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With the Bank of England opening its consultation on digital currencies, the key question for the payments sector is could a digital pound interact with the existing infrastructure.
What is this article about? As the digital pound moves through its inception, it’s important to understand how it may affect the payment landscape for retail customers.
Why is this important? The digital pound is set to change the payment landscape and firms should prepare and adapt processes in advance to remain competitive.
What’s next? The digital pound is undergoing consultation on how it would operate within the existing payment systems.
In February 2023, the Bank of England (BoE) issued its consultation paper for the UK’s central bank digital currency known as the digital pound. It follows several major economies including China, the US and the EU’s own central bank digital currency issuance, with China being the furthest along.
Currently, the most significant focus of the digital pound is monetary stability, with its use-case for retail payments coming further along its creation and consultation process. The BoE has stated that wallets for the digital pound would be designed by private companies like banks or payment firms as well as new businesses appearing over time.
“One of the messages from the BoE is that it is the industry’s area of expertise to think about the digital pound’s use cases; how you present retail payments to consumers; and how that you make it work in the optimal way by liaising with merchants, acquirers and issuing community,” says Rhiannon Butterfield, principal policy adviser at UK Finance.
While there hasn’t been much progress in what a “digital pound would look and feel like for a retail customer”, Butterfield explains, in an ideal world it shouldn’t be noticeable.
“[That’s] because ultimately in retail payments, most people just don’t think that much about their payments.”
Another key aspect of the digital pound is how it would interact with the existing payments infrastructure. The UK government hopes it would “bring benefits by adding to already existing payments options, support financial inclusion and improve cross-border payments which can be expensive, slow and opaque,” adds Butterfield.
However, what the industry is currently grappling with is the idea of whether a CBDC is even needed to fix the existing problems in the payments system. For payment firms to craft the potential solution to existing problems, the CBDC wallet may be programmable.
“We’ve been exploring as an industry how you give consumers more control over the time that money comes out of their accounts, for example,” she says. “There is already a functionality in the existing payment system called request to pay.
“So, it comes back to this point, do you need a CBDC to solve some of these problems or can you do it with the structure today? But this idea that actually with programmable wallets, you can give consumers a lot of control over how money flows in and out of their CBDC accounts.”
The power of programmability
A programmable digital pound would mean that there are rules and constraints built into the digital currency for users. The BoE has been adamant that it will not pursue programmable functions but stated that the payment interface providers may do so.
“People look at programmability as potentially harmful, but the reality is more nuanced,” says Richard Turrin, author of ‘Cashless: China’s Digital Currency Revolution’. “We already have programmable money, for example the US hands out debit cards for food assistance and those debit cards expire if you don’t use them within a matter of six months.
“If you take that food assistance card and you take it to a gun store and you try to buy a pistol with it, guess what? It won’t work,” adds Turrin. “So, programmability gets a very bad reputation, but in fact, it is already in use, people want it, and find it quite logical.”
The challenges of interoperability
To maximise the benefits of the digital pounds for customers, it will need to be interoperable with existing UK and foreign payment systems.
“The next level of interoperability for CBDCs is the ability to work for global transactions. Without seamless cross-border functionality, most CBDC projects will significantly underachieve their potential,” says Anthony Ralphs, director, product management, CBDC at Ripple.
However, there are currently several global projects that are experimenting with interoperability. For example, the Bank of International Settlements launched Project mBridge, which explores how to connect economies through CBDCs; participating nations include Thailand, Hong Kong, China and the UAE.
“There are several projects out there trying to work on this interoperability issue,” says Dr.Oriol Caudevilla, board director and secretary general at the global impact fintech forum (GIFT). “But to be honest, this is a future issue as most countries haven’t actually launched their CBDCs yet. Talking about interoperability is like talking about a phase two that might only arrive a few years from now.”