in 10 years [about CBDC].”

He referred to the formation of the growing number of CBDC engagement groups over the past couple of years. “We have to be having that commercial [funding] conversation alongside the design-type conversations, the offline [use of CBDC] conversations,” he urged. “There’s a ‘merchant acceptance’ group, there’s a ‘privacy’ group, there needs to be a commercial conversation that goes on as well so we’re not just ending up with a really expensive infrastructure that no-one really uses.”

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

HM Treasurys communications challenge

McNabb was speaking during a panel session titled ‘Stablecoins and CBDCs – what will be their impact on the payments industry?’ at the ‘Pay360’ conference alongside a further commercial bank representative – Paul Horlock, chief payments officer at Santander; as well as the BoE’s head of future technology Will Lovell; and Nilixa Devlukia, an ambassador for the Payments Association, which organised the two-day event.

The session (19 March) was taking place less than a couple of months after the BoE and HMT set out their next steps towards a potential UK CBDC in their response to a consultation that attracted 51,529 responses. The consultation document stated that a UK CBDC was ‘likely to be needed in the future’. Lovell described the volume of responses as being “off-the-scale”, saying that the BoE “normally [considers] more than 1,000 [as] a big response”.

“There was a lot of concern expressed particularly about privacy and about [government] control – that came through loud and clear,” Lovell said.

The design phase, expected to run for two years, contains four workstreams. These include 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.’

HMT will be leading this ‘national conversation’ initiative, Lovell said. He was confident that awareness would engender positivity. “I think what we’re finding is [that] the more conversation you have, and the more you explain what it’s for, what it is and what it is not, I’m confident the public will come around,” he said.

“If I had my time over again, I think we have left a bit of a void, and that void has been filled a little bit by ‘voices’ – some of which were legitimate concerns, [and] we absolutely are taking seriously; some of it a bit more down the ‘conspiracy theory’ end; and some of it driven by initiatives in other countries and jurisdictions who are not introducing CBDCs for the same reason that you might see in the UK or in the eurozone,” he added. The European Central Bank is progressing at roughly the same speed as UK authorities as regards a potential digital euro.

RELATED ARTICLE Think you know CBDCs? An A(CID) to Z(KP) test – a feature article (26 June 2023) focused on some of the many technology considerations involved with CBDCs (the article is based on the Bank of England ‘Digital pound: technology working paper’)

‘Seismic moment’

Horlock said the consultation had “brought the debate out into the open about new forms of money, which is fantastic”, but that “some polarised positions” need to be “worked through”.

“I was lucky enough to be invited to join the [BoE/HMT digital pound] offline payments [working] group and I’m sure I’m not breaking any confidence [to say] that [it] took us two meetings as a group of professionals to agree what an offline payment was,” he said.

“I think we have to be careful when we expose some of that from a [public] engagement perspective,” he said. “We’ve got to get really tight and clear on how these things are going to work.”

“It feels like quite a seismic moment in money terms, not just payment terms, and all these different pieces of the broader puzzle,” said McNabb (a reference to non-CBDC-specific innovation in money).

“The argument might be ‘build it and they will come’ but who’s funding that ‘build it and they will come’, and is it worth that investment from a customer perspective?”, he asked, rhetorically.

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 that featured Katie Fortune, senior manager in the BoE’s CBDC unit, among the panel

Who’s paying?

The topic of how a potential CBDC would be funded was re-addressed in a question from an audience member.

“The short answer is ‘fees’,” responded Lovell, saying that “current ways of funding” would be “repurposed in some way” and that “exactly what that blend is [is] the kind of thing [being] worked on right now.”

NatWest and Santander are among the country’s nine largest current account providers that were required by the Competition and Markets Authority (CMA) to create and pay for the establishment of the body that oversees UK open banking.

“We can’t just keep loading it on,” said Horlock, in reference to the extent to which commercial banks have to finance such infrastructure. “We’ve got to say: what’s the future? It’s hard putting money up for this stuff. What we can’t do is put money up for stuff and then we don’t see the benefit. Open banking’s been a great a case study, I think, in terms of how you should and maybe shouldn’t do some of those things.”

“We’ve not got the deepest pockets in the world to invest in stuff that may fall at the first hurdle,” said McNabb.

RELATED ARTICLE UK authorities tap into academia for central bank digital currency advice – a news story (2 January 2024) on the BoE and HMT’s ‘CBDC Academic Advisory Group’ 

Similar to contactless payments’ adoption – or not?

An audience member – who described a CBDC as a ‘hard sell’ – asked whether there was a ‘stopping condition’ that would make UK authorities ‘call off the project’.  

“With any payment product – and CBDC is fundamentally a payment product – people need to see the value and the usage of it,” responded Lovell. “So, for example, contactless [payments] was available for a very long time before it saw a lot of uptake in usage. But it turned out that, actually, contactless payments were a distinct product that people did want, it took some time for the use-cases to emerge. There is no reason that this couldn’t be the same.”

“At the moment, it’s a theoretical proposition, and, like I said, we have left a bit of a void around there, which is not what I do if I had my time again,” he continued. “I think once it becomes a practical proposition, something that people can use, and becomes a bit easier to use, then we’ll start to see if we get adoption. If we don’t, then we’ll need to look at what the next steps are. But we don’t have a kind of run-out clause on it.”

“The focus now really is to get to the go/no-go decision,” he explained. “And what I hope you’ve heard from the discussion on the panel is, there are lots of different propositions and ideas about how we get to that. And so that’s really what we’re focused on: the going or no-going. And we do have time within that to actually start to build up that ‘story’.”

McNabb challenged the comparison with the take-up of contactless payments. “Yes, contactless took a while to adopt, but it was a very minor tweak to an existing journey on an existing rail that mitigated an obvious pain point,” he said. But CBDC would be a different kettle of fish. “We [would be] fundamentally looking to rewire and rebuild the underlying rail, not the overlay service,” he said. “I don’t think it’s as simple as saying ‘build it and they will come’ because with cards and then contactless, it was already built – we just made it a little bit better. With this, it’s fundamentally starting again with money, not a type of payment rail.”

RELATED ARTICLE Banks ‘barking up wrong tree’ over digital euro deposit flight fears: ECB blogpost – a news story (23 February 2024) on an article written by three senior European Central Bank figures to address what they describe as ‘persistent criticism’ on the topic of bank disintermediation

Need to ‘prove value’

It will be important to focus on firstly proving and, then, communicating use-cases for CBDC, said Horlock, giving the examples of online purchases and “the mortgage journey”.

“If we can prove value and make it better and easier for customers, it’s much easier to drive adoption,” he said.

The practicalities of precisely how a CBDC would work are undecided but will form a crucial part of consumer communications. “What [will it] actually mean to them?” Horlock asked. “How are they going to use it? How does it differ, if it does [from existing money]? Is it private? Is it not? Is it anonymous? They’re the questions we need to start asking now so we don’t drop it in people’s hands, and then [they ask]: ‘what the hell is this?’.”

Devlukia emphasised the importance of driving take-up among merchants. “If my local newsagent accepts it, I’m probably going to want to use it,” she said. “For me it’s going to be merchant adoption that’s actually to be key to how we actually use CBDC.”


Existing CBDCs not ‘immediately successful’

Just a handful of nations – including the BahamasJamaica and Nigeria – have to date formally issued a CBDC.

The People’s Bank of China (PBoC) is at an advanced stage of rolling out the digital yuan (widely known as the e-CNY) but a senior official last year said it needed to be made ‘more appealing and more user-friendly’ in order to boost adoption.

Asked what lessons could be learned from China’s experience to date, Lovell said: “I think the number one learning is actually the pilot has had quite slow adoption. It’s not rolled out to immediate success, […] even given the resources that they’ve put behind it. And that’s a probably similar story elsewhere.”

He pointed out that different nations have different motivations, with Horlock concurring saying that “there isn’t an ideal template.”

The governor of the Bank of Japan, Kazuo Ueda, earlier this month described CBDC as a ‘pivotal’ topic for central banks worldwide but highlighted low awareness of CBDC among the Japanese public. Japan’s central bank launched a pilot CBDC programme in 2023.

In January Donald Trump 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’.