Jana Mackintosh
Managing Director of Payments and Innovation, UK Finance
The Bank of England and HM Treasury have been contemplating the introduction of a Central Bank Digital Currency (CBDC) and whether it would be beneficial to our economy.
While no decision on a CBDC has been made at this stage — if they decide to go ahead, it could significantly impact our financial systems and the way people and businesses make payments.
Challenges and solutions
The private sector may have a role in introducing a CBDC; but what are the hurdles, and how could they be overcome? The two key considerations are (1) Fungibility — the ability for a CBDC to be exchanged with bank notes, coins and other types of money; and (2) Interoperability — the ability of the system to exchange one form of money for another.
Finding a solution to these issues is not as simple as it sounds. The payments ecosystem will need to be adapted to make this change — a task that is not insignificant. By comparison, the 2020 estimated cost of implementing changes to enable Open Banking was £1.5 billion.
A UK CBDC could change the way people and businesses use financial services while welcoming innovation.
Potential models
Currently, both Financial Market Infrastructures (or FMIs, often referred to as the ‘plumbing’ of the financial system) and payment service providers (PSPs: companies that provide services to businesses to help them get paid) have services and systems that support interoperability of the market. UK Finance has explored models to allow a CBDC to be worked into these. One model relies on FMIs, one relies on Payment Interface Providers and a third relies on a hybrid of both.
Each model has its own benefits, but any infrastructure change must enable firms to provide consumer services at a competitive price point. Moreover, to fully understand the best model, we need better clarification of the policy objectives of launching a CBDC. The industry also needs to understand whether firms will be required by regulation to provide CBDC services or whether it will be left to the competitive market.
Studying the benefits
The CBDC development process allows for public and private bodies to work together to understand the technical concerns and opportunities at hand. A UK CBDC could change the way people and businesses use financial services while welcoming innovation. While UK Finance has started to think about how this could be done in practice, changes to the payments system must be thoroughly investigated to ensure that a CBDC will benefit the UK economy.
