In a significant step, the Bank of England and HM Treasury have declared that it is "likely" that a digital pound—the catchy moniker for a UK retail central bank digital currency—will be needed in future.
As illuminated in a joint consultation paper published last week, a digital pound would be issued by the Bank of England and would be used by households and businesses for their everyday payments. Justifications for a digital pound in the paper lean heavily on declining cash use—which has shifted the balance between public and private money used to make payments—and the potential emergence of new forms of private digital money, such as stablecoins (implicitly evoking a Hayekian spectre of competition in currency).
The paper is packed with interesting thoughts about the implications of a digital pound for monetary and financial stability, and includes consideration of the potential for adverse impacts on banks’ business models. But for now, I want to highlight two areas that lawyers can dig into: the proposed 'platform model' for the digital pound, and data protection and privacy.
Drilling into the 'platform model'
The platform model, which is intended to play to the respective strengths of the public and private sectors, goes something like this. The Bank issues digital pounds, which are recorded in a 'core ledger' built and operated by the Bank (this ledger may or may not utilise distributed ledger technology). Regulated private sector companies, which could be banks or approved non-banks, provide the interface between the Bank and users, offering digital 'pass-through' wallets. This means that end-users interact with these wallets, likely through their smartphone or a card, rather than directly with the Bank.
End-users in this scenario retain a direct claim on the Bank, and the digital pound would always be a direct liability of the Bank. The private sector entities, known as 'Payment Interface Providers' or PIPs, would never be in possession of the end users' digital pound funds, and the transfer of holdings and settlement occurs at the central bank. As such, PIPs do not pose counterparty or credit risk to their customers and are "unlikely to need extensive prudential regulation".
In line with the simplicity of this model, it is proposed that non-financial firms— from sectors including media and social media, broadcasting and content sharing platforms, and e-commerce—might add a digital pound wallet to their services, bringing "significant benefits for choice and innovation".
For the financial services regulatory lawyer, this prompts three immediate reflections. The first, that the potential entrance of non-financial firms into the digital pound ecosystem is reflective of the increasing enmeshment of payments with big tech and online media. This enmeshment is already provoking a fresh approach to financial regulation, as illustrated by the Bank, PRA and FCA's recent discussion paper on strengthening the resilience of critical third parties to the UK financial sector. And if even half of what we are hearing about the metaverse and Web3 is true, this trend will only accelerate.
Second, a particularly salient question will be how the Treasury and the regulators strike the right balance between ensuring robust regulation of (what would be) a major national payments infrastructure, while enabling non-traditional financial service providers, with their unique backgrounds and cultures, to get involved.
And third, the paper betrays anxieties about (and consults on) the commercial viability of PIP services, querying whether these should be viable on a stand-alone basis. While the paper suggests some plausible possible revenue streams for PIPs—such as transaction fees levied on merchants—this question mark around commercial viability is of interest given that operational resilience has been front and centre of the regulatory agenda over the past few years. This issue also uncovers a potential tension at the heart of what is, essentially, the delivery of a public service via private means.
Data protection and privacy
Good data use is billed as critical to the success of the digital pound, and is given notable attention in the paper. Under the current proposals, a user's holdings of digital pounds are recorded anonymously on the Bank's core ledger, and individuals' personal details would only be known to PIPs who identify and verify users. The paper stresses that a digital pound would have the same (or stronger) privacy protections as bank accounts, debit cards or cheques. But does that close the case? Amidst a media response to the digital pound that has foregrounded concerns about government access to payments data, it is clear that data protection and privacy law issues are central to this project. Look out for an upcoming post from our data privacy team.
The Bank and HM Treasury will now invest in a ‘design phase’, evaluating the technological feasibility and the legal basis of a digital pound before making a decision on whether to proceed around 2025. With this next step towards a digital pound initiated, we are invited to engage with what the future of payments will look like.