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For over fifty years, UK financial institutions have been using cards and electronic payment systems to make transactions and offer digital services to their customers. Digital networks already connect financial institutions, merchants and customers in a way that could accelerate the acceptance of a UK Central Bank Digital Currency (CBDC).
On the other hand, with such a long list of systems, providing interoperability between them could compound the cost and difficulty of developing a CBDC. Rather than too many cooks; too many ingredients could easily spoil the broth.
Tomorrow, I can go and get some cash from a cash machine. I put in my bank card, LINK handles the request to my bank to withdraw commercial bank money and out pops Bank of England notes. I use these to pay for my shopping and I get some change – Royal Mint coins. Eventually both the coins I receive and the notes the merchant receives are likely to be deposited again with a commercial bank which, in the case of the bank notes, can deposit these with the Bank of England and receive central bank reserves in return.
In such a short journey seven or more different entities have been responsible for the transfer of money from commercial bank deposits. Through a shared digital ledger, into Bank of England backed notes, exchanged for coins minted on behalf of HM Treasury and finally back to wholesale deposits with the Bank of England. Throughout all of this, the fundamental integrity of pound sterling as a stable store of value, a unit of account and a means of exchange is maintained.
The question of where a CBDC would fit into this equation could provide us the insight to understand what level of interoperability is needed to ensure that a CBDC could be fully interchangeable with existing forms of money, both digital and physical.
Rather than considering the systems that a CBDC should interoperate with, it might be better to consider the parties that provide those points of interchange. Or to put it another way, how the concept of fungibility – the ability to exchange two tokens at par – can be applied to a CBDC.
This response only goes some way to answering what level of interoperability will be required for a UK CBDC. Answering the question about what we need a CBDC to provide to the industry, and what user journeys it needs to support, will also help to coalesce the interoperability question. The art to a successful UK CBDC is perhaps less about what ingredients we need to include, but what ingredients we need to leave out.
Austin Elwood, Manager, Payments Policy, UK Finance