Three considerations for design of the digital pound

The Bank of England is currently in the design phase for a potential UK retail central bank digital currency: the digital pound. A Barclays report finds there are three use cases that demonstrate the design options for supporting functional consistency across the digital pound and commercial bank money.

The Bank of England and UK Treasury have published a consultation paper and a technology working paper that describe the Bank’s ‘platform model’ for the digital pound. This comprises the Bank of England operating a digital pound core ledger and providing access via application programming interfaces to authorised, regulated payment interface providers and external service interface providers that enable user access to the digital pound.

Mitigating fragmentation risk and supporting functional consistency

In an earlier Barclays paper on the digital pound, we identified the risk of fragmentation in payments markets and retail deposits if digital pounds and commercial bank money do not have common operational characteristics. We also presented an illustrative industry architecture intended to mitigate this risk by placing the digital pound and commercial bank money on a similar footing.

Another Barclays paper defined the important concept of functional consistency as the principle that different forms of money have the same operational characteristics and explored how it could mitigate the risk of fragmentation. It also evaluated design options to support functional consistency across the digital pound and commercial bank money based on a set of key capabilities.

Eleven financial institutions, including Barclays, recently participated in the UK Regulated Liability Network experimentation phase, which included prototyping a common ‘platform for innovation’ to support functional consistency across the digital pound and commercial bank money.

Use cases and design options

Three of the key capabilities being analysed during the design of a digital pound are: communication between PIPs and other ecosystem participants such as merchants, acquirers and financial market infrastructure, funds locking, and interoperability between the digital pound and commercial bank money.

We explored these key capabilities through the lens of three payments use cases: person-to-person push payment with interoperability across the digital pound and commercial bank money; merchant-initiated requests to pay with interoperability across the digital pound and commercial bank money; and locking digital pounds and payment on physical delivery from digital pounds to commercial bank money.

To simplify our analysis, we focused on the standard flows in the use cases. We presented design options that were based on the platform model for the digital pound and that supported the specific capabilities for each use case. We then evaluated the suitability of the design options.

Conclusions

Figure 1 summarises our preliminary evaluation of the design options. The specific capabilities for each use case are grouped under key capabilities, and the design options are categorised based on whether the capability is provided by the central bank, by PIPs (optionally in partnership with other entities) or by a third party such as a technical service provider or FMI.

Figure 1. Preliminary evaluation of the suitability of design options

Source: Barclays

We found that an FMI could be a suitable option to facilitate communication between PIPs and other ecosystem participants, provide funds locking and release across both the digital pound and commercial bank money, and clear and settle funds transfers across the digital pound and commercial bank money. Such FMI services would simplify the experience of ecosystem participants, including consumers and merchants, simplify the operating platforms for both PIPs and the central bank and facilitate the creation of innovative services.

More experimentation is needed to select design options that align with the Bank of England’s platform model, meet the desired goals for privacy and innovation, and support functional consistency across the digital pound and commercial bank money. We hope the use cases, design options and analysis presented in our latest paper will aid the design and experimentation for the digital pound and we look forward to further industry engagement.

Lee Braine, Shreepad Shukla, Piyush Agrawal, Shrirang Khedekar and Aishwarya Nair are members of the Chief Technology Office at Barclays. Lee Braine is also a member of the Bank of England’s CBDC Technology Forum.

OMFIF is further exploring this topic in a roundtable with the Bank of England. Register to attend here.