A potential UK retail CBDC: the role of the private sector

The Bank of England has not yet made a decision on whether to introduce a UK retail Central Bank Digital Currency (CBDC). However, if it does, it will look to do so in collaboration with the private sector.

One of the challenges put to UK Finance by its members is how a sustainable commercial business model could support the providers of CBDC payment services. For the last six months, I have been contributing to conversations on this question alongside UK Finance members ahead of a presentation to the Bank of England's Engagement Forum.

In the UK, banks do not tend to charge customers for depositing money in a personal account and for the majority of associated payment services on that account. Deposits enable banks to make loans and earn interest and that return can be set-off against the cost of providing the account and associated payment services. In addition, for card payments, merchants pay a charge which helps fund services.

If we assume that the private sector will be unable to lend CBDC, providers of CBDC services will no longer generate a return from using that deposited money.

It's been suggested that perhaps end user customers could be charged for making payment in CBDC. However, customers are unlikely to want to be charged for making payments that are currently free via existing payment rails. An exception could be where the quality of the payment service is improved by providing increased functionality (such as programmability). Clearly, there is scope to charge for payments that customers are currently charged for, such as international payments for example.

A route to a commercial model could be via a charge on merchants for accepting payment in CBDC. The House of Lords acknowledges this in its report on a potential CBDC. There is an important question as to how merchants would accept payment in CBDC.

For example, will they need to invest in additional point of sale equipment or software capability? These considerations could impact whether merchants wish to accept payment by CBDC or how quickly they proceed to accepting payment in CBDC.

There will be a number of costs that will need to be funded if a CBDC is launched. One example is provision of consumer protection. Consumers may well choose whether they use a CBDC for payments depending on whether there is an equivalent level of protection in place as there is for card payments and faster payments. So this goes to the potential use case and uptake of a CBDC.

While CBDC may be seen as an evolutionary replacement for physical cash, our expectation is that consumers would expect a similar level of protection as with other forms of digital payment.

Private sector firms will be considering whether a viable eco-system under the BoE's platform model can prevail.

UK Finance recently published its report on commercial models of a potential UK retail CBDCin association with Addleshaw Goddard: you can read it hereThe report considers how sustainable business models might function for firms with the issuance of a UK retail central bank digital currency. A second report published with PwC last week looks at what interoperability could mean for this new form of money.

 

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