Date: 9 February 2022
Item 1: Welcome
Co-chairs Charles Roxburgh and Jon Cunliffe welcomed Members to the second meeting of the CBDC Engagement Forum. They noted the announcement made by the Bank and HM Treasury on 9 November 2021 regarding forward plan for exploration of a UK CBDC and the planned publication of a CBDC Consultation Paper during 2022. They also noted the publication of the House of Lords Economic Affairs Committee report on CBDC.
Item 2: Debrief of the last Technology Forums
The Bank of England provided a brief summary of the two Technology Forum meetings in November and January that took place after the first Engagement Forum meeting (minutes of those meetings can be found following the links).
Item 3: CBDC use cases
The Bank of England presented on CBDC ‘use cases’. The presentation suggested a ‘use case’ would be important for all elements of the CBDC ecosystem – UK authorities, private sector intermediaries, and end users – but would likely differ for each. It went on to set out different and illustrative types of CBDC, outlining the fundamental features that each type might require. The Bank presented the discussion around a question of whether CBDC should be designed with one or more primary use cases in mind or aim to be as adaptable a platform as possible with use cases development left to the private sector. The Bank also asked members what information and mechanisms could help the private sector to develop their thinking on use cases.
Members discussed the arguments for and against determining specific use cases and corresponding functionalities prior to developing CBDC. Members largely supported the creation of a basic but extensible core platform that allowed the private sector to innovate on top of it and come up with value propositions that would ultimately shape and accommodate the use cases. It was argued that a flexible and extensible platform would allow innovators to identify and develop potential use cases and promote competition by reducing barriers to market entry. Some Members thought that limiting CBDC to a set of particular pre-defined use cases would be detrimental to innovation by limiting the ability to accommodate future use cases that couldn’t easily be anticipated today.
One Member warned about the risks of aiming for too much flexibility, arguing that it could lead to complexity that could ultimately reduce the utility of CBDC. It was also noted that use cases would more likely be limited by other factors such as technological constraints, regulation or barriers to effective user identity verification, themes that will need to be duly considered as CBDC is developed.
Members emphasised the private sector needed clarity around the policy and technical parameters the authorities will put in place for CBDC in order to start identifying potential use cases and commercial opportunities within the CBDC ecosystem. To that end, the Bank of England noted its interest in organising workshops, hackathons or sprints involving the private sector innovators in the future to explore CBDC more practically. The Bank of England also mentioned the recent announcement of a joint project with the BIS Innovation Hub London on CBDC and API applications.
Item 4: mitigating exclusion (digital, financial, socioeconomic etc.)
HMT introduced the topic of inclusion and noted that building a CBDC in line with HMT’s financial inclusion objectives meant promoting access to useful and affordable financial products and services, whatever a person’s background or income. Presentations by two Forum Members followed.
The first presentation by a Member provided an overview of three themes relating to financial inclusion: access to banking services, access to cash, and digital exclusion. The presentation used real life case studies to illustrate the main drivers that may prevent certain groups from accessing financial products and services, and, in particular, digital services such as online banking. The presenter proposed that, in order for a CBDC to solve some of the current issues around financial exclusion, the aim should be for CBDC to be universal, replicate some of the functionalities of cash, and be technologically simple and cheap for end users.
The presentation argued a universal CBDC, with free and unconditional access for everyone, would tackle some of the difficulties faced by the unbanked, such as not having a fixed address or not being able to prove their identity. The member presenting proposed that one way to address this might be linking CBDC accounts to other official databases, but only with the informed consent of the users. This could enable CBDC to be used for potential use cases such as government to person payments (e.g. social security) where the beneficiary didn’t have a bank account. Other Members pointed out such an approach would need careful consideration of how to protect user privacy.
The presentation then considered how CBDCs may be used by certain groups of people who rely on cash. It was suggested that a CBDC should aim to replicate some of the features of cash such as its tangibility, the ability to segment payments or to put money away for specific purposes, in order to support budgeting. Some Members considered that current banking and payment options intend to address those needs.
With respect to digital exclusion, the presentation reflected that some UK households currently do not have, or struggle to afford, an internet connection, which makes using online banking or other digital financial services a challenge. Digital skills are also an issue in certain households. The presenting Member suggested a CBDC would need to be free of charge for users at risk of exclusion, and capable of working offline to be accessible to digitally excluded people.
A second Member presented on current cash usage attitudes in the UK based on survey and observational data. The findings indicated that cash use, while in decline, is still relatively prominent for specific demographics, including older people, but also those aged between 16 and 24 years old. The presentation set out the use case of distributing emergency funding. The presenter stated that a significant amount of emergency funding is distributed in cash to people, for example who are either unbanked or unable to share bank details. They proposed that for a CBDC to be viable for this use case, it would need to be simple to distribute funds to people, for example through a phone number, or at specific secure locations such as a job centre or refuge.
The Member presenting supported some of the design features that were proposed in the first presentation in the session, such as the ability to control own finances, tangibility and the opportunity for CBDC to improve current social security payments. The presentation also proposed other key desirable features of CBDC that would increase the likelihood of adoption by current cash users, such as convenience, accessibility and seamless convertibility between CBDC and physical cash.
Members noted that some long-term drivers of exclusion might not be addressed by CBDC, and simultaneously that some other drivers might be addressed by existing payments solutions rather than necessitating a CBDC. Some Members thought that it was important to understand the effectiveness of current policies aimed at mitigating exclusion, such as basic bank accounts, in order to clearly articulate whether a CBDC could offer additional value. Others contended that a CBDC, which arguably would be a digital payment system, would not address some of the issues relating to tangibility or digital literacy and skills, and warned that these could be worsened by CBDC.
Members noted that a range of design questions would need to be solved to ensure that financial inclusion and other exclusion challenges are effectively factored into CBDC’s design, although there was a question of how much was for a CBDC platform to solve, and how much was in the design of wallets.
Item 5: Co-existence between CBDC and other forms of money
The Bank of England introduced the final item in the agenda, providing a definition of coexistence and outlining its requirements, potential benefits and challenges. The objective of this session was to discuss how a CBDC could fit into the current UK payments landscape, how it might interact with other forms of money, and the different ways this might be achieved, considering the trade-offs and risks associated with the different approaches.
Two Members presented on this topic. The first presentation covered two potential interoperability models. The first one a ‘create and destroy’ payment-only option, in which value could not be stored in CBDC but only pass through it. The other option was a ‘store of value’ option, or “custody model”, where CBDC would be held until required, converting into other forms of money only where it was necessary to use a payment system other than the CBDC system. The Member presenting suggested that adoption of one or the other model would depend on the cost and ease of exchange between CBDC and other forms of money. It was also argued that end users would not be interested in the exchange and accounting mechanisms, and hence be indifferent to the form of money held in their accounts.
Some Members argued that CBDC had the potential to differentiate itself from other forms of money, which would ultimately make it appealing to users. Features such as the risk-free nature of central bank money were mentioned as examples. Another Member pointed out that merchants would be interested in the different forms of money and payments available to them if the costs differed between using one or another.
The second presentation compared stylised maps of payments messaging and settlement journeys under the status quo for push (Faster Payments) and pull (card) payments to potential CBDC models. It outlined two of the possible models for CBDC ecosystem, one where CBDC would exist and function independently from current commercial payment rails, and another, more integrated, where banks could provide an interface to pay in CBDC and exchange commercial bank money into CBDC across the Bank of England’s RTGS and CBDC ledgers. The presented argued that the latter model was feasible to build in today’s ecosystem, but saw very limited benefits or added value in it.
Some Members thought the second CBDC model set out by the presenter would favour banks, who might end up being the only providers of wallet services. Others thought that the design of CBDC would determine the types of firms who could provide wallet services, especially where business model for wallets was driven by ancillary services.
The co-Chairs closed the meeting and thanked the Members for their contributions. The next meeting would be in May 2022.
Annex: Meeting documents:
Jon Cunliffe (Chair), Bank of England
Charles Roxburgh (Chair), HM Treasury
Tom Mutton, Bank of England
Katie Fortune, Bank of England
Danny Russell, Bank of England
Bhavin Patel, Bank of England
Frankie Evans, HM Treasury
Adam Jackson, Director of Policy, Innovate Finance
Anne Boden, CEO, Starling Bank
Arun Kohli, COO EMEA, Morgan Stanley
Bryan Zhang, Executive Director, Cambridge Centre for Alternative Finance, the University of Cambridge Judge Business School
Charlotte Hogg, CEO, Visa Europe.
Chris Rhodes, CFO, Nationwide Building Society
Chris Wilford, Head of Financial Services Policy, CBI
Christian Catalini, Chief Economist, Diem Association
Diana Layfield, President of EMEA Partnerships, Google
Georges Elhedery, Co-CEO Global Banking & Markets, HSBC
Jana Mackintosh, Managing Director Payments & Innovation, UK Finance
Jess Houlgrave, Chief of Staff, Checkout.com
Jorn Lambert, Chief Digital Officer, Mastercard
Judith Tyson, Research Fellow, Overseas Development Institute
Martin McTague, National Policy Chair, Federation of Small Businesses
Matthew Hunt, Chief Strategy Officer, Deputy CEO, PayUK
Natasha de Terán, Member of the Financial Services Consumer Panel
Paul Bances, Head of Global Market Development of Blockchain, Cryptocurrency, and Digital Currencies, PayPal
Paul Thwaite, CEO Commercial Banking, NatWest Group
Polly Tolley, Director of Impact, Citizens Advice Scotland
Rodney Garratt, Professor of Economics, University of California Santa Barbara
Ruth Wandhöfer, Chair, PSR Panel
Simon Coles, CTO, PayPoint
Simon Gleeson, Financial Regulatory Group Lead, Clifford Chance
Stephen Gilderdale, Chief Product Officer, SWIFT
Tracey McDermott, Group Head of Conduct & Financial Crime, Standard Chartered Bank
Andrew Cregan, Head of Finance Policy, British Retail Consortium
Andrew Murphy, Executive Director for Operations, John Lewis Partnership
Arunan Tharmarajah, Head of European Banking, Wise
Reema Patel, Head of Deliberative Engagement, Ipsos UK
Simon Gaysford, Founder & Director, Frontier Economics