On 28th June 2023, the Digital Pound Foundation hosted an in-person roundtable consisting of a selection of our Use Case Working Group members and external participants. The purpose of the roundtable was to share some of the potential use cases we have been developing for the digital Pound and gather feedback from the external participants. This paper was produced based upon those discussions.
Central Bank Digital Currencies (CBDCs) are a form of digital money that is gaining attention amid the rise of various digital currencies, including cryptocurrencies, stablecoins, and tokenised commercial deposits. The concept of a retail CBDC and more so a digital Pound, has sparked significant interest not only in the UK but around the world. Success however hinges on identifying use cases that resonate with different stakeholders, from government agencies and financial institutions to private sector organisations and most importantly individuals.
The Digital Pound Foundation’s Use Case Working Group, led by Individual Expert Member William Lorenz and supported by representatives from Electroneum, Herbert Smith Freehills, Modulr, OneStep Financial, Quant, and Ripple, recently defined the working group purpose, outcomes it hopes to achieve and methods of working to this end.
Seeking feedback and understanding the perspectives of varying stakeholders is critical, and so on Wednesday 28th June, the working group held an in-person roundtable discussion. Attendees included representatives from DPF member organisations as well as several external participants and observers from HM Treasury, HM Revenue & Customs, Visa, FIS and NatWest Group amongst others. In this article, we highlight some of the most pertinent points and feedback raised during that session.
Bridging the gap between physical cash and CBDCs
One fundamental challenge is the perception of CBDC compared to physical cash and commercial money. How does this new form of digital money differ from today’s money as we know it? Many individuals are unaware that whilst physical cash (public money) is fully backed by central banks, making it the safest form of money available, commercial bank (private money) is exposed to the risk of default of the commercial bank. This is an important distinction.
A CBDC is in the same way as physical cash, fully backed by the central bank and therefore a low-risk form of money; simply a digital form of physical cash. We are in an increasingly digitised world and from a practical perspective, it makes sense to be exploring how the public can continue to access this low-risk form of public money, particularly where the acceptance of physical cash is declining. A CBDC is therefore not fundamentally new money, but rather a new way of representing physical cash as we know it. If a CBDC is to be adopted, the public needs to be educated about its similarities to traditional cash and relative security, plus how it can be used in a trust-building and privacy-enhancing manner.
Whatever the form and for as long as there is a demand or need for central bank-backed digital money, it will need to keep up with market innovation, otherwise as time goes on demand and peoples’ choices regarding which form of money they use will become limited, with potential implications for financial stability.
Public trust, confidence and education are key to a successful implementation
Public trust and confidence are pivotal for a widespread CBDC, or indeed other private forms of digital money adoption, and addressing concerns relating to privacy and excessive sharing of personal data is key. For CBDCs in particular, allaying fears of government control is going to be essential. One way to demystify CBDCs and perhaps to alleviate concerns is to present them as “digital cash”, that sits alongside physical cash as an alternative rather than a replacement for the notes and coins that we use today. It is important that people understand that there will continue to be a choice with regard to the form of money that consumers wish to use.
With an increasing interest in new forms of digital money, such as cryptocurrencies and stablecoins, and a growing appetite for innovation within the payments landscape, central banks are understandably concerned that people who prefer to use physical cash may be left out in the cold.
A CBDC or indeed a private stablecoin could therefore be a potential solution to evolving user preferences, notwithstanding the comments above regarding the difference between public and private money and the varying associated risk profiles. Tokenised deposits are also increasingly being discussed, however as these are backed by commercial bank money, the considerations regarding risk exposure noted above apply. In any case, in order for any of these new forms of money to be widely adopted, the user needs to feel comfortable with its features including the level of credit risk, privacy controls and security.
For those seeking central bank-backed money, a CBDC could serve as an essential lifeline for those who rely solely on cash. The roundtable group explored this further and agreed that measures will need to be taken in order to support those who are heavily reliant on cash today. These include enabling access to the digital money infrastructure, offline capabilities and user education.
In the case of user access and onboarding for example, a central identity verification process is likely to be needed for certain use cases, whilst user-friendly, inclusive interfaces that adopt a lighter-touch, risk-based approach will help facilitate access for those who typically struggle to access more traditional financial services.
Public education is essential to ensuring adoption – people have to understand what the benefits of the new systems are and the fundamentals of how it works, in order to buy into the premise. To get to this point, the frictions and pain points of today’s payment mechanisms need to be understood so that the potential improvements to the user experience can be articulated.
Ultimately in order to successfully deploy a digital Pound and support the transition between physical cash and CBDCs, we will need close collaboration between multiple stakeholders, including government agencies, financial institutions and private sector organisations.
The role of financial institutions and private sector organisations
Financial institutions and private sector organisations will play a pivotal role in shaping the adoption of CBDC and other new forms of digital money. Understanding the different risk profiles, characteristics and associated innovation opportunities will be paramount to how the payment industry evolves alongside the regulatory framework of course, and participants will need to decide how they navigate the emerging landscape and adjust their business strategies accordingly.
Once decisions have been made, they will also need to build applications and services that complement core CBDC and digital money functionality, akin to “building and running trains” on the “train tracks” established by the digital money issuer, whether that be the central bank, commercial banks or indeed other financial institutions such as e-money issuers.
Private digital money issuers and distributors are in a prime position for exploiting opportunities to innovate and, in the case of a UK CBDC, it will be the Payment Interface Providers (PIPs), not the central bank, who will be at the heart of innovation and finding those compelling use cases.
The roundtable group saw the potential for a variety of use case ideas for CBDCs and other forms of digital money, where the use of new technologies enable functionality that is not so easily available today: splitting payments where part is due to a third party (e.g. agent, HMRC); allowing users to pay bills in smaller increments based on actual usage (think utility bills or content streaming); smart payments that are automatically released upon fulfilment of a certain criteria or task completion; and more efficiently making micropayments that can often be disproportionately expensive to process. As we mentioned above, innovation will come from the commercial sector, driven by the motivation to solve real-world problems whilst making revenue.
It was interesting to discuss the specific use cases for a CBDC – should these relate to today’s uses for physical cash only or does this new form of central bank-backed money actually enable a much broader thinking and scope of uses? The group decided on the latter – now is indeed the time for innovation and the digital nature of this money should enable a more diverse approach to opportunities that would emerge from the creation of a central bank digital currency. The holding limits being proposed for a CBDC bring another interesting dimension to the identification of suitable use cases.
Importance of exploring diverse retail use cases
A successful transition from traditional cash to digital money, for those who choose to do so, relies on presenting a digital Pound as a natural evolution that does not erode the existing level of trust that the general public has in their central bank.
People are generally aware that day-to-day life is becoming more and more digitalised, however when it comes to money there is an understandable hesitation to fully embrace innovation in this space. By demonstrating how familiar use cases are solved in an enhanced manner using digital money, it becomes easier to promote widespread adoption.
Exploring and identifying these use cases is key and now is the time to be bringing them to life within a safe testing and validation environment. For example, BIS and the Bank of England recently led Project Rosalind, which focused on API prototypes to support innovative retail CBDC use cases.
Similarly, the DPF is actively brainstorming and discussing those important use cases that resonate with the general public, with a view to developing user-friendly pilots to showcase how a digital Pound can be used in practice, whilst raising awareness of the benefits and other considerations that emerge.
In the DPF working group’s last update, four initial use case themes were highlighted as potential drivers for digital Pound adoption in the UK. At the heart of these use cases is a deliberate intention to showcase the level of innovation that these new forms of digital money can bring; efficiency and programmability are likely to emerge as compelling features that encourage adoption. Care has to be taken with the narrative here and it is essential to use appropriate words to communicate functional advantages without causing confusion or concern. For example, ‘programmable payments’ are a different concept from ‘programmable money’, with the latter implying control over what a particular form of money can be spent on, which is not the intent. It is however worth noting that even in today’s payment landscape there is an element of programmability around, for example, food or gift vouchers where they can only be used in certain stores or for certain purchases.
A related use case might therefore involve the purchase of an item where payment is delivered automatically to the seller only when the item is received on time and in the advertised condition. Combined with the tokenisation of physical assets, this could provide the means for people to buy and sell goods and assets in a faster, cheaper, fairer, and more transparent way.
Next steps for the DPF’s Use Case Working Group
The roundtable discussion confirmed that the DPF Use Case Working Group was on the right track and provided some refinements to their ideas. Work will continue on building out the detail of key retail use cases and determining how these can best be clearly and simply communicated to UK citizens. The ultimate goal of the working group is to deliver a comprehensive description of a selection of use cases that are aligned with the themes outlined above, so that DPF member organisations, government agencies, financial institutions and other private sector organisations can work together to develop these and move towards real-world pilots and proofs of concept.
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