Overall, we support the BOE and HM Treasury’s initiative to consider the introduction of a Central Bank Digital Currency (CBDC)– a ‘digital pound’. The authorities’ aim is to “maintain public access to retail central bank money, thereby anchoring trust in the monetary system in a more digitalised world and underpinning monetary and financial stability”. The UK has a sophisticated and complex economy and whilst this potentially gives rise to some complex issues, the proposals are a good first step in the process for the UK to safely introduce a digital currency.

In our consultation response we highlighted three key recommendations for future analysis and consideration.

Recommendation 1:

Expand analysis to understand how implementation of a retail CBDC will impact upon the wider payments and banking ecosystem

• The operation of payments is not an activity that operates in a silo. It’s part of a wider banking ecosystem and set of economics that supports commerce, investment, risk taking, liquidity, credit creation, financial and price stability, social cohesion, and trust within the economy and broader society.
• As the economics of current transactional banking erode and where additional costs are introduced, to facilitate multiple payment systems, firms within payments will seek ways to either grow revenue or reduce costs. Consequently in opposition to the BOE’s objectives for a CBDC we could see: greater marginalisation of low profit or higher risk customer groups as branch network closures accelerate; availability of cash is reduced; more explicit fees and charges levied on current account and wallet holders; higher interest rates on credit products as funding is ring fenced away from the banking system and higher interest rates are demanded on deposit products with banks; market forces that lead to undue market power by wallet providers; wider disintermediation that impacts the provision of credit cards, overdrafts, insurance and other services often sold alongside or within the context of transactional banking and payments.
• It is in this context that we would encourage future proposals to take on a more holistic approach. Consideration should be given to the economics of current retail payment value chains: existing supply side incentives; how profit is derived and shared (including through lower customer acquisition costs for adjacent products and services); where revenues from payments support other services. For example, branch networks, online services, critical retail commercial and regulatory protections; explicit and implicit fees and charges levied on consumers and businesses and how different risks are managed and where they materialise into costs, shared.
• Only then will we be able to fully appreciate the first and second order effects that might manifest should the status quo be significantly disrupted by widespread adoption of a retail CBDC. We may end up with a very efficient form of retail payment system but that comes at a higher overall cost when considering the wider ecosystem of benefits currently provided to consumers and businesses.
• We recognise that the introduction of an alternative to existing retail payments provides for the opportunity for innovation, greater competition, and efficiency. It would also incentivise banks and other PIPs to develop and provide new services and/or new on-chain products derived from a government-backed digital currency. In time, banks will need to change and adapt their business models to this new environment and most importantly they need to advance faster technologically – either organically, or through cooperation with fintech companies working on viable products.
• Indeed, we may find that on balance the prospects for disruption within payments are likely to lead to a net benefit with the inclusion of a retail CBDC. Nonetheless, we would recommend that caution is exercised, and analysis is expanded to include the likely scenarios that will unfold and risks and opportunities that might materialise, depending on the parameters imposed in the CBDCs design.

Recommendation 2:

Where possible, seek to remove payment frictions and potential barriers to interoperability

• Adoption by consumers and businesses of a CBDC will only be widespread if their interaction with the payment system is at the very least as frictionless as existing means of payments. Therefore, at each stage of proposals, consideration should be given to the use cases and practical implications and to what extent the BOE will be reliant on the private sector to find solutions where new frictions are created. 
• It is apparent that with each design choice, whether this is to impose deposit caps, restrict access to consumers and UK residents or run a central ledger; there are several trade-offs to be considered which will impact upon the utility of the CBDC. The BOE has been thoughtful in such choices. However, where scope or design restrictions have been proposed to resolve one issue, we would recommend the BOE explore where this solution has the potential to introduce other challenges or risks. For example, limits on holdings may provide the answer to many of the monetary and financial stability issues identified in the proposals should a CBDC instead be implemented unfettered by restrictions. We agree that these are material issues and should continue to be prioritised in the hierarchy of potential trade-offs.
• However even in the event of technological solutions, they are likely to impose issues for wallet holders.
• For example, in the event deposit limits are reached all CBDC account holders will need to have an alternative commercial bank deposit account. Further their wallet provider will need to be able to initiate payments to this respective account – diminishing the financial inclusion argument to a CBDC and introducing administrative burden on users and providers. The BOE will need consider grace periods and other options to ease these potential issues including access via ATMs.
• For example, in the event deposit limits are reached all CBDC account holders will need to have an alternative commercial bank deposit account. Further their wallet provider will need to be able to initiate payments to this respective account – diminishing the financial inclusion argument to a CBDC and introducing administrative burden on users and providers. The BOE will need consider grace periods and other options to ease these potential issues including access via ATMs.
• Prohibiting corporates from CBDC deposit accounts may reduce the extent to which funding is ring fenced away from the commercial banking sector. However, it may result in challenges issuing refunds for defective or unfilled orders, where a recipients’ commercial bank deposit account information would also be needed. The restriction means less flexibility and so less / little incentive to use the digital currency, overall, an impediment to its widespread adoption.
• AML and fraud risks are potentially reduced by prohibiting non-UK residents’ access to CBDC accounts. However, prohibition creates issues for consumers wanting to undertake cross border transactions and limits the opportunity to address well-known issues with settlement times and costs in retail foreign currency transactions.

Recommendation 3: 

Further consideration in proposals as to what regulatory framework and consumer protections will be required for different types of retail transaction

• It has been widely accepted that the implementation of a CBDC would introduce a risk-free digital asset for consumers and this would be the primary motivation for holding it over other forms of currency. While that is true to a certain extent, it is mainly in the context of the settlement and counterparty credit risk of the deposit provider. 
• Existing payment systems afford consumers and businesses with various other means of risk mitigation and protection. Many of which have supported widespread adoption including the rights to merchant refunds, recourse in the event of scams and fraud and access to branch networks. Many of these protections are set out in statute but others have been developed as part of commercial arrangements over time.
• A retail CBDC could conceivably cover several different use cases: Person to person; online and instore merchant transactions; utilities; rent and mortgage repayments. There is a risk that consumers could be forgiven for assuming that the current value additions and protections afforded to them when using a debit or credit card or when moving money via their commercial bank are at a minimum in place or indeed set higher when using a CBDC. For example:
  • legislation affords certain rights when using certain existing payments. The absence of those same rights applying to a digital currency might be a potential impediment to the take up of the digital currency. Consideration should be given to whether existing rights should be also added via legislation and regulation to the digital currency and where this is not done, ensure that the reasons for delineation are explored and understood.
  • there are additional services offered with existing payment systems that are part of the means of competing for business. These are the result of competitive choices made by different providers.
• Consumers may not necessarily understand the differences. So as the digital currency is rolled out it will need to be accompanied with an extensive consumer education process on the differences between holding digital currency and bank deposits, and the protections in law between digital payments and payments using cash, credit, or debit cards and other.
• We also recommend that alongside CBDC proposals, a regulatory framework is mapped out. It should consider the gaps that currently exist between those additional features and protections that are afforded through existing regulation and those that exist commercially as part of payment or card scheme rules. If trust and confidence is to be supported though adoption of the CBDC, appropriate regulation will need to bridge the gap. Answers to specific questions.