About Innovate Finance
Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Innovate Finance’s mission is to accelerate the UK's leading role in the financial services sector by directly supporting the next generation of technology-led innovators.
The UK FinTech sector covers businesses from seed-stage start-ups to global financial institutions who embrace digital solutions, playing a critical role in technological change across the financial services industry. FinTech has grown strongly since the Global Financial Crisis of 2007/8, which led to mistrust in traditional banks and coincided with an explosion in the use of smartphones, widespread adoption of the use of apps, the advent of blockchain technology, and significant investment in FinTech start-ups.
FinTech is synonymous with delivering transparency, innovation and inclusivity to financial services. As well as creating new businesses and new jobs, it has fundamentally improved the ways in which consumers and businesses, especially small and medium sized enterprises (SMEs), access financial services.
In developing this response we have consulted a wide range of Innovate Finance members, including challenger banks, payment providers, open banking, personal financial management tools, regtech, and id verification. We have also drawn on discussion at a number of roundtables we have organised with the Bank of England and Innovate Finance members.
This response sets out the views of Innovate Finance, based on consultation with members across the UK FinTech ecosystem. Our policy view is focused on creating an environment that best supports FinTech startups, scaleups and high growth firms and it is these groups of members who have predominantly shaped our response and we have reflected views and feedback received from these FinTech firms.
Key points
1. A digital pound should be introduced.
We strongly support the introduction of a digital pound, which can reinforce the UK’s position as a global centre for payments innovation. The digital pound will stimulate innovation across a variety of markets, enable the development of financial inclusion solutions and reduce the costs for small businesses. An early decision to proceed will be a significant signal to innovators in terms of the UK being seen as a base for financial transformation.
A decision to go ahead with the digital pound should also stimulate an industry of UK FinTech providers which will provide the supporting infrastructure and/or act as key service providers that draw users and drive adoption. This will create an opportunity for the UK to build global capability and expertise which can be exported to other countries adopting central bank digital currencies (CBDCs) and to international financial institutions.
2. Design must support innovation and a diverse and competitive market of service providers.
Design and implementation will need to enable competition and diversification, and innovation in service providers through:
Co-existence with a diverse and competitive stablecoin sector: The digital pound should not crowd out private sector stablecoins (cryptoassets that aim to reduce volatility by pegging their value to government-sponsored – or ‘fiat’ – currencies). It should be looked at alongside regulation of stablecoin, to create a complementary financial system. The parallel Bank of England work on regulatory models for stablecoins1 is an important part of the jigsaw which could enable public-private sector collaboration with central banks providing settlement finality to privately issued stablecoins and increase trust for consumers.
Competition and diversity of providers: the implementation model should be designed to support the development of a diverse and competitive group of service providers (e.g. wallet providers). These service providers will be well placed to offer innovative products and services, for example combining digital pound payments with digital ID to create frictionless purchases with embedded identity verification (see Figure 1). Design of the digital pound should ensure that service providers are not limited to existing commercial banks and other Financial Institutions.
We believe the Bank of England proposals for a digital pound provide the basis for achieving these aims, subject to points made elsewhere in this response. In particular we support the Bank’s ‘platform model’, which provides a basis for low cost market entry by service providers, given that it minimises the regulatory requirements by locating custody with the Bank of England and not with service providers.
3. The digital pound should be interoperable with all other domestic digital and fiat money, and between wallet providers and payment schemes.
Innovate Finance is supportive of the Bank’s intention to make a digital pound interoperable with all other domestic digital money types both physical and digital, including cash, commercial bank money and stablecoins - in other words it should be possible to have ‘on and off ramps’ between the digital pound and these other forms of money. The Bank must also guarantee interoperability between wallet providers who will act as intermediaries between individual and corporate accounts and the Bank’s core ledger. Finally, the Bank must also ensure interoperability between the digital pound and the existing payment rails to ensure frictionless exchange between different types of money.
Ensuring interoperability between different types of money and wallet providers will be necessary for ensuring ‘walled gardens’ do not develop in the payments space which would allow wallet providers and operators of private money to exert market power in their favour, countering the Bank’s primary objective of promoting innovation, choice and efficiency in an increasingly digital economy.
While we acknowledge the difficulty in building and maintaining interoperability of a digital pound with foreign digital currencies, our members are supportive of the Bank exploring and taking a global lead in enabling cross border payments between the digital pound and other CBDCs as they develop. This could include, for example, enabling cross border payments, via the new SWIFT Central Bank-to-Central Bank settlement system. In its current design stage, the Bank should ensure that there are no technical barriers built into the design of the digital pound that would constrain cross border payments functionality in the future. Our members believe that a key commercial opportunity stemming from the digital pound will be interoperability with other CBDCs which would allow payment interface providers (PIPs) and external service interface providers (ESIPs) to offer payment services to customers by transfering value globally at reduced cost and time. To unlock this functionality for UK payments companies, our members welcome a roadmap of how the Bank aims to enable cross-border payments between CBDCs and are open to collaborating with the Bank in its experimentation stages for this feature.
4. The limit on holdings of digital pounds should be no lower than £20,000.
We recognise the need to enforce limits on holding of digital pounds as a measured, early stage design choice to allow the Bank to assess the impact of the digital pound on the financial system and avoid the abrupt disintermediation of the banking sector while also allowing the digital pound to be a viable method for value exchange in today’s digital economy.
We are supportive of the upper limit within the Bank’s proposed range of £20,000 for individual digital pound accounts. This limit strikes the right balance of enabling the potential use cases of the digital pound to come to fruition by allowing users to receive salaries, pension payouts, benefits, dividends and more into their accounts without most users needing to worry about being in breach of the limit. Equally, the limit isn’t so high as to pose threats to the financial system by absorbing the transactions of the entire housing market, as an example. A limit of £20,000 pounds will therefore allow the Bank to safely reach an adoption rate which will be both necessary and sufficient to unlock innovation in the payments sector through the introduction of the digital pound without resulting in functional limitations for individual account users.
5. Scheme rules will be needed to guarantee consumer protection, support competition and create commercial opportunities for PIPs and ESIPs. These should include ‘baking in’ Open Finance from the outset.
Innovate Finance is supportive of the platform model for the digital pound, which in principle would enable a new class of innovators to operate in the payments space with lower regulatory and compliance burdens when compared to banks and Electronic Money Institutions (EMIs). A key feature of the platform model is the safeguarding of the user’s assets is built-in at the core with all digital pounds stored and secured directly by the Bank, essentially risk-free. This provides a resolution advantage because the risk of failure by an intermediary will not jeopardise the user’s deposits: users can rest assured in the knowledge that their money is always safe with the Bank.
There will, however, be other risks that will need to be addressed by the digital pound scheme rules and corresponding liability models to protect the user when things go wrong. These include, but are not limited to:
- What happens if there is a technical failure on the part of the wallet provider?
- How will liability for fraud (e.g. Authorised Push Payment fraud) be decided and implemented?
- What performance standards (e.g. reliability of data requests) need to be applied?
- Under what circumstances, if at all technically feasible, can a transaction be traced and charged back to the owner? In the case of fraud, who will guarantee consumer redress?
- What will the fee structure be for participating in the scheme?
- What governance standards should wallet providers need to adhere to in order to qualify as a regulated intermediary?
- How will the Bank ensure intermediaries are accurately maintaining user records, especially in cases where a customer transitions wallets or utilises more than one wallet provider?
- Will wallet providers be required to share a user’s transaction history with another wallet provider if the user switches, or with the police if there’s a criminal investigation?
- How will the Bank ensure data portability between wallet providers so a customer can request that their data is transferred if they change wallet providers and so that other service providers can, with consumer consent, combine and analyse data for the benefit of the consumer (similar to Open Banking account information service providers)?
- How will the Bank ensure that transfer of data, at a consumer request, is not hindered by disproportionate fees from the exporting data holder?
Our members have highlighted that in terms of designing smooth customer journeys, ease of access and reliability of value-add services, and commercially viable innovation, a critical success factor will be eliminating unnecessary frictions by actors within the system (e.g. by financial institutions). ‘Scheme rules’ can set standards for performance across a range of measures which should apply to all organisations participating in the digital pound and ensure that this new payments system fully enables innovation from the outset.
These ‘scheme rules’ need to be set by the Bank of England and are additional to the core workstreams already identified by the Bank. In other words, critical components should include:
- Technical design and standards including API standards;
- Product design and policies, e.g. value of limit on holdings, data privacy;
- Regulatory regime for wallet providers; and
- Scheme rules for participants comvering redress for commercial and consumer dispute, Open Banking / Open Data requirements, and any other rules that can remove friction in transactions and unlock innovative product offerings – for example, by agreeing consistent interpretation of Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements (which can sometimes be applied by some players in ways that unnecessarily hinder third party service providers).
As the Bank begins to develop the scheme rules for a the digital pound, we suggest taking from the learnings of the development of Open Banking in the UK, where the Joint Regulatory Oversight Committee (JROC) has recognised the Open Banking ecosystem needs some form of independent oversight alongside “strong regulatory direction to build commercial arrangements that are fair and proportionate for a multitude of new products and services…”.2 We foresee similar measures will also be necessary if the Bank is to achieve its aim to ensure fair access for a wide range of providers and avoid established financial institutions dominating the market for digital pound services.
6. Rapid progress is needed
The UK is seen as a leading global centre for FinTech. The digital pound is a powerful sign to the rest of the world that the UK is committed to further developing and nurturing innovation and attracting innovators. The UK has the opportunity to be the leading G7 country in developing and introducing a CBDC. It seems likely that the European Union will make a commitment this year to introduce a retail digital euro following its proposals for a Single Currency Package in June 2023.3
At the same time, financial institutions and Big Tech are already working on digital payments models, including commercial bank digital money, stablecoins, and adapting existing card payment rails to support digital currencies. Some of these models have the potential to lock in dominant players and distribution models. A digital pound alongside these would provide an alternative and complementary payment system, which has designed-in support for innovators, startups and scale ups, and wider public policy objectives.
The Bank has held off on making a decision to issue the digital pound, preferring to assess the feasibility of the technology and see where trends in the payments sector go in the next few years. We are encouraged that the Bank has chosen to invest in exploration and design in order to be ready to launch the digital if there is a need for one in a few years' time.
However, as outlined below (Question 1), other developments in the payments sector are advancing very quickly. On current trends, the maturation of payment tokens and stablecoins alongside tokenised commercial bank deposits and payments could mean that by 2025, the private sector starts to crowd out a digital pound and the Bank will miss its opportunity to deliver on its numerous benefits. Atlantic Council’s CBDC tracker also shows that 130 countries, representing over 98 percent of global GDP, are exploring a CBDC.4 If current trends persist, the UK could find itself lagging behind peers and rivals on the international stage.
We are encouraged by the Bank’s progress to date and appreciate the building of a new payment scheme and digital currency to be a significant technical and material undertaking that must be done right the first time. Our members have expressed a strong willingness to support the Bank and Government to ensure momentum is maintained to bring the digital pound to market as soon as possible.
7. Connecting other infrastructure and payments projects
The digital pound is not being developed in isolation and needs to connect to other projects underway. These include:
Other forms of digital money: Regulatory frameworks for stablecoins (as e-money), for systemic stablecoins (regulated by the Bank of England) and digital commercial bank money, will create a number of new forms of digital money and payments. These need to be designed alongside the digital pound to ensure complementarity (with consistency of principles where appropriate and clear differences in approach where the utility or risk is different) and interoperability. Forthcoming consultations form the Bank, HM Treasury, Financial Conduct Authority (FCA) and Payment Systems Regulator (PSR) on all of these will be important and need to be progressed alongside the digital pound. This also calls for close coordination between regulators and a single shared vision of the future payments landscape.
New Payments Architecture (NPA): Linked to this vision for the future payments landscape, the New Payments Architecture (the new retail payments infrastructure being introduced by Pay.UK) needs to be designed and implemented with the necessary functionality to support these developments. Crucially, the NPA, as the retail payment rails for the UK, will need to provide for interoperability and clearing between different digital payment methods, enabling interoperability of stablecoins, digital pound, and commercial digital money. FinTechs in particular will need confidence that Pay.UK, the NPA procurement and its contractors are fully building-in and implementing any critical functionality required to enable the Bank’s model for the digital pound - including, crucially, supporting the scheme rules which we argue will be essential for ensuring the digital pound works effectively.
Digital ID: Reusable digital ID – or a ‘digital financial passport’ – is an important component of the roll-out of the digital pound. It would provide the user verification that ensures secure access and KYC. Reusable digital ID or financial passport not only provides the basis for the security of the digital pound, it can also provide the underpinnings for ensuring financial inclusion. Digital ID is cited by campaigners and activists in the financial inclusion space as having great potential to reduce financial exclusion, by providing access to services (including banking, credit and payments) which otherwise require identification such as a passport and/or a credit file.
To support and accelerate this, the Government should mandate public sector data owners to allow access for trusted digital identity providers (with safeguards) to their data sets for digital ID:
- In particular, the Driver Vehicle and Licensing Agency (DVLA) to enable identity verification, as well as His Majesty’s Revenue and Customs (HMRC) and the Department for Work and Pensions (DWP) (which can also help build individual’s credit profiles); and
- More generally, commonly accepted digital identity protocols – perhaps supported by blockchain – could drastically reduce the compliance cost burden of financial services firms as all could jointly share compliance costs as opposed to each firm repeating tasks done by others, as is the case today.
There are further steps Government can take to advance corporate digital identity which would also support the digital pound by enabling consumers to verify the identity of a business they may be making payment to. The Companies Act could be reformed to better enable digital signatures and a central database of beneficial ownership information which firms can rely upon, for example.
Smart data / Open Finance: Open Banking - enabling data to be transferred when a customer moves to a new bank - has taken a long time to introduce not least because it has been introduced as a new feature within a pre-existing system. Open Banking also enables data interoperability and portability, with third party providers able to access data with a customer's consent and use this to provide innovative financial management tools. With the introduction of the digital pound, a customer should be able to move from one wallet provider to another and transfer all their customer data to the new provider (if they so wish). Third Party Providers should also be able to use data from digital pound transactions - if the customer consents - to provide additional services to that customer. To achieve this will mean incorporating from the outset a set of Open Finance rules that require wallet providers to share data when requested with a customer’s consent, using a standardised form of APIs.
This needs to be based on a comprehensive set of scheme rules (which in some respects are still being developed and evolving for Open Banking) which cover issues including performance standards, datasets that are included in scope, liability, fees for data transfer costs, and consumer and commercial redress. There is an opportunity to bake-in Open Finance and data interoperability at the outset of the digital pound. This means not only building it into the technical infrastructure but - crucially - setting and enforcing the scheme rules that ensure it is understood and implemented by all participants. The digital pound therefore needs to work alongside the Open Banking Limited, FCA, HM Treasury and PSR as they develop the current Open Banking rules - and to develop a similar and linked set of rules to ensure that the digital pound has data portability built in from Day 1. Many of the innovation opportunities which a digital pound can support will depend upon this. The digital pound, as a new payments system, provides an opportunity to develop the gold standard for data interoperability and portability.
Fraud: In the UK Faster Payments Service, the PSR, with Pay.UK, is taking forward work on exchange of data for fraud prevention. In the case of faster payments, this work is being started a number of years after the introduction of the new payment system. In the case of the digital pound, there is an opportunity to apply these approaches and build in from day 1 an approach to identifying and preventing fraud that is based on data exchange and analysis. As with Open Data, this will not only need to be part of the technical design but also baked into ‘scheme rules’ that apply to any commercial participants. We would recommend early discussion with industry players on this, as there is a huge opportunity to design the digital pound in such a way that it has a high standard of in-built fraud detection and mitigation.
8. Public engagement and debate needs to be stepped up
Innovation thrives when people have trust and confidence in the products and services it delivers. Mistrust can occur if people have not been engaged or misunderstand an innovation. Widespread public debate, dialogue and education is critical for the adoption of the digital pound - and could perhaps include citizens assembly type approach and more interactive engagement and public involvement and information in envisioning what the future of money could look like. The key messages to deliver are why and how a digital pound can be more secure, trustworthy and convenient for users.
This should also engage a wide variety of businesses, including small firms and retailers. Ways should be found to bring to life what a digital pound might look like. Discussion with businesses should be cross-organisational, to reflect the potential multi-faceted benefits and elements of a CBDC.
A wider debate on what a digital democracy model for financial services looks like would help - how do we best develop a digital world that protects consumers and supports innovation, and avoids the risks of overbearing government or private monopoly and guards against cyber crime. This would help build engagement around a model that reflects our societal norms and expectations and a vision for the future of banking and finance. This could include the other features mentioned above - digital ID and open finance, as well as stablecoins.
In the EU, public debate has been widespread, with support form governments and parliamentary debate. One reason why the United States has fallen behind in progress on a digital dollar is the heavily polarised debate on the digital dollar. Already in the UK much of the public debate on digital pound is being led by conspiracy theorists. These are exploiting and conflating genuine public concerns about access to cash and privacy and about practices in countries with weak or non-existent checks and balances which are developing their own twisted versions of CBDC. Bank of England proposals for a digital pound mitigate against such concerns and have the potential for huge benefits for a democratic and inclusive society. We all need to engage more widely and discuss digital pound benefits and safeguards in accessible, public fora.
This public engagement will be a major undertaking. It should start very soon as urgency is required if the UK is to develop a globally-leading position in this area.
9. Next steps: industry engagement on scheme rules as well as technical solutions
We welcome the Bank’s commitment to developing the digital pound as a public-private collaboration. Work is already underway and more planned on technical testing and development with industry players. Following initial discussions within member forums and with the Bank, we would welcome the development of further workstreams to include developing a wider set of standards (e.g. on performance, data transfer etc), an integrated approach to fraud prevention, and a Scheme Rules framework (including liability, data portability, commercial fees and redress). This should be taken forward alongside some beta testing of use cases and programmability elements to ensure commercial viability. In many cases the wider scheme rules will determine whether or not innovative products and services can be commercially viable.
Questions and responses
Question 1: Do you have comments on how trends in payments may evolve and the opportunities and risks that they may entail?
From our vantage point, we see three key trends and developments in the payments space. We elaborate on the opportunities and risks of these trends below.
Digital payments
There is a race in the private sector to develop private stablecoins, network tokenization services (within existing card schemes) and cryptocurrencies under similar, if not more rapid, timelines to the launch of the digital pound. While still a small fraction of the market, payment tokens such as Ethereum, Bitcoin and Solana are being used for real-world payments, demonstrating crypto’s ability to service transactions efficiently and at a low cost. Stablecoins such as Tether and USDC are also already providing alternatives to fiat currencies, delivering the price stability of fiat currencies with the added benefit of transparency that is enabled by the blockchain-enabled platforms that support them. Card schemes are also offering network tokenisation services which enhance payment security and reduce friction within their schemes’ infrastructures.
Each of these digital payment methods and platforms are already delivering on the potential for cryptography to change how payments are made in a digital economy. As we raised in our response to the FCA DP22/5, our members are concerned that as more private providers enter the market with their own proprietary currencies and payment rails, this risks the emergence of multiple closed-loop ecosystems as companies try to capture the entire value chain, leading to market fragmentation. As a reaction to this, other firms could either decide to partner with these payment systems or create their own. In a scenario where all of these are transformed into closed loops, this could lead to an inefficient level of fragmentation and a lack of interoperability that could lead to consumer harm and likely increase the cost of acceptance to merchants.
The Bank and HM Treasury could mandate that all digital payments systems and currencies are interoperable with the digital pound, allowing the new scheme built by the Bank to act as a bridge between all digital payments schemes, thus avoiding the problem of fragmentation, skewed market power and the adverse impact this could have on consumers and SMEs. While it seems inevitable, and indeed desirable, in our view that in the future there will be a mixed ecosystem of different forms of money and payment options available to businesses and consumers, all with their own functionalities and benefits, we see a necessity for preventative measures to be taken for this ecosystem to remain a competitive space that is inviting to disruptors and avoids a market developing which is dominated by a small number of payments providers.
Open Banking and Open Finance:
The Open Banking Implementation Entity published that in 2022 there were 68.2m Open Banking payments, up from 25.2m in 2021 showing a month-on-month growth of around 10%.5 This adoption rate shows the growing appetite for faster, cheaper, more convenient Account-to-Account (A2A) payments when compared to status-quo methods.
The completion of the CMA Roadmap which initiated Open Banking in the UK prompted a review of where the industry has reached in the last five years and what more should be done to unlock the full potential of Open Finance in the UK. The Strategic Working Group (SWG), set up by Joint Regulatory Oversight Committee (JROC), ran industry sprints and identified three thematic priorities to unlock the potential of Open Banking Payments:
- Balancing fraud and friction;
- Improving ecosystem performance; and
- Expansion of Variable Recurring Payments (VRPs) beyond sweeping.
Following the SWG’s findings, JROC has committed to supporting Open Banking payments as an additional payment method that can support a wider range of use cases to those already in the market. In its priorities, JROC has identified the need for a commercially sustainable model and dispute resolution processes to be in place for Open Banking payments to continue growing and deliver on its potential for consumers and businesses. Commercial Variable Recurring Payments (C-VRPs) will be tested as a pilot for multilateral agreements and dispute resolution principles.
The direct parallels between Open Banking and digital pound payments as new, alternative payment methods make a clear case for the Bank to take the learning from Open Banking when developing a UK CBDC. In particular, our members have shared that what will determine the success of the digital pound to deliver on the policy objectives of the Bank will be the adoption by users, which in turn will depend on the use cases FinTechs are able to build on top of the Bank’s ledger. Our members have shared that in order to invest in innovative use cases for the digital pound (see Figure 1), FinTechs must be able to anticipate the commercial viability of these services, a large part of which will depend on the principles for determining liability and dispute resolution processes such as in the case of purchase scams or civil disputes. As the FCA, PSR and HM Treasury all attempt to resolve these issues for the Open Banking ecosystem, we would encourage regulatory cooperation with regard to where lessons learned can be applied to the digital pound ecosystem during the Bank’s current design stage (Stage 2).
Authorised Push Payment (APP) fraud:
The APP scam landscape is complex. Both the PSR and the Lending Standards Board (“LSB”) agree that there are eight types of APP scams; each with different characteristics, typologies and OBIE, New Impact Report sees significant growth in open banking payments and increased business use, March 2023 refund rates. Our members recognise the significant impact (not only financial) of these APP scams on victims. Our members are supportive of providing a fair level of protection for consumers who, notwithstanding reasonable steps to protect themselves, fall victim to APP scams, and they welcome a consistent approach to consumer protection across the payments industry.
As we have described in more detail in our response to the PSR CP22/4 on ‘Authorised push payment scams: Requiring Reimbursement’, our members are extremely concerned that the introduction of an unfunded, uncapped liability regime proposed by the PSR could potentially have a devastating and disproportionate impact on prospective market entrants and existing start-up and scale-up firms in the payments ecosystem.
As a result of the PSR’s proposals, our members will need to introduce significant friction in the payments journey in order to allow more time to detect and investigate fraud. This will have a knock-on effect in terms of user experience because consumers will likely find it is not as quick or as slick to make payments.
This partially defeats the purpose of the Faster Payments Service (“FPS”) – widely regarded as a UK success story – which was introduced in 2008 to help enable mobile, internet, telephone and standing order payments to move quickly and securely with real-time transfers between UK bank accounts, 24 hours a day.
There is also a risk that the mandatory reimbursement proposals could incentivise some PSPs to apply increasingly stringent criteria when deciding whether or not to allow a customer, or a class of customers, to obtain payment services, thereby undermining financial inclusion for some consumers. This would be a patently unacceptable outcome, at odds with UK financial services regulators and the Government's efforts to boost financial inclusion.
Our members see a large opportunity for the Bank to work with industry to build fraud prevention and detection at the network level of the Bank’s core CBDC ledger. This would be a step change in public-private efforts to address the most common crime in the country today.6 In particular, our members shared that it would be really helpful to be able to trace funds and recover them, which under the current systems is quite difficult to do. Our members would urge the Bank to stand up a technical working group to explore and test solutions to tackle fraud using the digital pounds scheme and network in greater depth.
Carbon footprint management:
While still a nascent trend in the FinTech ecosystem, we are excited by the opportunities a digital pound could present in supporting individuals in reducing their carbon footprint through the merging of payment transaction information with carbon footprint management tools.
FinTech as a sector is uniquely suited to provide consumers and SMEs with accessible, affordable analysis to identify Net Zero impact and priorities and deliver targeted behavioural nudges - with users’ consent - to reduce an individual’s footprint. UK FinTechs are already providing plug-in tools for retailers and payment services that link emissions with spending data, making it easy to use analytical tools that enable individuals and small firms to measure and reduce emissions.
We see an exciting opportunity for FinTechs to offer enhanced carbon footprint management tools as (or in partnership with) ESIPs in the digital pound ecosystem. By granting these players ‘read’ access to specific data on the digital pound ledger, wallet providers can build in carbon tracking directly into their interface, informing users on the size and composition of their carbon footprint and providing nudges on how it can be reduced.
Question 2: Do you have comments on our proposition for the roles and responsibilities of private sector digital wallets as set out in the platform model? Do you agree that private sector digital wallet providers should not hold end users’ funds directly on their balance sheets?
We are supportive of the ‘platform model’ proposed by the Bank which we believe will appropriately leverage the Bank and private sector’s capabilities to deliver benefits to consumers and businesses by creating a fertile ground for innovation in the digital payments landscape.
A ‘platform model’ will see the Bank build and maintain a centralised core ledger where individuals will have a direct claim on the Bank for their digital pounds. Individuals can access their accounts through regulated intermediaries (e.g. FinTechs) which can communicate with the ledger through an API layer. These intermediaries will bridge the gap between the ledger and the end user, and may also provide some value-add services through their digital wallet interfaces.
Because the Bank will build and maintain the core infrastructure, this should reduce barriers to entry for wallet providers compared to banks and Electronic Money Institutions (EMIs). This is because in the ‘platform model’:
- To provide a payment service, wallet providers don’t have to provide the settlement asset and are therefore no longer responsible for a balance sheet. This absolves the wallet provider of balance sheet risk, which should translate to fewer regulatory requirements.
- For example, we foresee that wallet providers will not be required to join the Financial Services Compensation Scheme, which is designed to protect users from prudential risk.
- To provide a payment service, wallet providers don’t have to build the transfer mechanism (i.e. ‘the switch’). This would place the responsibility for real time capabilities solely with the Bank, which has proposed uptime of 99.999% to ensure resilience and trust in CBDCs, compared to RTGS and CHAPS services which have a target uptime of at least 99.95%.7
By removing the need for intermediaries to hold settlement assets and build the transfer mechanisms, the platform model in principle would enable a new class of innovators to operate in the payments space with lower regulatory and compliance burdens when compared to banks and Electronic Money Institutions (EMIs).
Given the user’s deposit is guaranteed by the Bank, the money held in a digital pound account will be 100% risk free (unlike any commercial bank deposit) which could alone be the core consumer value proposition. Consumer protection in other aspects will still need to be considered, such as the standards of systems and controls set out under The Electronic Money Regulations 2011 (e.g. record-keeping).
With a lighter touch regulatory and compliance burden, we foresee PIPs and ESIPs could unleash a wealth of new functionalities in payments and connected services such as a micropayments, programmable payments, Digital ID, business analytics, budgeting tools and embedded finance payments.
We recognise however that wallet providers will, nonetheless, need to comply with the same regulations as other payment accounts (i.e. Payment Services Regulations 2017), especially regarding the access of account information service providers (AISPs) and payment initiation service providers (PISPs) to these wallets.
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Figure 1: Potential FinTech use cases for a digital pound Personal financial dashboard (enabled with reusable digital ID): A digital wallet can seamlessly integrate with a digital pound and reusable Digital ID to empower consumers with a comprehensive financial dashboard and financial passport. By leveraging the digital pound, users can securely store, send, and receive digital currency directly within their digital wallet. The Digital ID functionality enables users to authenticate their identities and access personalized financial insights, including account balances, transaction histories, budgeting tools, and investment portfolios, all consolidated in a single user-friendly interface. This integration promotes financial inclusion, transparency, and convenience, offering users a holistic view of their financial activities and empowering them to make informed decisions about their money. Smart rental contracts: A digital wallet could reduce cost and frictions for renters and landlords alike in the rental market by seamlessly integrating the digital pound with smart contracts that are programmed and verified on the blockchain, providing transparency and enforceability, ensuring the terms of the rental agreement are met and enabling deposit protection. Through multi-user KYC checks, landlords can easily verify the identities of potential tenants and ensure a secure rental process. Credit score checks using Open Finance can enable landlords to assess the financial credibility of applicants, streamlining the tenant screening process. The wallet facilitates recurring payments, allowing tenants to automate rent payments, and reducing administrative burdens for both parties. If digital pound wallets can be shared by groups of people this could also enable the occupants of shared households to pay rent and bills or pool money for a communal digital ‘kitty’. Fraud prevention at the network level: With the support of FinTech solutions, the Bank can deploy advanced encryption techniques, cryptographic algorithms, and secure access controls to the core ledger which ensure the integrity and immutability of transactions, minimising the risk of fraudulent activities. Additionally, the Bank can work with RegTech providers to embed real-time transaction monitoring, anomaly detection algorithms, and identity verification protocols. Cross-border payments: By leveraging a wallet with digital pound features, users could perform real-time and low-cost cross-border transactions directly from their wallets, eliminating the need for intermediaries and reducing transaction fees. This could foster global financial inclusion and accelerate economic growth. Benefits payments: Claimants could choose to receive payouts from the Department of Work and Pensions into their digital pound wallet, allowing them to access their funds instantly, enabling timely assistance for essential expenses such as food, shelter, and healthcare. The wallet's user-friendly interface, coupled with features like budgeting tools and transaction tracking, empowers beneficiaries to manage their funds and improve financial well-being. Premium payments: Merchants could harness the power of programmable money and embedded tokens to enable smart contracts, revolutionizing the way they automate complex workflows. By utilising smart contracts, merchants can streamline and automate various processes, such as supply chain management, inventory tracking, and customer rewards programs. This monetization strategy leverages the flexibility of programmable money, empowering merchants to provide value-added experiences and unlock new revenue streams while delivering seamless and personalised services to their customers. A simple application of this would be payments programmed to be made on receipt of a product. |
Question 3: Do you agree that the Bank should not have access to users’ personal data, but instead see anonymised transaction data and aggregated system-wide data for the running of the core ledger? What views do you have on a privacy-enhancing digital pound?
We agree that the Bank should not have access to users’ personal data and are supportive of a privacy-enhancing digital pound. Privacy will be a core feature that determines the public’s trust in using a digital pound as a payment method, and will be necessary to the adoption and success of the digital pound in accomplishing the Bank’s objectives. In addition to how the Bank manages and protects users’ personal data, the Bank will need to implement the highest standards of cybersecurity to safeguard the digital pound’s network from malicious actors.
Our members have shared that there would be a lot of value to users in being able to switch accounts and move transaction histories with them if they chose to move wallet providers. In addition, users may wish to utilise multiple digital wallets simultaneously subject to the Bank’s threshold. Both these features will require technical solutions by the Bank or private sector that don’t trade-off user privacy.
One option would be a requirement for some level of data portability between wallet providers which would necessitate an industry standard or protocol for data sharing and appropriate governance and oversight. Much like the CMA has mandated data sharing in the case of Open Banking, the Bank could do the same for PIPs and ESIPs to mandate data portability between wallet providers, noting the Bank would need to support this initiative with the appropriate standards and governance to ensure consumer protection and industry compliance.
With the (re)introduction of the Data Protection and Digital Information Bill to Parliament, the Digital Identity verification service this Bill would enable could be utilised to enforce this functionality.
We would not support any solution where the Bank would itself offer a centralised information system that tracks an individual’s deposits across different wallets. This would deviate significantly from the Bank’s sole responsibility of building and maintaining the core ledger and would also raise privacy concerns over the regulator or Government’s access to users’ private information.
While we support privacy and data protection features that are built-in to the digital pound’s network, we encourage the Bank to find solutions to scenarios where privacy features would, in the first instance, cause trade-offs with the functionality of a digital pound. Our members have particularly raised that the Bank should provide clarity over whether and how a user will be able to move a coin between different wallet providers and move their transaction history in the case where they switch wallet providers.
Question 4: What are your views on the provision and utility of tiered access to the digital pound that is linked to user identity information?
We agree that tiered access, linked to strength of identity verification, should be allowed and enabled. This should support both innovation and financial inclusion. In the case of innovation, the cost of high levels of KYC and AML checks can create barriers barriers to entry for new service providers. Having a tiered access, enabling simpler user verification for lower value transactions would enable lower cost innovative services and providers to enter the market and to serve particular market segments.
The cost of KYC also impacts on accessibility, as the customer ultimately has to pay. Tiered access can therefore also assist with financial inclusion, removing cost barriers to consumers, In addition, tiered access and a simpler form of customer verification would help one of the significant barriers to access to financial services - namely meeting the high bar set for customer verification (e.g. passport).
In developing a tiered approach, it will be important to ensure that this allows the same individual to build up a customer verification or use different levels for different sizes of transactions - and should enable a single reusable digital ID and verification that can flex up and down to tier requirements.
This approach should also enable identity verification for groups of people - e.g. for a shared household of four people to pay rent (where higher level of verification may be needed) or simply to operate a digital ‘kitty’ for shared bills (lower tier). The design of the digital pound should allow for pooled or shared wallets, creating the digital equivalent of people contributing cash to a shared fund.
Question 5: What views do you have on the embedding of privacy-enhancing techniques to give users more control of the level of privacy that they can ascribe to their personal transactions data?
We support the proposal for embedding privacy-enhancing techniques to give users more control of the level of privacy they can ascribe to their personal transactions data. Enabling users to choose the level of privacy they want for individual services is an important component of giving citizens control of their data. Data portability is a key component of this - developing an ‘Open Data’ framework for data portability which gives consumers the right to access their data held by businesses and require those businesses to share the consumers’ data with other trusted Third Party Providers (TPPs).
The digital pound should provide the framework for service providers to offer consumers a data dashboard, where they can give permissions to share (or not) their data with trusted TPPs to offer services to them. This will enable more innovation. Privacy enhancing techniques should enable customer-driven data-sharing. As expanded upon elsewhere in this response, this will require a comprehensive set of scheme rules, set by the Bank of England as rules that all participants must comply with. These will need to cover a range of areas to enable fully data-enhanced services and put consumers in control of their data - including requirements on providers to act on any requests a consumer makes to share their data and an effective framework that covers performance standards (for transfer of data), liability, reasonable fees for data transfer, consumer redress, managing commercial disputes between data holders and requesting TPPs. This should be modelled on the approach taken for Open Banking and reflect the current and future development of the Open Banking model.
There is also scope for this to combine with other sector specific smart data’ schemes, as enabled by the Data Protection and Digital Information Bill - potentially enabling value added service providers to combine data from other sectors (e.g. energy and telecoms) with the digital pound; developing smart contracts which can trigger transactions based on other data; and linking legal transfers with digital pound payments (e.g. a smart contract enabling payment for a secondhand car to be synchronised with transfer of the vehicle ownership title).
It will be important to ensure ease of consent for consumers. In Open Banking there was originally a ‘90 day rule’ which meant that user consent had to be renewed every 90 days; which significantly stymied adoption and frustrated consumers and has subsequently been dropped. Such manual requirements for collecting and approving consent should be avoided.
Question 6: Do you have comments on our proposal that in-store, online and person-to-person payments should be highest priority payments in scope? Are any other payments in scope which need further work?
As outlined in more detail in question 11, we would encourage work on offline payments as well as online payments, particularly in the context of financial inclusion.
Other areas where there may be strong demand and use of the digital pound may be:
- Services - particularly SME providers (e.g. cleaners, dog walkers, window cleaners, car maintenance and building and decorating services).
- Rent payments would also offer significant benefits and scope for wider embedded services (e.g. linked to credit scores and identity verification).
- Some larger item purchases may also benefit such as secondhand car sales.
Question 7: What do you consider to be the appropriate level of limits on individual’s holdings in transition? Do you agree with our proposed limits within the £10,000–£20,000 range? Do you have views on the benefits and risks of a lower limit, such as £5,000?
We recognise the need to enforce limits on holding of digital pounds as a measured, early stage design choice to allow the Bank to assess the impact of a digital pound on the financial system and avoid the abrupt disintermediation of the banking sector while also allowing the digital pound to be a viable method for value exchange in today’s digital economy.
We are supportive of the upper limit within the Bank’s proposed range of £20,000 for individual CBDC accounts. This limit strikes the right balance of enabling the potential use cases of a digital pound to come to fruition by allowing users to receive salaries, pension payouts, benefits, dividends and more into their digital pound accounts without most users needing to worry about being in breach of the limit. Equally the limit isn’t so high as to pose threats to the financial system by absorbing the transactions of the entire housing market, as an example. A limit of £20,000 pounds will therefore allow the Bank to safely reach an adoption rate which will be both necessary and sufficient to unlock innovation in the payments sector through the introduction of a digital pound without resulting in significant functional limitations for individual account users.
Question 8: Considering our proposal for limits on individual holdings, what views do you have on how corporates’ use of digital pounds should be managed in transition? Should all corporates be able to hold digital pounds, or should some corporates be restricted?
We would caution against setting a limit on corporates but agree that the concept of automatic ‘sweeping’ into a nominated corporate bank account.
We would recommend that all corporates should be able to hold digital pounds. As noted in the consultation, this would enable salaries and suppliers to be paid in digital pounds as well as receiving digital pound as payment in exchange for goods and services. This will be important for adoption and uptake.
Our members have shared that as a digital pound is not remunerated, there is no cash flow incentive to hold money in a corporate digital pound account.
Our members also shared that there is currently a lot of friction that arises from settlement flow issues in moving people on from BACS and into Faster Payments. When it comes to corporates using digital pound accounts, it is crucial that there is no friction between moving money from a commercial bank account to a corporate digital pound account into a payroll account. The flex in commercial bank money in and out of the corporate account into the individual consumer account will be really important in allowing the digital pound to pass around the economy for consumers to pay for goods and services and corporates to meet payroll.
We note the concern in the consultation paper that this could enable financial firms to engage in wholesale digital pound activity. This risk can be mitigated with a combination of sweeping (as proposed) and RegTech surveillance of the market which could identify any unusual movements of the digital pound that resemble wholesale trading. This could be built into scheme rules and regulatory approvals for service providers serving the large corporate market.
Question 9: Do you have comments on our proposal that non-UK residents should have access to the digital pound, on the same basis as UK residents?
We agree with the proposal that non-UK residents should have access to the digital pound, on the same basis as UK residents. This will increase opportunities for innovation and new business models. As noted elsewhere, cross-border interoperability will be important and access by non-UK residents will further support this. More widely it increases the potential customer base which will widen commercial opportunities for service providers.
Question 10: Given our primary motivations, does our proposed design for the digital pound meet its objectives?
While the platform model should lower barriers to entry, thereby increasing competition and innovation in the payments space, our members have shared their concerns over the commercial viability of an intermediary operating in the digital pound ecosystem and the design of the scheme rules.
It is highly likely that FinTechs who offer services that grant users access to their digital pounds will operate under very tight margins on their value add services - at least in the short- to medium term. This is because providing access to digital pounds will not be profit-making and the costs of AML and KYC checks per unit of operating a retail payment will likely be considerable. Assuming this is the case, some members are concerned that wallet providers will have a limited revenue base to meaningfully absorb fraud and liability costs similar to those we see for other financial intermediaries operating in existing payment schemes.
Our members emphasised their concerns over the weight of liability costs for PIPs and ESIPs regarding KYC, AML, fraud (e.g. APP fraud) and consumer duty. If the digital pound is not remunerated (i.e. no interest payments) as the Bank has proposed, this blocks one potential avenue to cover these costs. Our members shared that if payment schemes such as FPS are to be commensurate with the Bank’s digital pound scheme with regard to the regulatory and compliance costs of being a member, this could untangle the Bank’s efforts of promotion of innovation, choice and efficiency in the payments space through a digital pound.
Some members shared their concerns that a combination of no-interest payments and a limited ability to track fraud due to the ‘baked-in’ privacy features could make it such that a digital pound is an unworkable payments solution. This, they argued, was because it was not feasible for a wallet provider to offset the interest income element, regulatory and compliance costs with programmability features and value-add services.
In building the scheme rules, the Bank must avoid an outcome where a flawed or absent liability framework or disproportionately burdensome KYC and AML requirements result in financial intermediaries with significant treasure chests crowding out the innovators, both from the outset of the digital pound and in the long term.
Our members would urge the Bank to conduct some exploratory cost-benefit analyses to explore the commercial viability of PIPs and ESIPs in the digital pound ecosystem. This would provide prospective intermediaries with some assurance that value-add services will go beyond merely offsetting these costs for the wallet provider.
The Bank should make clear whether there will be new approaches to KYC and AML that are made possible by the new technologies underpinning the digital pound; for example, the ability for a wallet provider to KYC multiple individuals in the case of shared accounts (e.g. rental homes, families, carers). This is very difficult with existing banks and existing power of attorney rules are very cumbersome.
The Bank should also set out its approach for already authorised EMIs to gain authorisation to operate as a digital pound wallet provider. At this stage, it remains unclear whether firms that are compliant with the existing regulatory framework would be required to invest in an entirely new authorisation scheme and corresponding standards (e.g. requirement to be a legal entity, governance). Equally, as noted above, the Payment Services Regulations can be expected to apply to wallet providers. Clarity should be provided at an early opportunity on the regulatory requirements for wallet providers as well as interplay with existing authorised EMIs.
Finally, the consultation states that “[t]he legal basis for the digital pound will be determined alongside consideration of its design.” There is a strong need to address the legal nature of the digital pound including whether it is, for example, legal tender, a promissory note or a bill of exchange.
Question 11: Which design choices should we consider in order to support financial inclusion?
The digital pound provides an opportunity to build in policies to mitigate financial inclusion from the outset. This should include approaches that tackle some of the main causes of financial inclusion including:
- Lack of strong physical identification documents (driving licence passport);
- Lack of track record of financial transactions (utility bills, credit history);
- Lack of permanent residence or proof thereof;
- Cost of demonstrating any of the above;
- Lack of trust in sharing data; and
- Inability to access technology due to access to data (NB. a digital pound will inevitably require some use of and access to technology).
As already noted, the digital pound will need to be underpinned by a reusable Digital ID or financial passport, which can help overcome the first three barriers to financial exclusion. As set out in question 4, a tiered approach to verification will also be a useful tool to enable individuals to access the digital pound with lower levels of identity verification; simplified KYC for lower value transactions will help overcome access barriers (including cost).
In terms of trust, the privacy and anti-fraud measures discussed elsewhere in this document will be critical. As will a widespread public engagement and ongoing information to raise understanding of the digital pound (as set out under our key point summary). Developing scheme rules which provide compatibility across providers and give customers a consistent look and feel will also help with access. The simpler and easier to use and the better the customer journey, the lower the barriers to access.
In terms of digital exclusion, the availability of an offline wallet will help tackle the risks of exclusion amongst geographically remote or low-income groups as well as build resilience into the system. Being able to pay for something should not depend upon always-on data on a mobile device nor the availability of a 5G signal. Whilst improvements in broadband coverage will significantly mitigate this, consideration is also needed for those who can not afford to have always-on data on a smartphone - or choose not to. The ability for offline payments and for offline non-smartphone devices should be enabled. We recognise that offline availability creates potential problems in terms of synching the wallet and ledger, and could create issues of custody for the wallet provider. We would recommend further exploration of this to assess options and solutions.
More widely, the digital pound can greatly assist financial inclusion by providing the potential for a low-cost basic account that is not dependent upon banks and which can - for most people - cover all their income and outgoings. The £20,000 threshold (and not lower) is therefore an important component of this. It could revolutionise the concept of the ‘basic bank account’.
Question 12: The Bank and HM Treasury will have due regard to the public sector equality duty, including considering the impact of proposals for the design of the digital pound on those who share protected characteristics, as provided by the Equality Act 2010. Please indicate if you believe any of the proposals in this Consultation Paper are likely to impact persons who share such protected characteristics and, if so, please explain which groups of persons, what the impact on such groups might be and if you have any views on how impact could be mitigated.
1 Bank of England, New forms of money, June 2021.
2 Joint Regulatory Oversight Committee, Recommendations for the next phase of open banking in the UK, 17 April 2023.
3 European Commission, Single Currency Package: new proposals to support the use of cash and to propose a framework for a digital euro, June 2023.
4 Atlantic Council, Central Bank Digital Currency Tracker, ud.
6 House of Lords, Fraud represents 41% of all crime against individuals in England and Wales, November 2022.
7 Bank of England, The digital pound: Technology Working Paper, February 2023
