What is a digital Pound really useful for?

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At its first webinar of 2023, the Digital Pound Foundation brought together members and industry experts to talk about potential use cases for a digital Pound: What is it really useful for, how does it add value and how will it improve today’s payment ecosystem?

Since the webinar took place, on 7 February the Bank of England formally announced a consultation with HM Treasury on a potential digital Pound. Complementing cash, a Central Bank Digital Currency (CBDC), could be used by households and businesses for everyday payments (in-store and online) and would be interchangeable with cash and commercial bank deposits. The Digital Pound Foundation has already contributed to initial consultations and will continue to influence the direction of travel for a UK CBDC and other new forms of digital money such as privately-issued stablecoins. It engages with many associations, organisations and public sector bodies such as the BoE, FCA & HMT and also recently announced an alliance with City of London Corporation, The Payments Association, TheCityUK and UK Finance in the UK Forum for Digital Currencies (UK FDC).

This is not the first time that new forms of money or payment have come to pass –  mediums of exchange have evolved from ‘coins of the realm’ to cards; bank transfers; alternatives like PayPal and electronic/digital money including Google Pay and Apple Pay; and most recently CBDCs, stablecoins and cryptocurrencies. These latter new forms of digital money share basic common characteristics but also bring with them varying risk profiles, which ultimately influence the suite of suitable use cases.  

Underpinning all forms of money is the framework that determines what is legal tender, who owns it and what it can be used for. From a CBDC technology standpoint, most countries are looking at blockchain/distributed ledger technology (DLT), for its high security and programmability. Built on top of this infrastructure are the use cases which will drive consumer, business and government adoption. In order to be successful, a CBDC’s potential users need to see the value it can bring to their daily lives. Otherwise, they simply won’t use it.

Infrastructure must be stable, secure, resilient as well as accessible and inclusive.  It needs to be interoperable with existing payment rails and fungible with respect to other digital currencies and technologies

A plethora of use cases

We now come to the core subject of use cases. When contemplating the most compelling use cases for a CBDC, they often centre around programmability (also referred to as condition-based payments). As the name implies, this enables conditions to be attached to the payment instruction (e.g. upon completion of a particular task, application of rules or validation of a particular piece of information). Programmable payments are not to be confused with programmable money, where a criterion is set for how funds can be spent. The philosophical debate around this degree of control cuts both ways, but there will be a natural and reasonable concern that programmability should never be used to impinge on civil/human rights, only for good. 

One form of programmable use case would be the splitting of digital currency payments at the point of purchase to hive off a portion of the payment relating to applicable taxes/VAT directly to HMRC, removing the merchant’s obligation and overhead to report and remit these themselves. This would clearly have operational benefits for both the merchant and the HMRC but also reduce erroneous or fraudulent returns.

Another case is for complex business mass pay-outs like incentives, refunds and payments to contingent workers, which in the traditional form are very expensive and burdensome to process. The payment itself is the easy part – it is the data gathering and information/task validation before and after the transaction which creates an operational headache. A programmable payment, where alignment of valid data (such as task completion and/or validated recipient information) and money (the correct amount to be paid) is achieved, and this results in reduced exception and error handling as well as creating opportunities for further engagement with the recipient.

Accessibility and inclusivity

In the case of migrant/transient workers, employment agencies fill roles from a pool of workers typically working in a new country and urgently need to start receiving income. The digital Pound could enable instant payment against task validation, directly into a wallet accessible without a full bank account. The process is frictionless, simple and cost-effective (for the agency and the worker). In turn, this engenders better engagement with and loyalty to the agency from the workforce.

Beyond migrant workers, financial inclusion use cases are key and the opportunities for digital money particularly in societies and countries where access to traditional banking services is constrained, whether by disasters, war or simple inaccessibility, are significant.  

Micropayments

Micropayments cover a wide range of sub-use cases, for example with small payments taken automatically when a person drives into a chargeable traffic zone or parking area. Alternatively, very small payments could be taken when reading a newspaper article (as an alternative to a fixed subscription requiring a regular payment). Indeed many artists could benefit from receiving a penny every time someone listens to a song or watches a music video, rather than having to wait for Spotify or another streaming channel to quantify the ‘royalty’ and remit it in bulk.  

The digital Pound might also be the answer to the BBC TV Licence challenge. By replacing a static charge with a micropayment model for every piece of content accessed, anywhere in the world, in any medium, the BBC would be put on a similar commercial (and competitive) footing to today’s big-name streaming services. 

Supporting sustainability

Environmental sustainability is a particularly hot topic currently and has seen the return, in some countries, to old-fashioned deposit/return schemes where consumers are incentivised to return plastic and glass bottles for recycling. The digital Pound presents a highly effective way to make multiple, tiny payments to consumers for returning recyclable items at a low enough cost to make the underlying payment process cost-effective. That is, ensuring that the associated processing cost does not exceed the value of the incentive.  

Summary

The advent of a digital Pound presents enormous potential to deliver multiple practical use cases that could bring real value to people’s day-to-day lives. Whilst some use cases may raise significant challenges with respect to trust in ‘the new’ with respect to concerns surrounding government control, data privacy and any perceived or implied threats to individual freedoms, a well-thought-through digital Pound, supported by robust policies and education could enable real innovation in the payments and financial services landscape. 

To gain trust and support, it will be essential to test the waters with use cases that demonstrate the true value of this alternative form of currency.

Making the best use of a digital Pound is about liberating money in a digital habitat, making sure that the new technology and ‘rules of engagement’ clearly demonstrate positive benefits whilst enabling more people to do more, more quickly and at a lower cost than under the current payments ecosystem.

Speakers & Panellists

William Lorenz, Individual Expert Member, Digital Pound Foundation

William Lorenz

Digital Pound Foundation Use Case Working Group Co-Lead

Moderator

James Wallis, Vice President at RippleX

James Wallis

Vice President, Central Bank Engagements and CBDCs, Ripple

Keynote Speaker

Chris Ostrowski SODA

Chris Ostrowski

CEO and Co-Founder, SODA (Sovereign Official Digital Association)

Panellist

Jakub Zmuda Modulr

Jakub Zmuda

Chief Strategy Officer, Modulr

Panellist

Andrew Dare CGI

Andrew Dare

CTO Banking and Financial Markets Director Consulting Expert, CGI

Panellist

Claire Conby, Executive Director & Chief Risk Officer at Billon Group

Claire Conby

Executive Director and Chief Risk Officer, Billon

Panellist

David Karney, Worldline

David Karney

Head of Digital Assets, Worldline

Panellist