Minutes
Date: 12 March 2025
Item 1: Welcome
Nick McLaren (chair) welcomed members to the fourth Academic Advisory Group (AAG) meeting. He outlined the agenda and discussed the purpose of the meeting. Subgroups formed at the last meeting of the AAG (December 24) would present their initial thinking based on their topic of focus. This would allow other AAG members to provide views to shape the future work.
The chair noted the importance of the AAG subgroups' work for the ongoing digital pound design phase. They ensure that the insights from academic research are used to inform and challenge the Bank and HMT’s work on the blueprint and the assessment.
The chair also flagged to members the publication of the progress update, blueprint framework design note and the announcement of the Digital Pound Lab. Members were keen to hear more about this work going forwards.
Item 2: Subgroup discussion – Uniformity & Alternatives
Subgroup headline question: Is a digital pound likely to meet the core objective of money uniformity, and is it the best option?
The subgroup began by highlighting there is no widely agreed definition of uniformity, and the existing academic literature does not determine to what extent uniformity is desirable. Acknowledging there is not a perfect definition, the subgroup outlined their working definition of uniformity as being a fixed exchange rate of 1:1 between different forms of money. They noted that the existing literature on uniformity was varied, but there are two distinct areas of focus. One is the role of public versus private money, and the second is competition in payments.
The subgroup explained that uniformity in money was not always necessarily needed to underpin a functioning economy and financial systems. But while you can question whether it is strictly necessary, the subgroup believes there are reasonable arguments that there is a case for the benefits of uniformity, which are similar in some respects to exchange rate stability, notably low transaction and information costs. Even small variations between the value of different types of money could more than offset any benefit from lower transaction costs.
The subgroups review of academic literature suggests households do not necessarily need to be able to convert into central bank money in order for uniformity to be prevalent, but that this is likely to support uniformity as it fosters trust in private forms of money. However, further research on these issues would be warranted, as there is still relatively little research on these issues.
If a conclusion was reached that convertibility into central bank money is a key component, then it might support elastic supply, and potentially renumeration, of a digital pound. In principle, imposing individual limits on holdings of a digital pound by individuals and businesses could lead to rationing, and therefore impact on uniformity. The subgroup has, therefore, so far concluded that adjustments to the rate of remuneration might work better than physical limits in controlling household holdings of a digital pound.
Discussion
The chair thanked the subgroup for their work, before turning to other AAG members for discussion. Members discussed the importance of payment systems working well for the public, with a focus on simplicity. The need for a single unit of account and monetary sovereignty was emphasised. One member noted that while members of the public may not be familiar with the concept of uniformity, having a single unit of account may play a similarly important role to an agreed standard for measuring distances, weights, volumes, etc.
The discussion focused on whether a digital pound is necessary for achieving financial inclusion, its role as a public good and the challenges of maintaining uniformity in the financial system. The discussion also touched on the historical context of multiple exchange rates and the equilibrium outcome of uniformity. The group agreed on the importance of a single unit of account and the need for a trusted institution to implement standards.
The next steps for the subgroup’s work focused on the definition of uniformity and considering lessons that can be learnt from optimal currency areas, focusing on the best design for a digital pound versus alternatives.
Item 3: Subgroup discussion – Public and Private Financial Viability
Subgroup headline question: Can a digital pound be financially viable for the public sector and private sector participants?
The subgroup began by outlining what they believe financial viability means. Noting from a private sector perspective it is profitability, but that public sector viability is about value for money. This is important both in build, but also in steady state operation. They focused on what would influence this and whether or not a digital pound can become financially viable.
They see the extent of adoption, both from consumers and merchants, as key. They considered the role of competitive pressures from existing methods of payment. The subgroup discussed the potential development of a framework incorporating both on adoption and competition. They outlined the demand side dynamics in terms of what leads consumers to potentially use a digital pound as a means of payment and what would then also lead merchants to accept it.
Discussion
Members discussed the current competitive payment landscape and the importance of a unique selling point (USP) for a digital pound that is easily understood by the public. Minimising costs to merchants and ensuring easy interoperability were highlighted as crucial for adoption. The experiences of the Bahama’s Sand Dollar and Nigeria’s e-Naira were cited as examples of challenges in adoption due to issues with establishing new providers and lack of consumer demand.
Public awareness and education were emphasised as key to the viability of a digital pound, with one member suggesting that charities and NGOs could intermediate this conversation. The role of commercial banks and existing payment infrastructure providers were discussed, noting that their incentives to support a digital pound was considered crucial. Members noted the need for a digital pound to be accessible through current wallet platforms. Although, the importance of differentiating a digital pound from existing private sector offerings was important.
The discussion concluded with a focus on the need for further consideration of the PIP layer and market structures, and the importance of clarifying which subgroup should focus on adoption as a key area.
Item 4: Subgroup discussion – Financial & Monetary Stability
Subgroup headline question: Is a digital pound consistent with the Bank of England’s statutory objectives of monetary and financial stability?
The subgroup explored the conditions necessary for a digital pound to function effectively, focusing on the design features that could encourage widespread adoption. They also examined how such a system could be introduced without compromising financial stability, considering whether certain features, such as limits on holdings of a digital pound, might need to be adjustable over time.
The subgroup suggested that conducting research into the preferences and behaviours of households and businesses would help the Bank about user needs. They suggested building on existing surveys that examine payment strategies and gradually introducing digital pound concepts to gauge potential adoption. A key area of interest was how individuals might respond in scenarios involving financial stress, such as a bank run.
The use of agent-based modelling was proposed as a method to determine appropriate limits for digital pound usage. These models could incorporate a wide range of data to inform policy decisions. It was noted that in a system with fixed supply, limits could lead to a form of deposit rationing. While converting between cash and digital pounds may not directly affect the banking system, large-scale transfers from commercial bank deposits into digital pounds could pose risks to financial stability. Preliminary modelling results were shared, with further findings expected in due course.
Discussion
Members discussed wider academic literature on surveys into household preferences for CBDC. It was queried whether banks in the agent-based model had sufficient reserves to cover deposit outflows. Concerns were raised about cases where deposit outflows exceeded reserves, but it was noted that the central bank had market operations available to it to handle such a scenario.
The potential of a digital pound protecting against banking crises by implementing inflow caps was debated, with members suggesting this could slow the movement of money out of the banking system in times of stress. It was suggested that inflow caps could be implemented in a way that would not affect most of the population. Paying interest on the digital pound was suggested as an alternative way of controlling demand, although some members noted this would also affect the extent of disintermediation of the banking system, which could increase overall financial system fragility.
The importance of deposit insurance and public education about its protections was highlighted. Members noted that the number of people with deposits above current deposit guarantee limits was small. It was also suggested a digital pound could serve as a backup payment method in times of stress that could complement deposit insurance. The significance of monetary sovereignty was emphasised. The session concluded with a focus on consumer research and the need to consider monetary sovereignty arguments within the uniformity of money group.
Item 5: Subgroup discussion – Security
Subgroup headline question: Does the digital pound design proposition meet best practice for a secure provision?
The subgroup split their work into two main areas; i) security & resilience and ii) privacy. They addressed key questions they would focus on in their work. They noted that further information on the proposed design would be needed to fully determine an answer to the set question. They noted that balancing users’ privacy with the need for AML/CFT checks was a core issue. On Cyber risks, they noted that low/free transaction costs could compromise security by making it much easier for some types of attack. Mitigations of this could be cool off periods, or time limits after a certain number of transactions are made.
The subgroup noted the importance of understand the cyber security risks PIPs may face in the ecosystem, and how they interact with the core ledger. The subgroup noted the importance of i) regulation and oversight of PIPs; oversight of the Bank in its role as issuer and operator of the digital pound; iii) legislative protections for users and iv) maintaining a view of potential cyber security threats. The subgroup noted a trade-off for the Bank between two of the core privacy objectives stated in the CP (Government and Bank not having access to users’ personal data, and the fact a digital pound would not be anonymous due to need to verify and identify users). They raised concerns about the difficulty of achieving this. The subgroup noted that the platform model proposed would support this position, as would Digital ID systems. They noted that a key area of future study would be considering the extent to which data could be inferred from the revelation of other data.
The subgroup highlighted an area of academic debate concerning an individual’s privacy and the collective good in privacy. They noted the importance of this debate in light of the Bank’s proposal that individuals would have more control over how they share data. Individuals’ choices will have an impact on the public good element of a digital pound as decisions taken by one individual would affect the amount of data held overall by participants within the ecosystem. The subgroup noted the need for a robust legal infrastructure which clearly pointed to which parties were responsible for which aspects of the ecosystem. They raised the findings of Project Tourbillon and the importance of the HM Treasury’s role in organising the parliamentary legislation.
Discussion
Members discussed the access commercial banks currently have to users' data and the ability to monetise it, questioning whether PIPs should have similar capabilities. The balance between anonymity and pseudo-anonymity was debated, with agreement with proposals that the Bank of England ledger should be anonymous.
The impact of regulatory freedom on PIPs and the variety of services offered was considered, with more research needed on the PIP regulatory framework's effect on end users. The representation of deposits on the ledger and its implications for anonymity were discussed, noting the comparison to current commercial bank deposits.
The importance of public engagement and education was emphasised, noting opposition to CBDCs and the need for citizen involvement in public sector projects. The session concluded with a call for more detailed discussions on governance frameworks and a privacy-focused session at the conference on innovation in money and payments the Bank was proposing to host later in the year.
One member noted that this has links with the innovation work, as user interfaces and design features may have implications for privacy.
Item 6: Subgroup discussion – Innovation
Subgroup headline question: Is the digital pound likely to meet the core objective of payments innovation?
The subgroup started with two key questions of whether a digital pound can drive 1) financial inclusion 2) efficiency in payments?
The subgroup conducted a literature review which suggested that CBDCs can be a key driver for facilitating financial inclusion, which is evident from many other live CBDC projects globally – particularly those in emerging markets – having this as a primary motivation. Emerging economies with a larger share of unbanked populations have more scope to improve financial inclusion through CBDC projects. Most countries are looking into a two-tiered model where the central bank is the issuer, and the private sector intermediaries, which the subgroup believe can help support innovation. The end user design is also important to facilitate inclusion.
They highlighted the key reasons why CBDCs can help with financial inclusion:
- Improved access to digital payments – especially where it is costly to reach some groups.
- Reduced transaction costs lowering the cost of payments
- Gateway to broader financial services
- Interoperability with a wider range of types of money and payment
- Supports financial identity
- Help with data sharing – linking with Open Banking
Looking to the UK specifically, the subgroup highlighted that around 2% of the UK population is financially excluded, and this impacts how much financial inclusion can be a primary driver.
Turning to the second question, one member noted this is where more developed economies are focusing their attention in CBDC progression. There are a number of ways in which a CBDC may support this:
- Reduced intermediation
- Faster transactions and settlements
- 24/7 availability
- Increased competition and innovation
- Reduced fraud and improved transparency
- Improved cross border payments
- Programmability and interoperability.
Many countries are also progressing wholesale CBDC programmes which also support these goals. They note a lot of innovation is coming not just from technology but from broader business models and rollout strategy, noting particular importance on the concern from merchants not wishing to pay high card fees on transactions.
Discussion
Members discussed the complexities of financial inclusion, noting that lower income households often pay more for financial services. The importance of correctly marketing a digital pound to drive adoption was highlighted. The changing landscape around stablecoins and the global regulatory responses were considered crucial, with potential benefits driving user adoption. The risks to innovation, particularly if implemented poorly, were noted.
The idea of minimum basic products was suggested to drive lower-level usage. The need to differentiate the digital pound from existing payment methods, targeting merchants with tangible savings, was emphasised.
The focus on innovation and growth was linked to financial inclusion, suggesting they may complement each other. The discussion concluded with a focus on the right environment for innovation and competition, debating whether improving existing payment infrastructure or creating a new form of money would be more effective.
Item 7: AOB
The chair thanked all the subgroups and noted the Bank was looking forward to the June meeting, with each subgroup providing more detailed presentations on these topics.
The chair reminded members of the Bank’s plans to host a conference in September which will cover some of these issues, and more detail would be shared in due course.
Attendees
Nick McLaren (chair)
Kate Evans, HMT (observer)
Members
Alexander Edmund Voorhoeve, London School of Economics
Anna Omarini, Bocconi University
Alistair Milne, Loughborough University
Andrew Theo Levin, Dartmouth College
Bill Buchanan, Edinburgh Napier University
Burcu Yüksel Ripley, University of Aberdeen
Danae Stanton Fraser, University of Bath
Darren Duxbury, Newcastle University
David Robert Skeie, Warwick Business School, University of Warwick
Davide Romelli, Trinity College Dublin
Dirk Niepelt, University of Bern & CEPR
Doh-Shin Jeon, Toulouse School of Economics
Gbenga Ibikunle, University of Edinburgh
Iwa Salami, University of East London
Jonathan Michie, Kellogg College, University of Oxford
Marta F. Arroyabe, University of Essex
Michael Cusumano, Sloan School of Management, MIT
Pinar Ozcan, Saïd Business School, University of Oxford
Sheri Marina Markose, University of Essex