Thoughts on the 2023 UK Digital Pound consultation
HM Treasury and the Bank of England (BoE) are consulting on the “Design Phase” of a Digital Pound. In this post I highlight some key concepts of the consultation. I also offer a few thoughts on the potential implications of the Digital Pound.
Please note that I am not a financial or legal expert.
The relevant documents are:
- Consultation Paper. The focus of this post. It sets out the arguments for a Digital Pound. https://www.bankofengland.co.uk/paper/2023/the-digital-pound-consultation-paper
- Survey. This invites feedback on Consultation Paper. The deadline is 7th June 2023. https://app.keysurvey.co.uk/f/41651494/3010/
- Technology Working Paper (TWP.) The accompanying document explores in more depth how fintech innovations might be applicable to a Digital Pound. These could include any innovations seen in cryptocurrency, DeFi, smart contracts, atomic swaps, digital ID, etc. https://www.bankofengland.co.uk/paper/2023/the-digital-pound-technology-working-paper.
- Feedback on the TWP is also invited until 7th June 2023. https://app.keysurvey.co.uk/f/41652411/5d1a/
- UK digital identity and attributes trust framework. Digital ID may underpin access to the digital pound. https://www.gov.uk/government/publications/uk-digital-identity-attributes-trust-framework-updated-version
For further background reading on CBDCs, I’d suggest this article from UK Column.
The consultation paper focuses on the technology and policy surrounding the coming Design Phase of a Digital Pound and “seeks views on the key features of the model we intend to take forward”. The Design Phase will include building proofs-of-concepts and will involve the FinTech sector.
After this phase will be the Build Phase, which is anticipated in “2025 at the earliest.” During this phase, pilots will be run in simulated environments.
Finally, there will be a decision whether to launch a Digital Pound. Factors influencing this decision include [see pp.34-35, 38]:
- The continued decline in use of cash – i.e., central bank money.
- The emergence of new forms of private digital money issued by new payment entities. A key concern is interoperability with sterling and avoiding dominant closed systems.
- Uptake of CBDC and private digital money. (NB: The proposed Digital Pound is a de facto CBDC.)
- Support for the BoE’s statutory objectives to “maintain monetary and financial stability”, including “maintaining low and stable inflation” and “stable provision of credit to the economy.” This applies especially to the transition period of adoption.
- The introduction of a Digital Pound is not a certainty. The BoE judges that it is “likely to be needed” and “no firm decision” has been taken. Responses to the paper “will inform the next stage of work and constitute an important step towards making a final decision.” [p.93]
- The Digital Pound is for households and businesses (and non-UK residents) to use for everyday in-store, person-to-person and online transactions. It would be compatible with existing payment systems. [pp.75-78].
- Cash will continue to be available, the paper claims. “UK authorities are committed to keeping cash available as long as there is demand for it.” [pp.27,86]
- You probably won’t need a smartphone. “It is likely most people would access the wallet via their smartphone, but there would be alternative options, such as a smart card.” [p.12] Moreover, the “Financial Inclusion” section (Box H) acknowledges, albeit briefly, that some users won’t have access to the Internet or to a smartphone. [p.87]
- The Digital Pound is a retail CBDC. It would be retail-focused to ensure that the BoE could still exert monetary policy. [pp.42,50]
- The Digital Pound would not earn interest, as this could weaken monetary policy. [p.48]
- A key justification for a Digital Pound is monetary and financial stability. Use of private money – i.e., holdings in private banks – is increasingly. Diminishing use of public money – i.e., cash from the Central Bank – means that “the monetary system could become fragmented, posing a risk to monetary and financial stability.” [p.10] Under the Digital Pound there will be a continued role for private commercial banks. They (and other approved non-bank private firms) will provide “pass-through wallets”, which will privately (but not anonymously) interface between users and the Central Bank.” [pp.11, 53]
- The Digital Pound will be “at least as private as current forms of digital money, like the money in a commercial bank account or e-money.” [p.69] So, not very private. Only cash offers real privacy.
- In a seeming self-contradiction, a proposed privacy objective is that “enhanced privacy functionality” could “result in digital pound users securing greater benefits from sharing their data.” For example:
- A tiered accounts system could limit users to small value transactions unless they provide greater KYC information. [pp.69-70, 73]
- Sharing more transaction data with PIPs could provide user with (unspecified) “additional value-added services.” Such sharing could “transform almost every part of our society and economy.” [pp.73-74]
- Under the banner of “Inclusion” allowing only “limited, low-value” payments is offered as a “gateway” for the “financially excluded.” [p.88]
- The Digital Pound will not be anonymous because it is still necessary to be able to mitigate and investigate financial crime. Law enforcement would have access to transaction data. [p.71]
- Although banks would not see your identifying information, Payment Interface Providers (PIPs) and External Service Interface Providers (ESIPs) would. PIPs and ESIPs would process all transactions via an API that accesses the BoE’s core ledger. [pp.12, 53, 60]
- PIPs and ESIPs would also handle identity verification, potentially using a UK-wide Digital ID. [pp.71-72]
- ESIPs would not process payments, but would analyse them for analytics, budgeting, fraud monitoring, etc. [p.56]
- The proposed CBDC model – with the BoE holding the core ledger and PIPs and ESIPs intermediating with the ledger and users’ wallets – is called the Platform Model. [p.53]
- PIPs and ESIPS could charge for processing or premium services, or for high-value or business or international transactions, or they could monetise your spending patterns. [p.57]
- The Digital Pound could be programmable. This would be implemented not by HM Treasury or the BoE, but by PIPs and ESIPs. User consent would be required, although there’s no guarantee that such “consent” won’t differ from the standard accept-it-or-you-can’t-use-it EULA. [p.79]
- Feedback from HM Treasury’s “CBDC Engagement Forum” with business, academia and consumer groups noted that “programmability, smart contracts or micropayments could drive demand for CBDC payments.” [p.90]
- Initially, the amount of individuals’ Digital Pound holdings will be “subject to some restrictions.” This could be between £10,000 and £20,000 or as low as £5,000 – enough, in the paper’s estimation, for many people to receive their salary. “It would be for a further decision, in the light of experience, whether those restrictions should be made permanent.” [pp.14,80] Corporations would also be subject to limits, although the mechanisms are yet to be determined. [pp.83-84]
- “The legal basis for the digital pound will be determined alongside consideration of its design.” [p.17]
- The paper claims that cash – the only retail form of Central Bank Money – provides “tangible proof” that bank deposits are “safe” and can be converted to cash “on demand.” [p.25]
- Uniformity is held up as a major concern, although the primary supporting argument is admitted to be weak.
“Preventing risks to uniformity underpins the case for the digital pound.” With declining use of cash, a Digital Pound will “anchor the money system”. Private or “walled garden” non-sterling money “could compromise monetary sovereignty – the UK authorities’ ability to achieve price stability through monetary policy.””
However, this is “judged to be unlikely” and the paper then even goes on to say that the Digital Pound could “complement and support new forms of private digital money and payment services.”
The section finishes by overserving that a Digital Pound could help “[preserve] sterling as the unit of account in the UK.”
- “[I]nnovation can come with risks of concentration.” The paper observes that closed ecosystems could threaten interoperability – i.e., uniformity / fungibility – and competition. If private firms used the Digital Pound then these concerns would be mitigated. [p.31]
- “Inclusion” for some “financially excluded groups” could be provided via “offline payments” – i.e., without a data connection.
- Bank Disintermediation, whereby households and businesses switch bank deposits to Digital Pounds, could increase the price or lower the availability of credit – i.e., loans. This is because banks will be forced to buy high-quality liquid assets (HQLA), such as government bonds. [pp.38-39, 41] Wouldn’t this make retail lending more resilient and provide more authentic pricing signals?
Disintermediation could also reduce responsiveness to monetary policy. [p.42]
- The BoE prefers a Digital Pound to stablecoins, for reasons of interoperability, stability and ability to exert policy. [p.47]
- The BoE has been experimenting with Ripple for cross-border (international bank-to-bank) synchronisation. [p.65]
Scattered throughout the consultation paper in their relevant context are questions to which readers are invited to respond. They are published as a block on pages 94-95 and I have reproduced them below.
- Do you have comments on how trends in payments may evolve and the opportunities and risks that they may entail? [p.37]
- Do you have comments on our proposition for the roles and responsibilities of private sector digital wallets as set out in the platform model? Do you agree that private sector digital wallet providers should not hold end users’ funds directly on their balance sheets?
- Do you agree that the Bank should not have access to users’ personal data, but instead see anonymised transaction data and aggregated system-wide data for the running of the core ledger? What views do you have on a privacy-enhancing digital pound?
- What are your views on the provision and utility of tiered access to the digital pound that is linked to user identity information?
- What views do you have on the embedding of privacy-enhancing techniques to give users more control of the level of privacy that they can ascribe to their personal transactions data?
- Do you have comments on our proposal that in-store, online and person-to-person payments should be highest priority payments in scope? Are any other payments in scope which need further work?
- What do you consider to be the appropriate level of limits on individual’s holdings in transition? Do you agree with our proposed limits within the £10,000–£20,000 range? Do you have views on the benefits and risks of a lower limit, such as £5,000?
- Considering our proposal for limits on individual holdings, what views do you have on how corporates’ use of digital pounds should be managed in transition? Should all corporates be able to hold digital pounds, or should some corporates be restricted?
- Do you have comments on our proposal that non-UK residents should have access to the digital pound, on the same basis as UK residents?
- Given our primary motivations, does our proposed design for the digital pound meet its objectives?
- Which design choices should we consider in order to support financial inclusion?
- The Bank and HM Treasury will have due regard to the public sector equality duty, including considering the impact of proposals for the design of the digital pound on those who share protected characteristics, as provided by the Equality Act 2010. Please indicate if you believe any of the proposals in this Consultation Paper are likely to impact persons who share such protected characteristics and, if so, please explain which groups of persons, what the impact on such groups might be and if you have any views on how impact could be mitigated.
A few my own thoughts on the consultation paper follow. My hope is that they’ll give you some fodder to consider and may inspire you to submit your own responses to the consultation.
Digital ID as Trojan Horse
The consultation paper suggests that digital ID – in the form of the UK digital identity and attributes trust framework – may underpin access to the Digital Pound. As of March 2023, the framework is already in alpha testing, so we can reasonably assume that it will be ready for the introduction of the Digital Pound.
The introduction of a national UK digital identity seems unstoppable. However, if it is tied to the Digital Pound our ability to opt out or minimise contact with it diminishes significantly.
Another Trojan Horse lies within the consultation paper: the Digital Pound could be a “gateway” to the “financially excluded”, with some form of limited functionality provided. This looks like an insidious and probably coercive trap for people who are “unbanked”, seeking benefits or otherwise trying to make meagre ends meet.
HM Treasury and the BoE claim that programmability is “not relevant” to their “policy objectives” as it could “damage the uniformity of the CBDC and cause user distrust.” However, the paper assesses the uniformity risks as “unlikely” and even offers several reasons why progammability may be a boon.
Regardless, PIPs and ESIPs would be allowed to implement programmable money – and this would apparently promote “innovation.” So, we can reasonably assume that it will happen, to some degree or another. It would require user consent, but how much real choice we will have in the matter is another matter, as it may be a take-it-or-leave-it offer that many could not afford the luxury of refusing.
Assuming that HM Treasury, the BoE and the BIS would be quite content with the prospect of programmable money then, by shifting the implementation to the private sector, their private agendas could be enacted by proxy with full deniability. (We’ve seen this kind of indirect “edict by guideline” in effect throughout the “Pandemic” years, of course.) They could establish rules, regulations, guidelines or market conditions that influence, incentivize or coerce PIPs and ESIPs accordingly. (c.f. Operation Chokepoint and the treatment of the Canadian truckers’ Freedom Convoy.) Alternatively, powerful financial institutions with aligned interests could dominate the market. Or corporate and state media could promote such products. Like any field of business, the big players will use their influence to get their way.
Compliance by coercion
During its introductory period, Digital Pound holdings would be limited to £10-20K – or even £5K – supposedly to manage risks to financial and monetary stability. This limit would subsequently be reviewed.
Given the proposed “tiered accounts system”, there is little incentive to raise the limits. Indeed, maintaining lower limits only serve to support increased state control and surveillance, as users who want access to greater funds would be coerced into offering up greater KYC information and sharing more information about their transactions.
An insidious justification for maintaining “limited, low-value payments” is to provide greater financial “inclusion”, as the associated KYC requirements will be lower. Note that “limited” might mean limited functionality; why else use this word alongside “low-value”? Such limited functionality would be another lever for coercion.
Enhanced security = reduced privacy and anonymity
The paper acknowledges the risks of fraud and suggests as mitigations: effective financial crime controls, particularly rigorous identity verification, and analytics of user behaviours and payment patterns in the system. [p.60] Thus, we will not enjoy the same privacy and anonymity benefits of physical cash.
Towards a single global currency
Central banks are evidently keen on the efficiency, surveillance and control that come with CBDC and this interest is unstoppable. The BIS General Manager Agustin Carstens has said as much.
The BoE is actively working with other central banks and the Bank for International Settlements (BIS) to experiment with and build new infrastructure for CBDCs. (See Box H, pp.63-66.) A “wholesale CBDC” could be incorporated into the updated Real-Time Gross Settlement (RTGS), the service that supports high-value wholesale payments between foreign exchanges and other financial institutions.
The BIS has a paper on global developments in CBDC, which observes that most CBDCs are “indirect” or “hybrid”, whereby private institutions intermediate between users and the central bank. There are other significant similarities in current approaches, perhaps indicating an outcome that is either inevitable or coordinated.
If the major difference between “direct” and other approaches is the interposition of private institutions between central bank and user, are you reassured that states will not be motivated and capable of controlling and tracking transactions of interest?
As international CBDC interoperability (and corresponding roll out of national retail CBDCs that this implies) increases, control over money moves upwards to central banks – and away from private money. Are these the foundations for a de facto global currency?
Who will run the system?
PIPs and ESIPs may include other approved non-bank private firms. Such as Elon Musk’s “X”?
As the paper is at pains to point out the many “risks” associated with a fragmented – i.e., non-centrally controlled – marketplace, perhaps this is another “gateway” (Trojan Horse) between CBDC and supposedly independent private payment systems.
Perhaps we should be viewing this scheme as an octopus, with its tentacles attaching itself to every form of payment available.
The decline of cash
The consultation paper quotes an August 2022 report from ukfinance.org as stating that cash use has declined from 55% of transaction to 15% in the last 10 years. The report notes that cash remains the second most popular form of payment, after card payments, although the decline will continue as the proportion of contactless payments increases and younger demographics opt ever more to use alternative payment systems, such as smartphones. Significantly, it predicts that by 2031 cash will “transition to an economy where cash is less important than it once was but remains valued and preferred by many.”
If cash is on the decline, what, then, is the role of digital cash?
The consultation paper’s answer to this is financial stability. You can read about the various factors behind this in Part B of the paper, such as uniformity, trust, bank soundness, fragmentation, the ease of convertibility, policy influence, sterling sovereignty and so on. Together, these factors underpin public – that is, central bank – money.
If cash usage continues to decline, a replacement will be needed to maintain this stability. It is therefore up to us to keep cash use at a threshold at which the justification for a Digital Pound is not sufficiently strong.
Use it – or lose it, your privacy, your anonymity and your independence.
What is the USA doing?
Very briefly comparing the UK’s approach with recent developments in the USA, one could say that the UK’s approach is the iron fist in the velvet glove while the USA’s is simply to shove you into a cage.
Bills are being introduced by over 20 states that, under the cover of a Universal Commercial Code (UCC) Guidelines Update, change the definition of currency in favor of CBDC while banning other forms of digital money and cryptocurrency. The governor of South Dakota, Christi Noem, was one of the first to spot this and veto it. How this plays out in other states will be pivotal in the evolving CBDC and digital money landscape.
Too many wallets
Finally, a practical issue.
The consultation paper suggests that many business sectors could provide Digital Pound wallets, including media, social media, charities, IoT manufacturers, and retailers. These wallets would take the form of mobile apps or physical cards.
It seems unlikely that people will tolerate maintaining a multitude of such wallets. (Remember those long concertina loyalty card wallets people carried in the 80s?) So, the choice being offered is effectively an illusion.
Also, would you trust a cash-strapped charity to be competent to write (or even contract out) secure code?
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