On the first anniversary of the launch of the Digital Pound Foundation (DPF), we were delighted to welcome cross-industry participants to an in-person get-together and to give an update on our progress since launch.
Susan Friedman, Head of Policy at Ripple and Chair of the Digital Pound Foundation welcomed the level of policy engagement with a range of key industry associations, noting, in particular, the participation of the Bank of England, FCA and HM Treasury in the most recent DPF private roundtable focused on privacy. Claire Conby, Operations and Governance Lead, then gave a whistle-stop tour of DPF’s achievements in the year since launch, commenting that the Foundation’s brief is broader than CBDCs, encompassing other privately-issued forms of digital money (and associated challenges and opportunities). As such, DPF is positioned as a central point of reference for all things digital money.
The Digital Pound Foundation’s key objective is to showcase the knowledge and expertise of members, demonstrate thought leadership and educate others. In 2022 this has taken the form of papers, articles, blogs and other published content on topics including financial inclusion, personal identity, data privacy and protection, cybersecurity, stabilising stablecoins, and the wholesale v. retail CBDC debate.
- In conjunction with our marketing communications partner, The Realization Group, DPF has its own podcast series – Poundcast – which invites key industry players to talk about matters relating to developments in new forms of digital money and CBDC space which are important to them. DPF has also hosted multiple webinars on the future of money, cross-border settlement, interoperability and the digital path to financial inclusion and will carry on leveraging these channels to increase public education and awareness
- Our first in-person roundtable event in September debated the challenges and opportunities inherent in different digital currency approaches with respect to personal identity and data privacy.
- Social media is an important communications channel for the DPF and has been instrumental in its ability to reach broad and deep target segments and to engage new supporters and members. Our Twitter following is over 31,000, and the DPF website has had over 80,000 unique visitors to date.
- The most active DPF working group is the Policy and Legal working group led by Jannah Patchay, which has made submissions to multiple industry, regulatory and governmental consultations, including the Bank of England, House of Lords, HM Treasury and associated committees and working groups
- Anushil Gupta and Ainsley Ward of CGI lead the Payments working group; the Use Case working group will launch early in 2023.
- DPF will engage with organisations like the Federation of Small Businesses to better understand what digital money should and could look like with a real focus on identifying meaningful use cases to bring these new forms of digital and their benefits to life. Other working groups slated for the new year include Privacy and Identity, and Financial Inclusion.
There followed a short panel discussion, moderated by Jannah Patchay, originating member and policy lead for DPF, Christian Walker, Poundtoken, a new, regulated sterling stablecoin initiative, Marjan Delatinne, Managing Director – Payments at SETL, and Keith Bear, Fellow at the Centre for Alternative Finance, Judge Business School, University of Cambridge.
A number of key design decisions around CBDC and discussions around privacy, offline payments, programmability and a lot of other technical subjects have taken place.
The Bank of England technology forum is tasked with looking at possible solutions to these challenges. In terms of financial inclusion, there are two extremes (each with different technology implications) – at the one end, a resource for people with limited access to financial services in the UK and at the other, the creation of a CBDC platform for continuing innovation in programmable money.
With respect to programmable money, DPF has considered how events and triggers around particular use cases could add significant value to the broader UK population. There are challenges in terms of how CBDCs fit within existing payment infrastructure and privacy and confidentiality sensitivities. BoE’s focus to date has been retail CBDCs primarily but there are a number of wholesale CBDC initiatives going on.
MVP versus DVP
DLT could be a differentiator in DVP (delivery versus payment), removing silos and batch processing (and associated risks) from settlement workflow and addressing challenges of ‘ownership’ in the settlement lifecycle through tokenization of deposits, removing banking system liability.
The challenge with nascent technology is that it takes time to introduce the safeguards and protections afforded to traditional cash. Stablecoins are trying to replicate traditional money but they are not there yet. But it is possible to conceptualise how to achieve settlement finality for digital pounds within the wholesale payments context.
In Singapore, the state-owned sponsor is funding the development of a cross-border MVP, looking at the challenges of moving liabilities from one party to another. A UK pilot is also looking at tokenizing deposits and bringing the value on chain, while using Central Bank reserves to underpin settlement finality. These pilots are engaging banks into the process of making existing payments businesses smarter, cheaper and more efficient through a Regulated Liability Network (RLN); in other words, bringing instruments which are already protected today by law onto the blockchain. The US Federal Reserve is also doing a lot of research around wholesale CBDCs, particularly around building interoperable and programmable RLNs.
Data privacy and protection
Digital (personal) identity, data privacy and protection are key sensitivities in digital currency development. From a technology perspective, digital currencies enable far greater amounts of user data to be captured, from validating user eligibility to access digital money at all, through to data associated with digital transactions themselves. AML/KYC does not go away with digital money, it just lends itself to smarter ways to validate identities. The key is to find the right balance between the data needed to validate user identity and that required to ‘monitor’ transactions to prevent economic crimes.
Another area of concern that comes up often in discussions around retail CBDCs is the negative connotations associated with programmable money vis a vis restricting user access for political or other reasons, for example, to ‘punish’ users for certain behaviours or actions. A Central Bank could potentially impose restrictions on how recipients of ‘state money’ can spend it (for example, no cigarette or alcohol purchases) or to block access to people considered to be ‘antisocial’ or ‘anti-government’. While this may be considered unacceptable ‘abuse’ of programmable money in the UK or US, it doesn’t mean that every central bank will feel the same way. As such, data privacy, protection and control are pivotal policy decisions that are needed to be nailed down from the outset, alongside navigating an appropriate trajectory to ensure social acceptance.
Financial markets recognise (and make provision for) regulation of systemically important stablecoins and as regulation around digital money solidifies, further private sector innovation will follow.
DPF members and supporters continue to showcase these efforts and our collective activity continues to inform government policy efforts. In terms of ‘go to market’ timing, we recognise that there is still a great deal more to be done with respect to determining use cases, requirements and associated technologies, particularly with regard to retail use cases.
The whole question of CBDCs rose to prominence originally because of Facebook’s attempt to launch Libra to its 2.5 billion users, and its potential impact on financial stability. Since then, the scope of the BoE’s CBDC project has evolved to encompass CBDCs for securities, not just payments, for frictionless trading. Fnality is progressing its wholesale central bank reserve-backed payments solution, built in a DLT-based ecosystem and other market participants are collaborating on a pilot for a tokens-based Regulated Liabilities Network. Most recently, Jon Cunliffe, Lord Holmes MBE and others have reaffirmed UK’s intention to show leadership in crypto and the objective to create a supportive environment for cryptoasset innovation.
BoE and HM Treasury are expected to launch a consultation before the year end to set out their assessment of CBDC use cases. As such, while the Bank of England has mooted the second half of the decade for a ‘live’ CBDC, and some political circles are talking around a 2026 timeframe, these timescales are perhaps ambitious.
In summary, the Digital Pound Foundation is thrilled with what has been achieved so far and we are very much looking forward to 2023 and beyond. We will continue to expand the DPF community and to increase policy engagement as well as our education programmes in the year ahead.