Date: 1 July 2022
Item 1: Welcome
Co-chairs Gwyneth Nurse and Jon Cunliffe welcomed Members to the fourth meeting of the CBDC Engagement Forum.
Item 2: Debrief of the last Technology Forum
The Bank of England provided a brief summary of the June Technology Forum meeting
Item 3: CBDC Payment Interface Providers business models
A Member of the Forum presented on potential business models for Payment Interface Providers (PIPs) in a CBDC ecosystem. The presentation set out that PIPs would likely undertake activities suggested in the Bank’s 2020 Discussion Paper on CBDC such as onboarding clients, conducting KYC (Know Your Costumer) and AML (Anti Money Laundering) checks, authenticating users and providing consumer protection and overlay services, among others. The presentation then laid out a set of costs that such a PIP would likely incur in offering those services.
The presenter assumed that PIPs would not be able to lend CBDC, nor use it as a source of funding, so a banking-like model based on revenues from net interest rate margin would not be possible. One Member suggested that it was important to define what non-financial corporate would be able to do with their CBDC holdings in contrast to what is possible currently with commercial bank money balances, as this could need to be factored into a revenue model calculation.
A fee-based business model for PIPs where end users are charged for the wallet service was deemed undesirable given current fee-free payment alternatives. It was argued, however, that customers could be willing to pay for a service if it provided increased functionality (e.g. programmability) or if its costs were lower than existing options where customers currently pay for specific services (e.g. cross-border payments).
The presenter suggested that a model where merchants would pay a fee for accepting payment in CBDC was more likely to be viable for PIPs, but adoption could depend on the costs of setting up the required infrastructure. It was argued that any limits on CBDC holdings or on transactions could influence how much customers used CBDC for day-to-day spending, which could in turn have an impact on how much revenue this model could generate.
The presentation also suggested that data monetisation and cross-selling opportunities were alternative means for PIPs to generate revenue. Some Forum Members thought that finding convincing business models for CBDC was not easy, while others argued that, similar to Open Banking, opportunities may be difficult to see at present but would be realised in the future. One Member argued that payment providers would consider the whole transaction lifecycle when identifying revenue opportunities for a new payment method, not only the payment element itself. This would include considerations such as the ‘halo effect’, the value to merchants of generating brand loyalty by accepting a specific payment method that costumers prefer. It was also noted that merchants and payment service providers had already incurred costs of building an infrastructure and onboarding customers that they would look to leverage to the extent possible for any new payment product, which would also influence the revenue-cost calculation.
One Member suggested that there were public policy considerations that would need to be factored into the cost calculation, as authorities may want to incentivise the use of CBDC to meet certain public policy goals, such as improving financial inclusion.
Item 4: Key G7 Public Policy Principles for retail CBDCs to support decision makers
A second Member presented a view on how the private sector could collaborate with policymakers to deliver on some of the G7 Principles on CBDC (published in October 2021). The presenter suggested four principles where the private sector relevant experience would be useful for the Bank and HMT when designing a CBDC. These principles were (i) operational resilience and cyber security, (ii) competition, (iii) illicit finance and (iv) data privacy.
The presenter noted that it was imperative to ensure operational resilience and cyber security in the CBDC payment chain end-to-end in order to build trust. Given the payment chain would involve different players, the central bank would have to create clear rules and standards of participation to require resilience and security along the chain. Central banks would also need to ensure CBDC capabilities are ‘secure by design’ and forward looking as much as possible, to tackle new threats such as quantum computing. Non-technical resilience elements were noted as integral too, such as behavioural rules and consumer protections.
On competition, the presenter spoke about the importance of interoperability of CBDC with existing payments systems to ensure user choice and support the level playing field. It was argued that leveraging existing infrastructure for on and off ramps into and out of CBDC was desirable to alleviate costs, especially for merchants.
With regards to illicit finance and data protection the presenter noted that the two principles were closely linked in payments, due to the importance of capturing and processing certain bits of data to combat illicit activities. It was noted that CBDC would need to find a balance in order to be an accessible, fast and cheap payment system while maintaining a commitment to mitigate its use for criminal activity.
In response to the presentation, one Member argued that all layers of the CBDC system had to be assessed separately to understand what is most important to deliver when building it. This would mean laying out the fundamental elements of each layer (the core infrastructure layer, the PIP layer, and so on) and determining which elements belong in each layer (ledger provision, operational resilience, ID validation etc.).
The co-Chairs closed the meeting and thanked the Members for their contributions.
Jon Cunliffe (Chair) Bank of England
Gwyneth Nurse (Chair) HM Treasury
Tom Mutton, Bank of England
Danny Russell, Bank of England
Adam Jackson, Director of Policy, Innovate Finance
Bryan Zhang, Executive Director, Cambridge Centre for Alternative Finance, the University of Cambridge Judge Business School
Chris Wilford, Director of Financial Services Policy, CBI
Jana Mackintosh, Managing Director Payments & Innovation, UK Finance
Jess Houlgrave, Chief of Staff, Checkout.com
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
Polly Tolley, Director of Impact, Citizens Advice Scotland
Ruth Wandhöfer, Chair, PSR Panel
Simon Gaysford, Founder & Director, Frontier Economics
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
Susannah Storey, Department for Digital, Culture, Media & Sport
Andrew Murphy, Executive Director for Operations, John Lewis Partnership
Anne Boden, CEO, Starling Bank
Arun Kohli, COO EMEA, Morgan Stanley
Arunan Tharmarajah, Head of European Banking, Wise
Charlotte Hogg, CEO, Visa Europe
Christian Catalini, Chief Strategy Officer, Lightspark
Chris Rhodes, CFO, Nationwide Building Society
Diana Layfield, President of EMEA Partnerships, Google
Georges Elhedery, Co-CEO Global Banking & Markets, HSBC
Jorn Lambert, Chief Digital Officer, MasterCard
Judith Tyson, Research Fellow, Overseas Development Institute
Paul Thwaite, CEO Commercial Banking, NatWest Group
Reema Patel, Head of Deliberative Engagement, Ipsos UK
Simon Coles, CTO, PayPoint