The digital pound:

a new form of money

for households and
businesses?

Consultation Paper
February 2023
The digital pound: a new form
of money for households and
businesses?
Presented to Parliament by the Economic Secretary to the Treasury
by Command of His Majesty

February 2023

CP 797
© Crown copyright 2023

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 Page 3

Contents
Contents 3

Foreword 5

Part A: Our proposal for the digital pound 7

The digital pound 11
Next steps 14
Box A: New technologies and payments functionalities 19
Box B: Forms of money in use now, and in prospect 21

Part B: The likely need for a digital pound 24

Central bank money as the anchor of monetary and financial stability 25
Supporting innovation, competition, choice, and efficiency 29
Box C: Future trends in payments drive the likely need for the digital pound 34
Box D: Other motivations for the digital pound 36

Part C: Monetary and financial stability 38

Financial stability 38
Monetary stability 41
Box E: Interactions between the digital pound and systemic stablecoins 45
Box F: Assessment of monetary policy as a motivator for the digital pound 48

Part D: Our model for the digital pound 50

Section D.1 The platform model and public-private partnership 52
Box G: Alternative models of provision to the platform model 61
Box H: Wholesale CBDC 63
Section D.2 Data protection and privacy 67
Section D.3 User experience for households and businesses 75
Box I: Corporates and the digital pound 83
Box J: Financial inclusion 85
Box K: Lessons learnt from our engagement with civil society groups 89
Box L: Lessons learnt from the Engagement Forum 90

Conclusion 92

Consultation process 94
Who should respond? 95
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Privacy notice: Bank of England 96

Privacy notice: HM Treasury 97
Public Sector Equality Duty 99

Annexes 100
Annex 1: The digital pound and international risks 100
Annex 2: Impact of the digital pound on the Bank’s balance sheet 103
Annex 3: Market research 106
Annex 4: Lessons learnt from our engagement with major financial institutions 110

Glossary and abbreviations 111

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Foreword

The way we use money in the United Kingdom is changing, bringing fresh opportunities and
new considerations for public policy.

Banknotes, issued by the Bank of England, are being used less frequently by households
and businesses. New technologies are allowing for the emergence of new forms of digital
money, and new ways and devices to pay with it. International developments have the
potential to affect the UK domestically and as a global leader in finance.

Ensuring that public trust in money remains high, and that our modern forms of money and
payments meet the evolving needs of individuals and businesses, are fundamental
responsibilities of the Government and the Bank of England. We are determined that the UK
should remain at the forefront of innovation in money, payments and financial services. This
is part of the Government’s vision for a technologically advanced, sustainable, and open
financial services sector that is globally competitive and acts in the interests of communities
and citizens, creating jobs, supporting businesses, and powering growth across all four
nations of the UK.

A UK central bank digital currency – a ‘digital pound’ – would be a new form of digital money
for use by households and businesses for their everyday payments needs. As part of the
wider landscape of money and payments it would sit alongside, not replace, cash – a digital
counterpart to familiar, trusted banknotes and coins, subject to rigorous standards of privacy
and data protection. A digital pound would help to ensure that central bank money remains
available and useful in an ever more digital economy, continuing to bolster UK monetary and
financial stability while safeguarding the UK’s monetary sovereignty in a changing global
financial system. It could provide a platform for private sector innovation, promoting further
choice, competition, efficiency and innovation in payments. It could also have further benefits
for the resilience and functionality of payments in the UK.

On the basis of our work to date, the Bank of England and HM Treasury judge that it is likely
a digital pound will be needed in the future. It is too early to commit to build the infrastructure
for one, but we are convinced that further preparatory work is justified.

Any future digital pound would be a major piece of national infrastructure which would likely
take several years to complete. Its launch would require deep public trust in this new form of
money – trust that their money would remain safe, accessible, and private. The journey
towards issuing any digital pound therefore necessarily involves an open, national
conversation about the future of our money, in parallel with detailed technical consideration
by experts across the UK public authorities, and informed by evolving market trends.
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This consultation – issued jointly by HM Treasury and the Bank of England – opens that
conversation and seeks to begin to build that foundation of public trust. It seeks feedback on
the policy and technical work undertaken so far in order to inform a future decision on
whether or not to progress to building and launching a digital pound and on our current
proposal for its form and functions which will be taken forward in the next stage. It commits
us to progressing the next stage of technical and policy work needed to underpin such a
decision. This paper is being issued alongside a Technology Working Paper from the Bank
of England, exploring the many technology challenges involved in a digital pound.

In the coming four-month consultation period, HM Treasury and the Bank of England will
engage extensively across the UK to seek views on a potential digital pound. Responses to
the consultation are invited from all interested members of the public, experts, and the widest
range of organisations.

At this exciting time of change in money and payments, this consultation is a vital step
in positioning the UK to act decisively by introducing a digital pound, should we
choose to do so.

Rt Hon Jeremy Hunt MP, Chancellor of the Exchequer

Andrew Bailey, Governor of the Bank of England

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Part A: Our proposal for the digital pound

The Bank of England and HM Treasury judge it likely that a digital pound will be
needed in the future. It is too early to decide whether to build the infrastructure for
one, but we are convinced the next stage of preparatory work is justified.
A digital pound would be a retail central bank digital currency (CBDC) – digital money for use
by households and businesses for their everyday payments, issued by the central bank, the
Bank of England. The Bank of England (the Bank) and His Majesty’s Treasury (HM Treasury)
plan to accelerate our work on the technology and policy architecture for a digital pound.

A significant factor in determining whether the digital pound is needed will be how the
payments landscape evolves in coming years, both in the UK and abroad. In particular,
whether new forms of privately-issued digital money emerge and how they interact with
existing forms of money and payments. International developments in the provision of
CBDCs by other countries, and their potential to affect the UK domestically and as a global
leader in finance, will also be important.

At this stage, we judge that it is likely that the digital pound will be needed in the future and
that it would offer benefits. As set out in more detail in Part B, the digital pound would
maintain public access to retail central bank money, thereby anchoring trust in the monetary
system in a more digitalised world and underpinning monetary and financial stability. Also, as
our lifestyles and the economy become ever more digital, it would, through partnership with
the private sector, promote innovation, choice and efficiency in domestic payments, thereby
boosting the UK economy, supporting growth and financial inclusion.

It is too early to take the decision on whether to introduce the digital pound. That decision will
be made in coming years taking account of developments in money and payments and
based on our findings as we investigate further the operational features and technology
needed to deliver a digital pound. For now, the Bank and HM Treasury’s priority is to step up
development work, build the necessary skills and put in place the technical capability to
introduce the digital pound in a timely manner, should a decision be made in future to do so.

The introduction of a digital pound would be a major public and private sector infrastructure
project. It would take several years.

Over the next stage of our work, we will work with the private sector to explore potential
technology solutions and undertake experiments to inform any future implementation.
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This stepping up in our development work and collaboration with the private sector will, in
itself, support future development of the digital economy. And as we intensify our work, and
as payments and the digital economy evolve, we will maintain a dialogue with all
stakeholders, including firms – large and small, new and established – to ensure the digital
pound’s design meets their needs.

In this Consultation Paper (CP), we are consulting on a proposal for a retail CBDC, designed
for everyday payments by households and businesses. That contrasts with a ‘wholesale
CBDC’, which would be used to settle high-value payments between financial firms. The
concept of a wholesale CBDC is discussed in a box in Part D of this paper, alongside the
Bank’s work with industry to enhance wholesale payments through RTGS renewal and the
RTGS future roadmap.

We are exploring a digital pound because money and payments are changing.1
Individuals and businesses in the UK use two main forms of money for day-to-day spending –
private money, issued by commercial banks, and public money, issued by the Bank of
England. ‘Private money’ is typically a claim on a private commercial bank in the form of bank
deposits held by households or businesses. This private money is underpinned by the
regulation and supervision of commercial banks. ‘Public money’ or ‘central bank money’, by
contrast, is issued by the Bank of England. It is currently available to the public only in the
form of physical cash.2 Central bank money is financially risk-free in the sense that there is
no credit, market or liquidity risk.3

Historically, the majority of payments have been made in cash. However, digital innovation is
changing the way we pay. With the convenience of card, app, and digital wallet payment
systems, the use of electronic payments has accelerated. In 2021, card payments accounted
for close to 60% of UK payments (Chart A.1) and 32% of all payments were contactless.4
Almost a third of retail sales were made online and about 9 in 10 adults own a smartphone,
which can be used to make digital payments, including in-store.5

1 Forms of money in use now, and in prospect, are discussed in Box B.

2 The Royal Mint issues coins which can also be considered ‘public money’. Deposits held at the central bank

(reserves) are also public money: they exist in digital form but are only available to certain financial institutions.
3 Throughout this Paper, we refer to central bank money as ‘financially risk free’ to reflect the absence of these

risks. Operational risks, including those related to the security and resilience of CBDC infrastructure, and the
role of ‘Payment Interface Providers’ are considered further in Part D.
4 UK Finance (2022) – UK Payment Markets Summary.

5 See ONS and Ofcom (2022) – Online Nation 2022.

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As a result of these innovations, the balance of public and private money used to make
payments has shifted. Around 95% of the funds held by individuals to make UK payments
today are private money, held as commercial bank deposits, and typically spent
electronically, such as by bank transfer or debit card.6 As spending has become more digital,
the use of cash for payments has declined, falling from 55% of transactions to 15% over the
past decade.7

Chart A.1: Cash payments have declined while card use has accelerated (a)

Sources: UK Finance and Bank calculations.

(a) Payment volumes (millions). Cards comprises debit card and credit/charge/purchasing card.

New services and technologies are emerging in money and payments. Some examples are
embedded finance, blockchain technology, smart contracts and decentralised finance (Box
A). These are often being developed by firms outside of the traditional financial sector, which
brings new entrants into payments markets. New functionalities can support novel use cases
and features, which are already starting to emerge in wholesale and business-to-business
payments. Going forward, were a digital pound introduced, private sector Payment Interface
Providers (PIPs) in the digital pound ecosystem would be able to leverage such new
functionalities to provide innovative services in retail payments to end users.

6 Cunliffe (2021) – Do we need 'public money’?

7 UK Finance (2022) – UK Payment Markets Summary.
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Cash, of course, remains vital for many. Around 1.2 million UK adults do not have a bank
account and around one fifth of people name cash as their preferred payment method.8 Cash
remains important to a large cross-section of society. Even those who do not use it regularly
consider it an important back up form of payment. For those reasons, UK authorities are
committed to ensuring continued access to cash. Measures to protect retail access to cash,
and the supporting wholesale distribution services, are being introduced in the Financial
Services and Markets Bill.9 But while we ensure continued access to cash, we also have to
recognise that it cannot be used in digital transactions, which are becoming an increasingly
important part of daily life.

If current trends continue, the public’s access to, or use of, central bank money will diminish
and the monetary system could become fragmented, posing a risk to monetary and financial
stability. The payments landscape could also become concentrated if firms’ use of new
technologies in money issuance results in dominance by a small number of them. That would
pose a risk to competition and diminish the incentives for longer-term innovation.

Considering these payment trends, we judge there is likely to be a benefit from the Bank
issuing a digital form of retail central bank money. It would support the safety and
interchangeability of money, as well as encourage choice, competition and innovation. The
digital pound would complement banknotes and ensure that the Bank continues to provide
money that is relevant to the way people choose to pay, both today and in the future. It would
also coexist with and complement both existing and new forms of private digital money.

The future payments landscape in the UK will not only reflect these developments in retail
payments (for households and businesses) and the likely need for a digital pound. There will
also be evolution in wholesale payments (high-value payments, typically between financial
institutions). The Bank already provides central bank money in electronic form for wholesale
settlement through its Real-Time Gross Settlement (RTGS) service. The Bank is improving
this service through a transformational programme of RTGS Renewal. This will include a new
core settlement engine to enable a range of new functionalities and capabilities to promote
more efficient wholesale settlement. It would be able to interact with a broader set of actors
and technologies. The Bank will continue to engage with the global central banking
community to monitor and learn from the wide range of experiments, including those using
new technologies, being conducted internationally.10

8 FCA (2020) – Financial Lives Survey.

9 UK Parliament (2023) – Financial Services and Markets Bill.

10 There is significant international experimentation around wholesale settlement. These projects have sought to

innovate and enhance domestic interbank settlement (for example, early stages of Project Jasper and Project
Ubin), securities settlement (for example, Project Helvetia) and cross-border payments (for example, Project
Jasper-Ubin, Project Inthanon-LionRock and Project Dunbar). Project Meridian, run by the London Centre
of the BIS Innovation Hub, seeks to develop a prototype synchronisation operator to connect counterparties and
co-ordinate settlement directly in central bank money.
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The digital pound

The digital pound would provide a public platform for private sector innovation.
The digital pound system would be a public-private partnership. The private sector would play
a crucial role in offering innovative and user-friendly services.

The Bank would issue the digital pound. This means it would be a direct claim on the Bank,
as cash is today. It would be denominated in sterling, the currency of the UK, and £10 of
digital pounds would always have the same value as, and be interchangeable with, a £10
banknote.

The Bank would provide the digital pound and the central infrastructure, including the ‘core
ledger’. Private sector companies – which could be banks or approved non-bank firms –
would be able to integrate into the central digital pound infrastructure and provide the
interface between the Bank and users. They would do this by offering digital ‘pass-through’
wallets to end users. The wallets could be integrated into their other services. They are
known as ‘pass-through’ wallets (hereafter referred to simply as ‘wallets’) because the user’s
holdings of digital pounds are recorded anonymously on the Bank’s core ledger, in order to
safeguard their privacy, and the wallet simply passes instructions from the user to the core
ledger. End-users would interact with these wallets rather than directly with the Bank.
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Users would interact with digital pounds by using their wallet to see their balance and instruct
payments and transfers of digital pounds. It is likely most people would access the wallet via
their smartphone, but there would be alternative options, such as a smart card.

We call this approach the ‘platform model’. It plays to the respective strengths of the public
and private sectors, and we judge it the most efficient mechanism to deliver the digital pound
in a way that also catalyses innovation.

Firms providing wallets would be regulated to ensure payments using digital pounds are
resilient, reliable, and compatible with other payments. HM Treasury and relevant regulatory
authorities would consult on the details of a regulatory regime in future. Standards for
participating firms would be set in such a way that encourages a competitive and innovative
ecosystem.

To support trust and confidence, the digital pound would be subject to rigorous standards of
privacy and data protection. Digital payments account for the majority of transactions today.
These generate personal data which is held by users’ payment providers, such as banks, to
identify users in order to prevent fraud, money laundering and the financing of terrorism. Like
current digital payments, the digital pound would not be anonymous because the ability to
identify and verify users is needed to prevent financial crime.

Recognising, however, the fundamental importance of trust, the digital pound would be at
least as private as current forms of digital money, such as bank accounts. Digital pound
users would be able to make choices about the way their data is used. Therefore, our
proposal for the digital pound envisages that Payment Interface Providers would identify and
verify users, but anonymise personal data before any sharing with the Bank.

As a result, the identity of users would only be known to their Payment Interface Provider,
and neither the Government nor the Bank would have access to digital pound users’ personal
data, except for law enforcement agencies under limited circumstances prescribed in law and
on the same basis as currently with other digital payments and bank accounts more
generally.
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The digital pound would be designed to support the Government’s and Bank’s
commitments to mitigate climate change.
The Government is committed to reaching net zero greenhouse gas emissions by 2050, as
part of a wider strategy of managing, and mitigating, the impacts of climate change.11
The digital pound would be designed to be consistent with this commitment. While the digital
pound would be a new form of digital money, it would be fundamentally different to a
cryptoasset and would therefore not make use of the same energy-intensive technologies
that underpin some cryptoassets.12

The digital pound would be used like a digital banknote.

The digital pound would be used like a digital banknote. It would be designed for everyday
payments – both in-person and online – and would be a direct claim on the Bank. Like a
physical banknote, and many current accounts, no interest would be paid on a digital pound.
This makes it useful for everyday payments but not designed or intended for savings.

It should be seamless to exchange digital pounds for cash and bank deposits and vice versa.
This would enable people to move money between accounts: £10 of cash or bank deposits
could be exchanged for £10 of digital pounds and £10 of digital pounds could be exchanged
for £10 of bank deposits or cash. If new, non-bank forms of payment such as stablecoins
emerge, they would be required to be exchangeable with the digital pound.

Although a digital pound would be designed with UK users in mind, it would be available to
non-UK residents too.

The digital pound would not replicate physical cash in every respect.
There would be some important differences with physical cash.

A digital pound would have the same (or stronger) privacy protections as bank accounts,
debit cards or cheques. Individuals’ personal details would be known to their private sector
wallet provider in the same way they are for bank account providers today (and subject to the
same privacy protections). But individuals’ personal details would not be known by the
Government or the Bank of England.

By providing the same privacy as most of the money we use, the digital pound would be
designed to protect against fraud and counterfeiting, while not facilitating financial crime.

11 The Bank remains on track to meet its 2030 target to reduce absolute greenhouse gas emissions by 63%
from 2016 to 2030. The Bank has committed to reduce emissions from its physical operations to net-zero by
2050 at the latest and aims to publish its net-zero transition plan as part of next year’s climate disclosure. Bank
of England (2022) – The Bank of England's climate-related financial disclosure 2022.
12 Blockchains which use a ‘proof of stake’ consensus mechanism are less energy intensive than those which

use ‘proof of work’.

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The Bank and HM Treasury would welcome views on this approach to privacy. Further
information on data and privacy can be found in Section D.2.

Unlike cash, the amount of digital pounds an individual or business could hold would be
subject to some restrictions, during an introductory period at least. This would ensure a
smooth introduction without unintended consequences for monetary or financial stability.
Those restrictions would still enable individuals to use the digital pound for their everyday
transactions, including receiving their pay. It would be for a further decision, in the light of
experience, whether those restrictions should be made permanent.

Next steps
The Bank and HM Treasury consider a digital pound is likely to be needed in the UK
though no decision to introduce one can be taken at this stage. We will therefore step
up development and move to the next stage of our work.
This CP, and the Bank’s accompanying Technology Working Paper are the conclusion of
the ‘research and exploration’ phase of our work on the digital pound – Phase 1 of our digital
pound roadmap (Diagram A.2). We will now move to Phase 2, to develop further, in both
technology and policy terms, the model for the digital pound set out in Part D, upon which we
are consulting.

This work in Phase 2, the ‘design’ phase, will enable us to respond to developments in the
payments landscape and materially reduce the lead time if there is a future decision to
introduce a digital pound in the future. It will involve investment in the Bank’s technology
capabilities, and an ambitious approach to the technology roadmap and collaboration with the
private sector.

By the end of the design phase we will have evaluated comprehensively the
technological feasibility of a digital pound, determined the optimal design and
technology architecture, and supported business model innovation through
knowledge sharing and collaboration between the private and public sectors.
Consistent with our objective of stepping up the development of a digital pound, and
positioning the authorities to respond to developments in the payments landscape, our aims
for Phase 2 – the design phase – are to:
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• Cut lead-times on development and equip ourselves with the knowledge and
capabilities to move into a ‘build’ phase, should there be a decision to introduce a
digital pound.
• Determine the technological feasibility and investment needed to build a digital pound.
• Articulate, in detail, what the technology and operational architecture for a digital
pound would look like.
• Assess and evaluate the benefits and costs of the digital pound architecture.
• Deepen the Bank’s knowledge of CBDC technology and the private sector’s
understanding of our technology approach.
• Support the development of the broader UK digital currency technology industry
through experimentation and proofs of concept.
• Provide the basis for a future decision on whether to introduce a digital pound and
move to a ‘build’ phase.

Consistent with these aims, the design phase will have two focus areas, both aiming
to accelerate development of a digital pound (Diagram A.2).
The first objective of the design phase is to develop a comprehensive, conceptual
architecture that could be used as the blueprint for construction of a digital pound should we
decide in the future to proceed to a ‘build’ phase. This will require us to set out in detail the
comprehensive and precise requirements for digital pound technology and the commercial
and operational implications of the digital pound.

The second objective is experimentation and proofs of concept – in collaboration with private
sector innovators – to inform the development of our potential architecture and to build both
the Bank’s and the private sector’s digital currency technology know-how. The Bank will
operate an open and transparent process for participation in proof-of-concept work and share
the lessons learned from those experiments.

The design phase will present opportunities for business model innovation and
technology capability in the UK fintech sector, benefits we expect to endure even if
we do not build a digital pound.
Technologies for a digital pound are also relevant to privately-issued digital money, such as
stablecoins. By partnering with the private sector on proofs of concept and experiments, the
Bank and HM Treasury seek to catalyse private innovation in digital currency technologies,
encourage innovative digital money business models, and support knowledge sharing across
the UK fintech sector. The design work will also benefit the Bank by informing our
assessment of the economic benefits and the risks to financial stability of technologies
supporting new forms of private digital money. Given our expectation that digital currency
technologies will be significant in shaping the future of finance, the benefits of the design
phase are expected to endure even if we do not build a digital pound.
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Like the research and exploration phase, the costs associated with the design phase will be
funded by the Cash Ratio Deposit (CRD) scheme, which is used to fund the Bank’s policy
work, and thereafter by the new Bank of England Levy, which will replace the CRD scheme in
future. No decision has been taken yet on whether to build or introduce a digital pound, and
therefore the funding arrangement for any such build phase is still to be decided.

After the design phase, there will be a decision on whether to build a digital pound.
On completion of the design phase, following further consultation, and in light of the evolution
in payments, the Bank and the Government will decide whether to proceed to build a digital
pound (Diagram A.2). Work undertaken during the design phase would help to generate
evidence to support a thorough evaluation of benefits and costs.

If we decide to move into a build phase, it would involve developing a prototype digital pound
technology in a simulated environment, before moving to live pilot tests. A digital pound
would only be launched if, among other things, it met our exacting standards for security,
resilience, and performance.
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Diagram A.2: The indicative digital pound roadmap has three phases

A decision on whether or not to proceed to a build phase would be made at the end of
the design phase, around the middle of the decade. This work will shorten the lead
time for the introduction of a digital pound, which would be in the second half of the
decade.
The digital pound would be major national infrastructure and would require significant
investment. Any decision on whether to build it would require extensive evidence and public
engagement. The legal basis for the digital pound will be determined alongside consideration
of its design.
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Proceeding to the design phase now will enable a digital pound to be introduced in the
second half of the decade. It would take time to build infrastructure that is secure, resilient,
and high performing. Experience from overseas digital currency projects, and from digital
innovation more generally, indicates that building user familiarity and understanding, and
ensuring that innovative and customer-friendly applications emerge will be critical to success.

We will engage stakeholders extensively and be transparent about our work.

Transparency around our work, and engagement with a diverse group of stakeholders, will be
more important than ever in the design phase. We will build upon our approach to date,
including our Engagement and Technology Forums. We will also continue engagement
with civil society, academics, technologists, and stakeholders across the UK as well as
internationally.

This Consultation Paper seeks views on the key features of the model we intend to
take forward in the next phase.
This CP consults on the proposed design for a digital pound, given our primary motivations.

The remainder of this paper is structured as follows. Part B sets out why there is likely to be a
need for the digital pound. Part C sets out the implications of the digital pound for the Bank’s
objectives of monetary and financial stability. Part D sets out the detailed model of the digital
pound that we propose, subject to consultation, to develop further in the next stage of our
work.
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Box A: New technologies and payments functionalities

Over recent years, new services and technologies have emerged in money and
payments. They are typically being developed and deployed by firms who are outside
the traditional financial sector, bringing a range of new entrants into payments markets.

These technologies are enabling new services and functionalities in digital payments,
supporting novel use cases and features. These functionalities are already starting to
permeate the markets for wholesale and business-to-business payments, supporting
new business models and improved efficiencies.

In time, these technologies could also improve retail payments. Private firms who would
provide services to digital pound users may be able to leverage some of these
innovations. The accompanying Technology Working Paper explores how some of
these technology trends might be applicable in the design of a digital pound.

Embedded finance is an innovation that could shape the retail payments experience.
This is where financial services, and in particular payments, are integrated into another
industry’s service, function or feature. Examples include, ‘one-click’ purchases of goods
via social media platforms, ‘in-game’ payments or, in the future, marketplaces and
transactions in the metaverse. Embedded finance is also often associated with
‘super-apps’, mobile apps which offer a one-stop shop for a wide array of products and
services in a single, seamless, platform.

Blockchain technology, which underpins many cryptoassets (for example Bitcoin) also
represents a major innovation. This introduced digital assets supported and distributed
in a peer-to-peer fashion, backed by cryptography alone and stored on an immutable
distributed ledger.

Smart contracts automate business logic based on pre-determined terms and

conditions. The concept pre-dates the emergence of Blockchain and is not exclusive to
any specific technology, but their use has been popularised recently by permissionless
blockchain technologies such as Ethereum.

Developments in smart contracts have led a trend towards 24/7, ‘always on’, automated
markets and products, and a wider world of decentralised finance, or ‘DeFi’. DeFi
applications use a combination of these technologies, including blockchain and smart
contracts, to enable users to buy, swap, sell and settle crypto products without reliance
on central intermediaries or institutions.

Atomic swaps, where the transfer of assets is linked to ensure that the transfer of one
asset occurs if and only if the transfer of another asset also occurs, have also seen a
rise in popularity. They are currently used in some traditional financial transactions to
remove settlement risk and reduce liquidity inefficiencies. The Bank is already exploring
atomic swaps and settlement in the wholesale market through its work on
synchronisation operators as part of our RTGS Renewal programme.
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The pseudonymous and public nature of permissionless blockchains has also spurred
research and innovation in cryptography. That is particularly prominent in
Privacy-Enhancing Technologies such as zero knowledge proofs. These can minimise
the risk of personal data exposure and maximise data security. These techniques are
not just applicable to blockchain and Distributed Ledger Technology (DLT), but to
centralised applications as well.

Innovative cryptography can also be used in novel digital identity solutions. Those can
enable users to prove their identity, or an attribute of their identity (for example that they
are over 18), without having to share all the personal identity data in an ID document.
The role of digital identity in the future digital economy could server to generate further
efficiencies and improve KYC and AML processes.
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Box B: Forms of money in use now, and in prospect

To serve its important role in society, money must satisfy three criteria: it must
be a store of value, a medium of exchange and a unit of account.
Most money today is a kind of IOU (or promise to pay) that is special in that it is widely
trusted and therefore performs important social and economic functions. It serves as: (a)
a store of value with which to transfer purchasing power from today to the future; (b) a
medium of exchange with which to make payments for goods and services, and (c) a
unit of account with which to measure the value of all other goods, services, and
financial assets.13

There are several forms of regulated money in the UK monetary system.

‘Public money’ or ‘central bank money’ is issued by the Bank of England. It is currently
available to the public in the form of physical cash.14 Central bank money is financially
risk-free in the sense that credit, market and liquidity risks are absent. ‘Private money’,
by contrast, is typically a claim on a regulated private commercial bank, in the form of
digital bank deposits held by households or businesses (Table A.3).

Looking ahead, new forms of money such as ‘stablecoins’ could provide money-like
instruments. But it is important that risks are managed robustly. The Financial Policy
Committee (FPC) has set out two expectations that stablecoins must meet to be used as
money-like instruments in systemic payments chains. The first expectation states that
payment chains that use stablecoins should be regulated to standards equivalent to
those applied to traditional payments chains. The second expectation states that
stablecoins used as a money-like instrument should have standards equivalent to those
that apply for commercial bank money in relation to stability of value, robustness of legal
claim and the ability to redeem at par in fiat.

Stablecoins issued by non-banks could be offered under a tailored regulatory regime

proposed by HM Treasury in the future.15 The Financial Services and Markets Bill,
currently in Parliament, seeks to address regulation of certain payment systems and
related firms that use ‘digital settlement assets’, drawing on the current Bank of England
and Financial Conduct Authority (FCA) regulatory regimes for e-money and payments
systems to cover the use of stablecoins. The interaction between the digital pound and
systemic stablecoins is discussed in Box E.

13 See McLeay et al (2014) – Money in the modern economy: an introduction for a discussion of the
evolution of money used in the economy and the types of money present today.
14 The Royal Mint issues coins which can also be considered ‘public money’. Deposits held at the central bank

(reserves) are also public money. They exist in digital form but are only available to certain financial institutions.
15 The exact scope of stablecoins that will be covered will be developed as the regulatory regime takes shape.
 Page 22

Table A.3: Types of retail money Issuer Form

Banknotes Issued by the Physical

Banknotes are bearer instruments – those who Bank of
possess a banknote generally own it, and by handing it England
to someone else, the new holder becomes the owner.

Bank deposits Privately Digital

Commercial bank deposits account for around 95% of issued by
the money held by households and businesses. They commercial
are created by bank lending and are a liability of the banks
banking system — banks stand ready to convert those
deposits into central bank money in the form of
physical cash or to honour payments customers make
with those deposits, which typically involves a transfer
of the claim to a customer in another bank. They could
include bank deposits that are ‘tokenised’ using
distributed ledgers.

Stablecoins Privately Digital

Stablecoins refer to cryptoassets that seek to stabilise issued by bank
their value against existing national fiat currencies or or non-bank
other assets, typically by holding backing assets providers
(Box E).

Unbacked cryptoassets are not money as they are high-risk, speculative

assets.
Cryptoassets are a digital representation of ownership or contractual rights that can be
transferred, stored or traded electronically, and which typically use cryptography,
distributed ledger technology (DLT) or similar technology.16

The majority of cryptoasset activity is driven by the use of highly volatile unbacked
cryptoassets as speculative investment assets. Such cryptoassets (the most commonly
known being Bitcoin and Ether) comprise around 90% of the total market capitalisation.

These unbacked cryptoassets do not provide holders with a safe or stable store of value
or a reliable unit of account.

16 See Bank of England (2022) – Financial Stability in Focus: Cryptoassets and decentralised finance.
 Page 23

Unbacked cryptoassets do not represent a claim on a future income stream or collateral.

As such, they only have extrinsic value in that they are worth only what someone is
prepared to pay for them. As a result, large daily swings in their value are common –
Bitcoin prices have fallen by 10% or more in a day around 25 times over the past five
years.17

The outstanding value of cryptoassets, globally, grew around tenfold between early 2020
and November 2021, peaking at US$2.9 trillion. The market capitalisation has since
fallen to under US$900 billion at the end of November 2022, so that it now represents
under 0.2% of global financial assets.18

Volatility in the value of unbacked cryptoassets has meant they do not preserve wealth
for their holders. Similarly, volatility in their purchasing power means they are unstable
units of account. In turn, this volatility has led to their low acceptance as a form of
payment so that they are not considered an efficient medium of exchange either.

17CoinMarketCap.
18CoinMarketCap and Financial Stability Board (2021) – Global Monitoring Report on Non-Bank Financial
Intermediation.
 Page 24

Part B: The likely need for a digital pound

Diagram B.1: Our primary motivations for the digital pound

Our primary motivations for the digital pound are the availability of central bank
money as an anchor for confidence and safety in money, and promoting innovation,
choice, and efficiency in payments.
Box C discusses trends in the digital economy and the payments landscape. In light of these
trends, the Bank and HM Treasury judge there is likely to be a future need for, and benefits
from, the digital pound. We consider there are two primary motivations:

1. To sustain access to UK central bank money – ensuring its role as an anchor for
confidence and safety in our monetary system, and to underpin monetary and financial
stability and sovereignty; and
2. To promote innovation, choice, and efficiency in domestic payments as our lifestyles
and economy become ever more digital.

These two motivations go hand in hand. For the digital pound to play the role that cash plays
in anchoring the monetary system, it needs to be usable and sufficiently adopted by
households and businesses. Some of that adoption will arise from innovation which in turn
will be supported by a public digital pound infrastructure available to all eligible private-sector
firms that wish to develop new payment services.
 Page 25

There are other motivations for developing the digital pound. These include supporting
financial inclusion and improving domestic payments resilience and cross-border payments.19
These have also helped to inform our design choices, set out in Part D.

Central bank money as the anchor of monetary and financial

stability
Uniformity and trust in the safety of money are the bedrock of our economy.
The stability of the UK economy and monetary system relies on the uniformity of money: that
all forms of money – both bank deposits and cash – are valued equally (‘at par’ or ‘face
value’), denominated in a common currency (sterling) and interchangeable with each other.
£10 in a bank account can be easily changed into a £10 banknote, and deposits held in one
bank are valued equally to the deposits in another and can be moved between them.

Access to public money – which is a safe liquid asset backed by the state – and the
uniformity of money are critical for the smooth functioning of the economy. That is because
they ensure that households and businesses can be confident in the value of money,
regardless of its form and issuer.

Widely usable public money that will always be accepted helps to anchor both the perception
of uniformity and its reality. Holders of commercial bank money can convert their money into
public money at any time they choose.

The three pillars of the monetary system that deliver uniformity (Diagram B.2):
1. Retail central bank money – currently in the form of cash – underpins uniformity.
Cash is currently the only form of central bank money available to households and
most businesses. Its existence and one-to-one convertibility with commercial bank
money supports public confidence that financially risk-free money widely accepted for
transactions in the UK will be available in both stress and normal times. Convertibility
of bank deposits into cash further supports confidence in private money and the
banking sector. It provides users with tangible proof that money kept in bank deposits
is safe, while the option to withdraw deposits as cash, one-to-one and on demand,
gives depositors control of their private money holdings.20 It provides the acid test for
the safety of commercial bank money as commercial banks must be able to convert
customers’ money into cash – public money denominated in sterling – on demand. As
all commercial banks must offer this option, this supports the uniformity of money.

19 The Bank and HM Treasury are required by the Equality Act 2010, in the exercise of their respective public
functions, to have due regard to the equality considerations set out in the Public Sector Equality Duty. In their
exploration of the digital pound, relevant considerations will therefore include the impact of the design on
individuals with certain protected characteristics, including the impact on individuals who rely on cash as the
dominant means of making payments.
20 See Panetta (2021) – Central bank digital currencies: a monetary anchor for digital innovation, and

Armelius et al (2020) – Is central bank currency fundamental to the monetary system?.

 Page 26

2. Wholesale central bank money also anchors the value of private money issued by
commercial banks. Wholesale central bank money (deposit accounts held by
commercial banks at the central bank, also known as ‘reserves’) is a financially
risk-free way for financial firms to store value and make payments to each other via
the Bank’s RTGS core infrastructure. Commercial banks commit to settle transactions
with other banks in reserves. This ensures uniformity between deposits at different
banks as they can always be converted, via the central bank, to deposits in another
bank at a rate of one-to-one.
3. Robust regulation and supervision target the safety and soundness of financial
institutions, the resilience of the wider financial system and therefore private money.
Prudential requirements for banks support the public’s confidence that they will meet
customer demand to redeem their deposits and honour their commitment to convert
deposits into central bank money one-to-one. The Financial Services Compensation
Scheme provides insurance on deposits up to £85,000, further supporting public
confidence. And the UK’s resolution regime ensures that if a bank failed, it would do so
in an orderly way with disruption to any of its vital services minimised.21

Diagram B.2: Three pillars of the monetary system deliver uniformity and trust in
money and the financial system

21The UK established a framework for resolution (known as the ‘resolution regime’) in the Banking Act 2009.
This followed the 2008 financial crisis, when alongside other countries, the UK felt it had no choice but to bail
the banks out because they were 'too big to fail'. See Resolution | Bank of England.
 Page 27

Uniformity and safety could be threatened by a combination of lower cash use and
the emergence of some new forms of private digital money.
As cash continues to become less central and less usable in many people’s lives, central
bank money will become less used for everyday transactions. The decline in the use of cash
is expected to continue as commerce and payments become more digital, even though UK
authorities are committed to keeping cash available as long as there is demand for it.

Technological advances also make it likely that new forms of private digital money that
enable new services will emerge (Box A). Stablecoins, for example, are different to
conventional bank deposits and are offered by institutions including non-banks, such as big
technology platforms. These offer the prospect of much deeper integration of money and
payments into digital services, for example through smart contracts. The emergence and
take-up of these new forms of private digital money are uncertain, as is whether they are
issued by existing financial institutions or new entrants, such as ‘Big Tech’ firms and start-
ups.

There is a risk that new forms of private digital money emerge in a fragmented way, such that
they cannot always be easily converted into other types of money. Fragmentation may arise if
holders of one form of money can only interact with others using the same system or from the
same issuer. It may also arise if there are restrictions on accessing certain services based on
the form of payment. For example:

• Walled gardens and closed loop systems are closed payment systems in which
all operations are controlled by the system operator. For example, an internet
platform issuing a certain form of money might impede other firms’ ability to provide
wallet services for that money. Alternatively, users may not be able to transact with
users outside of that specific system. For example, in many countries someone
who holds their money in a non-bank can find it cumbersome to transfer balances
to a user of a different non-bank (for example, Venmo in the US and, until recently,
Alipay and WeChat Pay in China).22 This contrasts with the UK banking sector,
within which someone who holds money in one bank is able to pay someone who
holds money in another bank.
• Convertibility may be costly, complex, or slow between different forms of digital
money, even where conversion is possible. And wallet services providers, who act
as intermediaries, might also restrict transactions.

22In October 2022, Alipay and WeChat Pay (which together account for more than 90% of the total mobile
payments market in China) launched features that permit inter-platform transfers.
 Page 28

A new form of non-sterling digital money may threaten uniformity if it were used for a
significant amount of retail transactions in the UK. If that were to happen at scale, sterling
might no longer be the unit of account for a significant portion of UK transactions. This could
compromise monetary sovereignty – the UK authorities’ ability to achieve price stability
through monetary policy. The Bank might also be unable to gain assurance about the
robustness and supervision of a foreign-operated form of digital money. This could
compromise financial sovereignty – the UK authorities’ ability to effectively regulate systemic
financial institutions and payments systems.

Such an outcome is judged to be unlikely, but if it materialised the impact would be very
significant, difficult to resolve and beyond authorities’ risk tolerance (Annex 1).

Preventing risks to uniformity underpins the case for the digital pound.
Declining cash use and the potential emergence of new forms of private digital money
suggest that, if current trends continue, the digital pound is likely to be needed in the future,
alongside cash, to anchor the monetary system.

The digital pound could support the uniformity of money by replicating the role of cash in a
highly digitalised economy. It would offer continued access to retail central bank money: a
financially risk-free, highly trusted, and accessible means of payment for households and
businesses.

The digital pound could, if designed appropriately, also complement and support new forms
of private digital money and payment services. For example, by acting as a digitally-native
‘bridging’ asset between different forms of digital money, it could support their convertibility
and enable them to trade at face value.23 And importantly, by establishing technical
standards available to all, it could promote interoperability among different digital platforms. It
would also provide a widely usable backstop means of payment, giving households the
security that they could exit the banking sector or private payment platforms to a digital,
financially risk-free asset.

If, in future, digital money denominated in other currencies became widely available, the
digital pound could play an important role in preserving sterling as the unit of account in the
UK. For example, by offering users the new functionalities in sterling as offered by new
non-sterling digital money, the digital pound would reduce the incentive to use such
non-sterling money.

23 A ‘digitally native’ form of money only exists in the digital world, rather than having a physical form.
 Page 29

Supporting innovation, competition, choice, and efficiency

Innovation boosts the UK economy and supports growth and inclusivity.
The way we make payments has evolved over centuries – from metallic coins, to banknotes,
to the paper-based use of bank deposits like cheques, to the range of options for payments
today. These innovations have benefited users, improved security, reduced frictions and the
cost of transactions and ensured the way we pay has kept pace with the demands of modern
life.

Recent innovations, within an appropriate regulatory framework, have opened up the

payments market, enabling new firms to enter, and have widened access to payment
services, resulting in improved user experience. Innovation leads to wider participation in
markets – by both providers and end-users – as well as improvements in convenience,
speed, cost, and choice. Such payments innovations increase productivity and hence the
growth of the UK economy.24 For example:

• ‘Contactless’ card payments, launched in 2007, are now used by close to 90% of
people and make up almost a third of all payments in the UK.25 This innovation has
benefited retailers and customers and increased the speed and convenience of
smaller transactions.
• Nearly a third of UK adults are registered for mobile payment apps such as
ApplePay or GooglePay.26 Such apps offer integration into ecommerce, security
benefits, and convenience.
• ‘Payment facilitators’ (for example, Zettle by PayPal, Square, SumUp) have helped
merchants, particularly smaller businesses, to accept card payments and join the
digital economy.27
• Open Banking enables consumers and small and medium-sized enterprises (SMEs)
to share their transaction data securely with trusted third parties and allows them to
initiate payments directly from their payment accounts to the bank account of their
payee, without the use of cards. Although in its early days, accepting payments in this
way is already reducing transaction costs for some businesses.28

24 Department for Business, Energy and Industrial Strategy (2021) – From ideas to growth.
25 Barclaycard (2021) – Tap, tap, tap: a brief history of contactless payments and UK Finance (2022) – UK
Payment Markets Report.
26 UK Finance (2022) – UK Payment Markets Report.

27 PSR (2021) – Market review into card-acquiring services.

28 Open Banking – How Open Banking can help businesses.

 Page 30

There is scope for innovation to generate further efficiencies in payments.

Innovation has not come to an end and there is likely scope for it to further reduce payment
costs and generate further efficiencies in payments.29 That improvement might be facilitated
by new technologies and new entrants to payments markets offering new functionalities.

Small and medium-sized merchants pay higher fees for accepting card payments than larger
businesses.30 The average merchant service charge for card payments was 0.6% of each
transaction in 2018, but the smallest merchants were paying over four times more on
average than very large ones (Chart B.3).31 Although these costs are not paid directly by
customers, they may feed into higher prices in the economy overall.

Elsewhere in the payments landscape, cross-border transactions in particular are often very
costly. The average cost of a payment sent to another country is about 6% of the value
sent.32

Chart B.3: Charges faced by merchants to accept cards are higher for smaller
businesses

29 This Consultation Paper focuses on the scope for innovation via the digital pound to generate further
efficiencies in retail payments. Innovation in UK wholesale payments, by contrast, is primarily being taken
forward through the Bank’s RTGS Renewal Programme and opening up access, for example to non-bank
payment system providers for settlement accounts.
30 Unlike card-based payments, cash handling between merchant and customer is free at the point of sale for a

cash payment. But the merchant does face costs associated with storage, transport and banking of cash.
31 Haldane (2020) – Seizing the Opportunities from Digital Finance.

32 The World Bank (2022) – Remittance Prices Worldwide Quarterly.

 Page 31

But innovation can come with risks of concentration.

UK authorities have identified several characteristics of digital markets that may lead to
concentration.33 Those suggest that the future development of private digital money issuance
could tend towards a small number of firms taking a significant market share. Such
characteristics include network effects (where platforms become more valuable to their users
as they grow), economies of scale and scope (which can act as a barrier to entry for small
firms), and data advantages (which allow incumbents to hone and personalise their products
in a way that is difficult for new entrants to replicate).

As recognised in a recent paper by the Financial Conduct Authority (FCA), ‘concentration and
market power are not inherently harmful. The success of a small number of firms can reflect
the fact they offer more innovative products, integration that benefits consumers, or greater
efficiency.’34

Market concentration might limit consumer choice, however. If operators or issuers of new
forms of private digital money were to develop and entrench dominant market positions, they
may create ‘walled gardens’ or payment systems with low interoperability (as discussed in
Part B in the context of risks to the uniformity of money).

Market concentration might also limit the ability of new firms to enter the marketplace. So
short-term innovation in digital payments might, under certain conditions, generate
dominance and reduce long-term innovation. Such outcomes might be detrimental to the
Government’s objectives around competition and innovation. For example, in 2022 the UK
Competition and Markets Authority launched an investigation into Google’s Play Store rules,
which obliged app developers offering digital content to use Google’s own payment system
for in-app purchases.

Authorities must remain proactive to support safe and sustainable innovation. In 2022, the
Payment Systems Regulator acknowledged that there is a ‘long-term risk to competition in
retail payments’ based on the existing concentration, and the difficulty for new firms to enter
the market to address this.35 And the FCA found that, while Big Tech firms’ entry in financial
services could benefit many consumers at least in the short-term, there was a risk in the
longer term that competition benefits could be eroded if Big Tech firms created and exploited
entrenched market power to harm healthy competition and worsen consumer outcomes. 36

33 The Furman Review for HM Treasury and the Department for Business, Energy and Industrial Strategy (2019)
– Unlocking digital competition: Report from the Digital Competition Expert Panel.
34 FCA (2022) – DP22/5: The potential competition impacts of Big Tech entry and expansion in retail

financial services. The paper predominantly considers Google (Alphabet), Apple, Meta Platforms (including
Facebook, WhatsApp, Instagram), Amazon and Microsoft.
35 PSR (2022) – The PSR Strategy and BIS Bulletin No 45 (2021) – Regulating big techs in finance.
36 FCA (2022) – DP22/5: The potential competition impacts of Big Tech entry and expansion in retail
financial services.
 Page 32

The digital pound can support innovation, choice and efficiency.

The digital pound would be a public-private partnership designed to support innovation and
competition. The Bank would provide core infrastructure and the settlement asset – the digital
pound – upon which a competitive ecosystem of private sector firms would provide innovative
user-facing payment services (Part D). This model of a flexible core platform would lay the
foundation for the private sector to innovate to provide new services to the public.

The digital pound could drive further efficiency in the provision of transaction services to
merchants and households. But, more importantly, it could provide an open platform for the
development of future services by the private sector. Experience of digital innovation to date
suggests that new services will emerge as digitalisation of daily life continues.

There are already examples of the direction in which the digital pound could support
innovation through improved functionality for users, such as programmability. Technology is
emerging that allows users to set rules to limit their spending on certain products, for
example on gambling, or to automatically save a small amount of money after each
purchase. This technology builds on existing, familiar applications like Direct Debit.

Programmability, delivered by Payment Interface Providers, could also enable the use of
smart contracts, which carry out specific actions based on pre-defined terms and conditions.
For example, a smart contract could be set up to immediately pay a supplier on signed
receipt of goods, rather than having to wait for an invoice to be issued and then paid. Another
type of function the digital pound could enable is micropayments, which are payments of
extremely low value. Supporting micropayments could enable new business models, such as
paying a small amount to read a single newspaper article, rather than having to pay for a
whole subscription.

The digital pound’s support for greater efficiency in retail payments in the UK would
complement the Bank’s efforts to enhance wholesale payments through RTGS Renewal.

The digital pound may offer other benefits. And it should not crowd out other forms
of digital innovation.
The digital pound may offer other benefits, aside from the primary motivations discussed in
this section (Box D). Those benefits might include payments resilience, support to financial
inclusion and improved cross-border payments. Importantly, the digital pound should not
crowd out or prevent other forms of digital innovation by the private sector.
 Page 33

For example, HM Treasury and the Bank are also establishing a regulatory framework for
systemic stablecoins.37 One possibility under consideration is that they could be backed by
deposits held with the central bank. Such a stablecoin would be economically like the digital
pound, but they could coexist and complement one another (Box E).

37The Financial Services and Markets Bill, which is being considered by Parliament, and relevant planned
secondary legislation, aims to bring fiat-backed stablecoins into the remits of relevant UK regulatory authorities.
The FCA would regulate activities including stablecoin issuance and custody. The Bank would have
responsibility for regulating systemic stablecoins, subject to a HM Treasury decision to recognise these as
systemic.
 Page 34

Box C: Future trends in payments drive the likely need for the
digital pound
The digital pound would only be introduced if it supported both the Bank’s and
HM Government’s objectives. A decision to proceed will depend on whether the
payments landscape evolves in line with current trends in the UK and abroad, and so the
Bank and HM Treasury’s priority is to build readiness should it be required. While we
cannot say for certain what the digital economy and payments landscape might look like
in coming years, we have identified key trends that may influence our decision to
proceed.

• First, whether, and how sharply, cash use continues to decline. While UK
authorities are committed to ensuring continued access to cash for those who
wish to use it, trends in recent years suggest the use of cash for payments may
continue to decline in the future.

• Second, the emergence of new forms of private digital money issued by new
payment entities. Today, card-based transactions (for example via Visa and
Mastercard) dominate retail payments in the UK. Banks connect with regulated
payment and technology companies, enabling electronic payments and
settlement with commercial bank money. But new business models and novel
technologies, including Distributed Ledger Technology (DLT), mean that
payments services can now be offered by non-bank firms. This includes the
potential for e-money, stablecoins and deposits at ‘narrow banks’.38 The
emergence and take-up of these new forms of private digital money is uncertain,
as is whether they are issued by existing financial institutions or new entrants and
start-ups.

• Third, whether new forms of private digital money display adequate

interoperability. This is how easily new forms of money can be converted into
existing (and other new) forms. It is also the ease with which new forms of money
can be transferred between individuals, as well as whether they can be spent in a
variety of places or only on particular platforms or locations.

• Fourth, international developments in CBDC and private digital money. Many

countries are exploring retail CBDC.39 Some are already live and some may be
introduced in more jurisdictions in the near future.40 A survey of central banks
showed that 68% consider it likely or possible that they will issue a retail CBDC in
the short or medium term.41 Some new forms of digital money might be issued

38 Deposits at banks with specialist payments-focused business models. Narrow banks typically hold very low
risk assets with maturities that match the bank’s liabilities.
39 For example, European Central Bank (2020) and Federal Reserve (2022).

40 For example, Central Bank of the Bahamas (2019).

41 BIS (2022) – Gaining momentum – Results of the 2021 BIS survey on central bank digital currencies.
 Page 35

that are denominated in currencies other than sterling, but still available in the
UK. These could be dollar (or other) denominated stablecoins or foreign CBDCs
available to UK residents.

In addition to these trends in retail payments, there is also innovation in wholesale

payments, which will be an important factor in shaping the future payments landscape in
the UK and globally. The Bank is renewing its Real-Time Gross Settlement (RTGS)
system to support more efficient wholesale settlement in central bank money. In 2024, a
new RTGS core settlement platform will be introduced, offering greater resilience and a
range of new features and capabilities. Wholesale settlement is discussed in more detail
in Box H.
 Page 36

Box D: Other motivations for the digital pound

Beyond its primary motivations, the digital pound may offer additional benefits.

The digital pound could improve resilience as an additional payment rail.

A key aspect of financial stability is the resilience of payment systems used daily by
households and businesses. Existing UK payments systems are already regulated and
supervised to ensure they are resilient. This intends to avoid disruption and ensures they
recover quickly on the rare occasions that disruption occurs. The digital pound could
improve resilience as a new payment system that could operate outside of existing ones
for digital pound-to-digital pound payments.

Like other digital payments systems, such as card networks, the digital pound would be
exposed to risks of electricity outages and cyber-attack. The Bank and other UK
authorities would need to ensure the digital pound had the highest standards of
resilience against such risks.

It could also complement existing financial inclusion initiatives.

Financial inclusion is relatively high in the UK and the Government has already made
good steps towards enhancing it. The digital pound could complement existing initiatives
as another option for some financially excluded groups (Box J). One way to achieve this
could be through offline payments – payments which can be conducted without a data
connection. While challenging to implement (see Technology Working Paper), this
could be valuable in remote areas or for users with limited internet access.

Using the digital pound to improve cross-border payments is an opportunity

but would take time and require international co-operation to deliver.
Cross-border payments are typically expensive, slow and opaque. Improving the existing
global infrastructure for these is a priority for the G20 group of governments, working
with the Committee on Payments and Market Infrastructures.

CBDCs such as the digital pound and those of other countries, would in principle offer
the opportunity to start from a clean slate, avoiding frictions that have built up between
existing national payments systems. But they would not address all frictions. For
example, CBDCs would not themselves alleviate frictions caused by different
Anti-Money Laundering regulations/Combatting the Financing of Terrorism (AML/CFT)
standards between countries. Addressing those is a focus of the G20 and several
initiatives are under way globally to improve existing systems (for example through
linking up national faster payments systems).

So, while enhancing cross-border payments is not a primary motivation for the digital
pound, we would work closely with other countries to ensure that its design did not
introduce unintended barriers to payments with other currencies and, in so far as other
countries issue their own CBDC, would offer the potential for interlinking.
 Page 37

Consultation questions

1. Do you have comments on how trends in payments may evolve and the opportunities
and risks that they may entail?
 Page 38

Part C: Monetary and financial stability

If introduced, the digital pound would need to support the Bank’s objectives for
monetary and financial stability.
The Bank’s statutory objectives are to maintain monetary and financial stability, which
includes maintaining low and stable inflation, and stable provision of credit to the economy.

The digital pound would contribute to the Bank’s objectives by acting as an anchor for the
wider monetary system, promoting trust and confidence in money and payments (Part B).

Care must also be taken in its design to manage any risks it could introduce to those
objectives.
The digital pound could also pose some risks, which would need to be managed before it
could be introduced. The introduction of the digital pound would require adjustment in the
financial system. Depending on the speed and scale of uptake by households and
businesses, the transition in particular could affect some bank business models. This could
affect the cost and availability of credit in the economy and there could also be an impact on
the transmission of monetary policy.

If a digital pound were to be introduced, the Bank would seek to limit such financial stability
and monetary policy risks through the design of the digital pound, particularly during that
transition period. The Bank would aim to ensure the digital pound’s introduction was orderly
and that the risks in transition were carefully managed.

The Bank does not, however, seek to preserve the status quo structure of the financial
system or to protect any business model within the commercial banking sector from the
impact of technological innovation and competition.

Financial stability
New forms of digital money, both the digital pound and stablecoins, could adversely
impact banks’ businesses models and affect the cost and availability of credit.
The introduction of the digital pound would result in households and businesses switching
some of their bank deposits to digital pounds. That loss of deposits for commercial banks is
known as ‘bank disintermediation’ and, depending on the speed and scale, could have
implications for financial stability.42

See Broadbent (2016), Mancini-Griffoli et al (2018), Andolfatto (2018), Kumhof and Noone (2018),
42

Meaning et al (2018), and Chiu et al (2019), among others.

 Page 39

As set out in the Bank’s 2021 Discussion Paper, banks losing deposits may replace them by
borrowing in wholesale funding markets to maintain the same level of lending. 43 To the extent
that wholesale funding is more costly than deposits, banks might pass this on in their lending,
by increasing the price of credit (loans) to households and businesses or reducing the
quantity of credit they are willing to supply, or both (Diagram C.1).

Diagram C.1: The movement of deposits from banks to digital pounds could
impact credit

43 First, banks lose central bank reserves, which are highly liquid assets, when they lose deposits. Second, in
order to maintain their regulatory liquidity and funding ratios, banks could raise longer-term wholesale funding
from capital markets to buy high-quality liquid assets (HQLA), such as government bonds.
 Page 40

The extent of bank disintermediation and impact on the cost of credit depends
crucially on the speed and scale of adoption of the digital pound. This is uncertain
and would vary between transition, steady state and stress.
The extent of bank disintermediation and the impact on the cost of credit would depend on
the behavioural response of households and businesses to the digital pound, including how
much of their money they would want to keep in that form. This is uncertain and very difficult
to forecast. And it would probably vary between transition, steady state and stress.

The illustrative scenario in the Bank’s 2021 Discussion Paper suggested that, under the
assumptions it used, the impact of even a very high degree of deposit disintermediation on
credit conditions in steady state would likely be modest. Assuming around 20% of
commercial bank retail deposits migrated to new forms of digital money (equivalent to the
total amount of non-interest-bearing deposits in the UK), bank lending rates were estimated
to rise by around 20 basis points in steady state, although there is considerable uncertainty
around this estimate.44

The speed of the transition to that steady state following the introduction of the digital pound
would matter, however. So it is particularly important to manage that period, during which the
behavioural response of households and businesses would become clearer, and the financial
sector would adjust.

Limits on holdings of the digital pound during a transition period would constrain the extent of
outflows from bank deposits and allow UK authorities to learn more about its impact (Part D).

Transition could take several years. During that period, there would be uncertainty about the
extent of deposit outflows, and for a given amount of outflows, banks’ ability to replace lost
retail funding with wholesale funding in a timely and cost-effective way. In turn, there would
be uncertainty about the impact on banks’ overall cost of funding and the extent to which the
cost and availability of credit may be affected. The non-bank sector’s ability to replace any fall
in bank lending to borrowers and the extent of any disruption to sterling money markets
would also be unclear.

In periods of banking or financial stress, where consumers seek safety and do not wish to
hold assets perceived as risky, demand for digital pounds could be particularly strong. If
outflows to digital pounds were particularly large and rapid, banks might be unprepared and
find it difficult to replace lost deposits. Existing bank regulation, which includes requirements
for banks’ liquidity holdings, and hence also their ability to draw on the Bank’s liquidity
facilities, provides resilience to the banking system against this risk.

44Under other assumptions the increase in lending rates might be around 80 basis points (Chart 3.4 in the
Bank’s 2021 Discussion Paper).
 Page 41

In time, the financial stability risks of large and rapid disintermediation due to a digital pound
could further diminish and should be manageable if the financial system had the time and
flexibility to adjust. That adjustment would be through the provision of greater long-term
funding to banks, or the provision of more market-based financing to the real economy.
However, as noted in the Bank’s 2021 Discussion Paper, there could be other increased
risks, including from banks becoming more reliant on wholesale funding and less on deposits.

Monetary stability
The digital pound would not fundamentally alter the traditional channels of money
creation, but it might affect monetary stability.
Today, money in the UK economy is created in two ways. First, the Bank can increase the
amount of money in the economy by creating reserves, which it exchanges for non-money
financial assets through open market operations. Second, commercial banks can create bank
deposits through lending. When a bank makes a loan, it simultaneously creates a matching
deposit in the borrower’s account, thereby creating new money.45 If introduced, the digital
pound would not fundamentally alter these channels or necessarily represent new money
creation.46 It would, however, be a new form of money for households to pay for goods and
services in their daily life.

The introduction of the digital pound could still have implications for monetary stability
though. First, via the transmission mechanism of monetary policy; second, via monetary
policy implementation; third, via the equilibrium interest rate and the effective lower bound
(ELB); and fourth, via productivity.

Bank disintermediation might affect the transmission of monetary policy to the real
economy.
The introduction of the digital pound could affect the transmission of monetary policy to the
real economy. The overall effects are uncertain – transmission could be weakened or
strengthened – and the Bank would monitor them closely. As set out in Box F, using the
digital pound as an additional tool for the transmission of monetary policy is not a policy
motivation for it.

If banks lost deposits to the digital pound, then they could become more reliant on wholesale
funding. It is unclear whether this would strengthen or weaken the monetary transmission
mechanism. On the one hand, if wholesale funding costs are more responsive to Bank Rate
than deposit rates, then increased use of wholesale funding might mean that bank loan rates
become more responsive to Bank Rate. On the other hand, recent research on the monetary

45 McLeay et al (2014) – Money creation in the modern economy.

46 See Box A in the Bank’s 2021 Discussion Paper and Box 4 of the Bank’s 2020 Discussion Paper.
 Page 42

transmission mechanism finds that banks’ use of retail deposits (as opposed to wholesale
funding) could strengthen the transmission of policy rate changes to loan rates. 47

Another way in which disintermediation could affect the monetary transmission mechanism is
via a greater proportion of lending being performed by non-bank financial intermediaries.
Recent research in the US and Denmark finds that lending by non-banks is typically less
responsive to monetary policy than lending by banks.48

These effects on the monetary transmission mechanism could be larger in times of stress if,
as described above, demand for the digital pound becomes particularly strong. To maintain
banks’ provision of credit to households and businesses in such circumstances and ensure
that monetary policy continues to be transmitted effectively, the Bank could conduct liquidity
and lending operations.

Keeping the digital pound retail-focused would help to ensure that monetary policy is
implemented effectively.
A core part of the Bank’s approach to implementing monetary policy is to keep short-term
market interest rates close to Bank Rate. The Bank transmits Bank Rate to short-term market
interest rates via the remuneration and supply of central bank reserves held by commercial
banks, a liability of the Bank. Should wholesale actors use the digital pound widely, this could
change the relationship between reserves and sterling money market rates. Keeping the
digital pound retail-focused – for example via holding limits – would reduce the likelihood of
such money market restructuring taking place. In addition, to ensure that monetary policy can
still be implemented effectively, the Bank would intervene to change the supply of reserves
more frequently or in larger size. Annex 2 considers the implications of the digital pound on
the Bank of England’s own balance sheet more broadly.

If households and businesses who hold bank deposits switched to the digital pound, that
would reduce the quantity of reserves held by commercial banks. If the introduction of the
digital pound did not reduce reserves below the level demanded by the banking system,
there would be no impact on the size of the Bank’s balance sheet (Annex 2). Instead, it would
simply change its composition, with fewer reserves and more digital pounds. However, if the
demand for the digital pound caused reserves to fall below the minimum level demanded by
banks at the target interest rate, the Bank would intervene to supply reserves to meet banks’
demand and ensure the effective implementation of monetary policy. 49

47 Drechsler et al (2017), Xiao (2020) and Polo (2021).

48 Nelson et al (2017), Xiao (2020), Elliott et al (2020) and Cucic and Gorea (2021).
49 The Bank recently published an Explanatory Note setting out its framework for ensuring short-term market

interest rates remain close to Bank Rate as the Asset Purchase Facility (APF) is unwound and reserves begin to
fall.
 Page 43

If demand for a digital pound grew gradually, the Bank’s Short-Term Repo Facility would be
available to meet demand for reserves. However, substitution into the digital pound could be
larger or more rapid in a stress. In this case, the Bank may choose to deploy longer-term
lending operations to supply additional reserves. In either case, all else equal, the creation of
reserves would increase the size of the Bank’s balance sheet.

No decisions have yet been taken on the framework for meeting demand for the Bank’s
liabilities (and therefore effectively implementing monetary policy) in the future.

The digital pound could affect the level of the equilibrium interest rate, with
implications for the conduct of monetary policy.
The ‘equilibrium interest rate’ is often thought of as an important guide for monetary policy. 50
It is the interest rate consistent with the economy producing output in line with its productive
capacity (‘potential’) and inflation at the target.51 As such it determines longer-term trends in
Bank Rate. For example, if a shock hit the economy and resulted in output being below (or
above) its potential, Bank Rate would need to be set below (or above) the equilibrium rate for
a period to return output to its productive capacity consistent with the Bank’s inflation target.

If introducing the digital pound were to lower the equilibrium interest rate, this would mean
the level of Bank Rate would need to be set lower on average. All other things equal, this
would imply that there is less scope to cut Bank Rate before hitting the effective lower bound
(ELB), constraining expansionary monetary policy more often. This is particularly the case if
the equilibrium interest rate is already low for other reasons.

We judge that the impact of the digital pound on the equilibrium interest rate is small,
though this is uncertain.
The Bank has considered ways in which the digital pound could affect the equilibrium interest
rate. To date there is little existing literature on the channels or the magnitude of such effects,
and so the Bank’s understanding of this issue is likely to develop over time. Two channels in
particular are worth considering at this stage.

First, bank disintermediation could lower the equilibrium rate. As described above,
disintermediation could lead to higher lending rates as banks experience higher funding
costs, and credit provision in the economy shifts towards non-bank lending, which may be
more expensive and difficult to access for households and smaller non-financial companies.
The resulting higher lending spread could be offset through a structural adjustment that
lowered the equilibrium rate.52

50 The equilibrium interest rate cannot be directly observed, but it is thought to have fallen in recent decades.
51 Bank of England (2018) – August Inflation Report.
52 This spread between the borrowing rate and the risk-free rate reflects the risk of the loan and the costs

related to intermediation. If this spread increased, for example, pushing up borrowing rates for a given risk-free
interest rate, investment would fall, and a negative output gap would open. A lower equilibrium rate is therefore
needed to offset the increase in the spread.
 Page 44

Second, the increased likelihood of deposit withdrawals could also lower the equilibrium rate.
The digital pound could make bank deposits more susceptible to more frequent inflows and
outflows because it could be easier to switch into digital pounds than into cash. As a result,
banks may choose to hold more high-quality liquid assets against the increased possibility of
high demand for withdrawals.53 This could lead to a lower proportion of banks’ assets being
available for longer-term lending: for example, the type of lending that might fund business
investment projects. This could slow productivity growth and in turn reduce the equilibrium
interest rate.

Overall, we judge that the impact on the equilibrium interest rate from the introduction of the
digital pound is likely small and probably slightly negative, though this is uncertain.

The digital pound could affect the level of productivity, but the direction is uncertain.
Productivity influences the economy in important ways, affecting key variables such as
output, employment and wages. It is a fundamental determinant of potential output growth
and the equilibrium interest rate.54 The digital pound could affect productivity in two opposite
ways, with possibly significant but highly uncertain impacts.

On the one hand, the digital pound could lift productivity, directly or indirectly. The direct
effect would be through enhanced payments efficiency as payments become faster and/or
cheaper. An indirect impact on productivity could also occur if the cost saving from more
efficient payments led to additional spending on productive activities, for example to fund
investment.55

On the other hand, the digital pound may result in bank disintermediation and tighter financial
conditions, reflecting higher funding costs or bank lending rates. That would lower
investment, weighing on productivity. These are the same channels that affect the equilibrium
interest rate, as explained previously.

Overall, the effects of the digital pound on productivity are highly uncertain and judged likely
to be small in steady state. But there could be a large effect during a transition period, if
banks adjusted to deposit outflows by relying on more expensive wholesale funding. Limits
on digital pound holdings would mitigate such bank disintermediation, so changes to the
equilibrium interest rate and productivity would likely be contained.

53 Ennis and Keister (2013) – Economic Growth, Liquidity, and Bank Runs.
54 Lopez-Garcia and Szörfi (2021) – Key factors behind productivity trends in euro-area countries.
55 Bank of England (2018) – Box 6, August Inflation Report.
 Page 45

Box E: Interactions between the digital pound and systemic

stablecoins
Stablecoins are a new form of digital money, issued by the private sector.
Stablecoins are a form of cryptoasset that aim to maintain a stable value, typically
against existing fiat currencies, by holding safe backing assets. As explained in the
Bank’s 2021 Discussion Paper, given their perceived safety, they have the potential to
become widely used in payments, particularly compared to unbacked cryptoassets (for
example Bitcoin).

If appropriately designed, within a robust regulatory framework, stablecoins offering

greater functionality than existing forms of electronic money could play an increasingly
important role in retail payments, offering benefits such as convenient and cheaper
payment services. As set out in Box A, novel features such as programmability, smart
contracts or micropayments, could drive demand for new digital payment methods.
Stablecoins might also improve consumer choice, better integrate into digital services
offering improved functionality, and promote competition. Currently, stablecoins are
traded and used as a settlement asset on centralised cryptoasset exchanges and used
in decentralised finance (DeFi) applications. But innovative functionality and attractive
use cases could result in a stablecoin achieving a large scale and becoming a systemic
payment method, widely adopted for retail and/or wholesale payments.

The Bank is working closely with the Financial Conduct Authority and HM Treasury to
establish the regulatory framework for systemic and non-systemic stablecoins, with
legislation currently before Parliament (Box B).

An important feature of systemic stablecoins is the asset used to back their

liabilities.
To meet the FPC’s expectations, we would expect that systemic stablecoin issuance
would need to be fully backed with high-quality and liquid assets.56 One model under
consideration would be for the backing assets to be held entirely with the central bank. If
backed by central bank liabilities, a stablecoin would be economically similar to the
digital pound. As the backing assets would be financially risk-free, it may be perceived
by end users as a safe alternative to traditional bank payments (though it would still be
exposed to operational risks). Another model under consideration would be to back
stablecoins with other high-quality liquid assets. In contrast to the digital pound,
stablecoins, regardless of their backing asset, would be a liability of the private-sector
issuer rather than a claim on the central bank. That means they would be private money,
like commercial bank deposits.

56 Financial Policy Committee (2019) – Financial Stability Report

 Page 46

Part C of this paper described how new forms of digital money that are safe or perceived
to be safe could cause commercial banks to lose some of their retail deposits, making
credit provided by banks to households and businesses more expensive. This risk to
financial stability might require imposing limits on the digital pound and/or systemic
stablecoins, at least in transition.57

Features other than the stablecoin’s backing assets would affect how similar
or different it might look to the digital pound.
Part D sets out our proposed design choices for the digital pound. These seek to
balance supporting the take-up of the digital pound and managing risks to monetary and
financial stability from its introduction.

Stablecoin regulation would need to consider the implications of any similarities and
differences between stablecoins and the digital pound, to ensure coherence in the
approach to monetary and financial stability risks, and prevent regulatory arbitrage.

In a mixed payments economy, the digital pound could coexist with, and
complement, a systemic stablecoin.
In the past, stability has been achieved by the coexistence of cash and
interchangeability of cash and bank accounts, and innovation through the introduction of
new banking products and services, for example Automated Teller Machines (ATMs) in
the 1960s.

As set out in Part B, the public sector can require uniformity between different forms of
money, for example through requiring banks to convert deposits into cash on demand.
Private-sector innovation in retail payments can then enhance users’ payments
experience and widen access to services.

There is scope for new forms of private digital money such as stablecoins to provide
further user benefits. But they could pose a threat to the uniformity of money (for
example if not easily converted into each other and/or existing forms of money), and to
competition (for example if a stablecoin issuer became dominant through network
effects, economies of scale and/or data advantages).

57The Bank’s 2021 Discussion Paper on new forms of digital money noted that ‘During any such ‘transition
period’, the Bank and other UK authorities may [therefore] wish to limit migration, so that the financial system
could adjust to the presence of new forms of digital money in an orderly fashion.’
 Page 47

Therefore, the Bank judges that even if there were a systemic stablecoin that is backed
by liabilities of the central bank, and looks economically similar to the digital pound, a
significant case for the digital pound would remain:

• The digital pound, issued by the Bank, would preserve access to retail central
bank money. As a claim on the Bank of England, this money would be supported
by the credibility of the issuing institution. This credibility is underpinned by the
institutional framework in which the Bank operates and its focus on public policy
objectives, as set out by Parliament.

• In much the same way that cash exists alongside private money, the digital pound
does not need to be a dominant form of money in order to meet its public policy
objectives. The digital pound could exist alongside other forms of money,
including stablecoins. However, private stablecoin issuers would not necessarily
have the same motivation to ensure the uniformity and interoperability of different
forms of money, given the commercial incentives to establish dominant market
positions. This could favour the creation of ‘walled gardens’ with low
interoperability. As discussed earlier in this consultation, such dominant positions
have the potential to be detrimental to innovation and competition in payments.

• Even setting aside these considerations for market structure, technological

challenges might limit the ability of private issuers to achieve wide interoperability.
Given the wide range of private providers and private systems in payments,
interoperability between all of them poses challenges for co-ordination. The digital
pound would provide public infrastructure with low barriers to entry to promote
innovation, and technical standards for interoperability. By doing so, and by
having the digital pound as a financially risk-free, widely available bridging asset,
this could also enhance competition between stablecoins, by helping users to
move between, and send payments to, different stablecoin networks.

• While regulation would seek to manage some of the above risks, the presence of
the digital pound might complement regulation and further reduce potential harms
to competition and innovation that might arise from non-interoperable stablecoins.
The digital pound could make it less likely that a stablecoin exploits network
effects to establish a dominant position in retail payments.
 Page 48

Box F: Assessment of monetary policy as a motivator for the

digital pound
Remunerating the digital pound, either positively or negatively, to make monetary
policy more effective is not a motivation for issuing the digital pound.

As noted in the 2021 Discussion Paper, paying an interest rate on the digital pound
could in principle provide the Bank with a new monetary policy tool alongside Bank Rate.
This is not a motivation for issuing the digital pound, which is one of the reasons it would
not be remunerated/interest-bearing (Part D).

Monetary transmission mechanism

The digital pound could in principle help to strengthen the monetary transmission
mechanism, by enhancing the impact of changes in Bank Rate on household spending
and saving decisions. A digital pound that pays interest – that is ‘remunerated’ – could
be designed to pass through changes in Bank Rate to its holders automatically. This, in
turn, could increase pass-through of Bank Rate changes to banks’ retail deposit rates.
For example, in response to an increase in Bank Rate and the interest rate paid on the
digital pound, banks may need to increase the interest they pay on their deposits by
more than otherwise, to avoid households moving their bank deposits into the digital
pound. Increased pass-through of changes in Bank Rate to bank deposit rates could
also increase pass-through to bank loan rates.

However, the economic response to a change in the interest rate on the digital pound
would be uncertain. The digital pound has never been used – indeed, no CBDC has to
date been used at scale in any economy – so there is much uncertainty about how
paying interest would affect the impact of changes in Bank Rate on the real economy,
including on households’ saving and spending decisions.58 There is also a risk that bank
disintermediation might work in the other direction and act to weaken, rather than
strengthen, the transmission of monetary policy to the wider economy.

The effective lower bound (ELB)

Following the global financial crisis, nominal interest rates in the UK and elsewhere
reached historically low levels. When nominal interest rates are low, there is a greater
risk of hitting the ELB – the point at which further cuts in Bank Rate no longer provide
additional stimulus. This limits the ability of monetary policy to stimulate the economy
should it be required. The precise level of the ELB is uncertain.59

58 For an explanation of how changes in Bank Rate affect the economy and inflation, see The monetary
transmission mechanism of monetary policy, Quarterly Bulletin, 1999 Q2.
59 Bank of England (2020) – Box 1, August Monetary Policy Report.
 Page 49

An important cause of the ELB is the existence of cash. Cash always pays a nominal
interest rate of zero. So if deposit rates fall below zero, depositors might decide to
withdraw deposits and hold cash rather than face negative interest rates. This means
banks might be unwilling to pass through cuts in Bank Rate to deposit rates below a
certain level. In turn, this might impede their ability to pass through Bank Rate cuts to
loan rates, and hence weaken the transmission of Bank Rate cuts to the real economy.

This has two implications for the design and impact of the digital pound.

First, applying a negative interest rate on the digital pound would not reduce the ELB.
Some commentators have argued that the potential to apply a negative interest rate to
the digital pound could enable the Bank to set a more negative Bank Rate. 60 That is, the
digital pound could help to reduce the ELB on Bank Rate, helping the Bank to loosen
monetary policy further in a low-interest environment, to meet the inflation target.61

However, this argument relies on the idea that the digital pound would replace cash. If
the digital pound were introduced, and if it paid a negative interest rate, depositors could
still convert their deposits to cash so long as cash were available, so applying a negative
interest rate on the digital pound would not reduce the ELB. The Bank and UK
authorities are committed to sustaining access to cash and meeting cash demand.62 The
digital pound would be designed to complement, rather than replace, cash.

Second, an unremunerated digital pound (ie one that paid no interest) could increase the
level of deposit rates at which the ELB occurs. That is because it gives deposit holders
another way to avoid negative rates on bank deposits. There are costs to holding
physical cash rather than digital deposits – such as storage costs and loss of
transactional convenience (for example for digital payments). This means that even
though cash does not pay interest, banks might be able to reduce deposit rates
somewhat below zero without losing large quantities of deposits to cash. Relative to
cash, the digital pound would have negligible storage costs and higher convenience for
online transactions. So the introduction of an unremunerated digital pound could make it
more difficult for banks to charge negative deposit rates without losing deposits. This
might increase the ELB for Bank Rate, and risk constraining monetary policy more often.

As explained in Part D, any decision to revisit our approach to remuneration would be

preceded by a review with full consultation. The Bank would provide adequate lead time
to allow holders of digital pounds to switch funds into or out of other forms of money
such as bank deposits and cash. Part D also explains why the digital pound would not
be remunerated, setting aside monetary policy considerations.

60 See Bordo and Levin (2017) and Haldane (2021).

61 In February 2021, the MPC decided to add a negative Bank Rate to the monetary policy toolkit. See the
minutes of this meeting. Also see Box 1 of the August 2020 Monetary Policy Report for more discussion of
negative policy rates.
62 Gov.UK (2021) – Access to Cash Consultation and HM Treasury (2022) – Protecting UK wholesale cash

infrastructure.
 Page 50

Part D: Our model for the digital pound

Part D sets out our proposed model for the digital pound and is organised around three
themes:

• Section D.1 sets out the platform model for provision of the digital pound. This
describes the roles and expectations of the Bank and of the private sector in its
delivery.
• Section D.2 sets out considerations around data and privacy. This describes the
robust protections around data protection and privacy for users that would be part of
the design for the digital pound.
• Section D.3 sets out the user experience. This describes the design features of the
digital pound that would benefit households and businesses and how they might
interact with it.

Our analysis has been supported by consumer and merchant research (Annex 3), the
discussions of the CBDC Engagement Forum (comprising senior stakeholders from across
business, academia, and civil society (Boxes K and L)), the Technology Forum (made up of
expert technologists) and outreach to major UK financial institutions (Annex 4). More detailed
information about design, and some principal technology considerations, can be found in the
accompanying Technology Working Paper.

The model for the digital pound set out in Part D is a proposal for a retail CBDC, designed for
everyday payments by households and businesses. That contrasts with a ‘wholesale CBDC’,
which would be for settlement of high-value payments between financial firms. Wholesale
CBDC is discussed in Box H of this paper, alongside coverage of the Bank’s collaboration
with industry to enhance wholesale payments through RTGS renewal and the RTGS future
roadmap.
 Page 51

Any model for the digital pound must meet a set of key criteria.
Based on the primary motivations set out in Part B, we have identified a set of criteria for the
model of provision of the digital pound. We judge the model set out here meets these criteria
and is the best design to support the objectives set out in Part B:

• To ensure that central bank money acts as the anchor of monetary and financial
stability, the model should ensure access to financially risk-free central bank money, a
direct end-user claim on the Bank and settlement finality for any transactions.
o The model should be interoperable with other forms of money, in particular
cash and bank deposits.
• To support innovation, choice and efficiency, the model should be extensible and
flexible reflecting the fact that the future payments landscape is innovative and
dynamic.
o The model should ensure a standard of operational resilience necessary for
major national infrastructure.

Our proposed model supports private sector innovation, safeguards data protection
and privacy, and promotes accessibility.
The model set out in this section is judged to be the best design to support the objectives set
out in Part B. It further supports private sector innovation, safeguards data protection and
personal privacy, and promotes accessibility.
 Page 52

Section D.1 The platform model and public-private partnership

The delivery of the digital pound would be a public-private partnership that reflects
the comparative advantages of each sector.
One of the digital pound’s principal aims is to support payments innovation by the private
sector. Publicly provided infrastructure that is open to use by all could catalyse innovative
and efficient payment (and other) services provided by the private sector. It could also
support participation in the digital economy by businesses – particularly small and medium-
sized enterprises.

Here we set out our high-level technology and operational architecture and define the
infrastructure that would allow digital pounds to be held, transferred and used for payments.
We also establish a boundary between what the Bank and the private sector would each do.
 Page 53

We propose that the digital pound should be designed as a platform model, as originally set
out in the Bank’s 2020 Discussion Paper. In the platform model, the Bank would issue the
digital pounds which would be recorded in a ‘core ledger’. The Bank would build and operate
the ledger – a highly secure, fast and resilient technology platform – which would provide the
minimum necessary functionality for the digital pound. Regulated private firms – Payment
Interface Providers (PIPs) and External Service Interface Providers (ESIPs) – could then
access the core infrastructure via an application programming interface (API). These private
sector firms would deal with all user-facing interactions, including handling customers’
information, and be able to develop and offer innovative services using the digital pound
(Diagram D.1).

The public sector would offer infrastructure to support private sector innovation.
In the platform model, a payment made in digital pounds between two users would be
processed and settled by a transfer on the Bank’s core ledger. Payment Interface Providers
(PIPs) would be responsible for initiating these payments, but the transfer of holdings and
settlement would occur at the central bank. The exchange of digital pounds into other forms
of money, for example bank deposits, would involve links to other payment systems.

As a retail payment system executing payments on a real-time basis, the digital pound
infrastructure must be operational 24/7 – i.e. at all times. There would be equivalent
expections for private sector firms involved in the ecosystem.

The private sector would be responsible for interacting directly with end users. They would
hold the customer’s information as banks do now. They would provide digital pass-through
wallets – an interface that offers payments services and related products to users. These are
known as ‘pass-through’ wallets because the user’s holdings of digital pounds are recorded
on the Bank’s core ledger, and the wallet simply passes instructions from the user to that
core ledger. The private sector would never be in possession of end users’ digital pound
funds. They would be responsible, however, for recording the identity of digital pound users
and carrying out any necessary Know Your Customer (KYC) and Anti-Money Laundering
(AML) checks. The Bank would receive payment messages instructing transfers on the core
ledger in anonymised form and would not know the identity of the payer and payee.

The platform model is agnostic to many technology decisions. For example, the core ledger
operated by the Bank might be centralised, running as a traditional database, or it might use
distributed ledger technology (that might be blockchain or another technology). These
concepts are discussed in the accompanying Technology Working Paper.
 Page 54

We consider that the platform model we have proposed best meets our criteria but
will test this further in the next phase of our work.
A platform model offers a robust and unambiguous user claim on the Bank, and supports a
diverse, innovative, and competitive Payment Interface Provider (PIP) and External Service
Interface Provider (ESIP) ecosystem. It also provides a single infrastructure to support
extensibility, offering common APIs for participants to connect to and build upon, as well as
managing changes and updates in a single place. Given the possible single point of failure
risk with the platform model, it would be necessary to ensure the infrastructure is protected to
the very highest standards, including working together with the National Cyber Security
Centre. Box G sets out alternative models of provision for comparison.

Diagram D.1: The platform model of the digital pound

 Page 55

The digital pound model must support innovation and competition.

The digital pound technology architecture must be flexible, adaptable and extensible.
‘Layered’ architecture comprises the public infrastructure (the core ledger), a significant role
for private innovators on the customer facing layers (wallets and devices) and standardised
components (API interface). These elements are important for supporting ongoing innovation
and ensuring the platform model can keep pace with developments in payments habits and
the wider digital economy.

The platform model of provision could support innovation and competition in three ways:

Mobilise Payment Interface Provider (PIP) participation: The digital pound would be
financially risk-free as market, credit, and liquidity risks are absent.63 PIPs, and the wallets
they provide, would never be in possession of end-users’ digital pound funds so do not pose
counterparty or credit risk to their customers. Therefore, PIPs are unlikely to need extensive
prudential regulation that is typical of some other types of financial institution. As a result, the
digital pound might offer an opportunity for payments innovators to mobilise their businesses
in a simple, safe and proportionate framework.

Accessible and open infrastructure: The digital pound, as an accessible public platform,
could allow new entrants to offer innovative payment services without the need to develop
extensive infrastructure or issue money of their own. The Bank would ensure that the digital
pound system was open to all innovators who meet the requirements for participation. These
would include regulatory requirements, complying with the Bank’s rules as the operator of the
digital pound system and being operationally robust. This openness may contrast with some
proprietary infrastructures, which might have incentives to be closed or exclusive.

Start-ups and non-financial companies could be encouraged to enter the payments market
too. The simplicity of digital pound services could make this system a ‘safe space’ for
innovation and might allow providers of wallets to have a wider variety of business models.
For example, media, e-commerce and technology firms might integrate digital pound wallets
to add payment functionality to their digital business models.

Extensible architecture: To keep pace with future payment needs, and support continued
innovation, the digital pound ecosystem must be extensible. Extensibility is a measure of how
easy it is to expand a system’s features over time without affecting its internal structure.
Extensibility would be an important part of the digital pound as it is difficult to predict what
future payments needs might be, and how the digital economy might evolve. The core ledger
would be a single piece of infrastructure that could be updated and upgraded as demands
and needs change.

63To note, however, that the possibility of conduct and operational risks including in relation to the activities of
Payment Interface Providers and External Service Interface Providers remains.
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Digital pass-through wallets allow customers to interact with their digital pound
holdings.
Digital pass-through wallets would allow users to hold and use the digital pound, which would
always be a direct liability of the Bank. Pass-through wallets contrast with a different type of
wallet where the user’s funds are held as a claim on the wallet provider or held in custody by
the wallet.

Wallet providers would be encouraged to provide an array of novel and user-friendly features
and services, but all wallets would need to provide certain minimum functionality:

• Access to digital pounds: customers must be able to register on the digital pound
ledger and open a wallet;
• Make payments: wallets should allow users to easily make and accept payments
from merchants, to other users, and commercial bank accounts, as well as switch
digital pounds into cash;
• View balances and transaction history: users must be able to view their activity;
and
• Mobility: customers must be able to switch easily between wallet providers and, if
desired, close their wallet.

There would be opportunities for businesses who do not wish to process payments.
External Service Interface Providers (ESIPs) might also participate in the digital pound
ecosystem. These are firms whose business is not payments. ESIPs might provide services
that augment digital pound wallets and are of value to users and merchants. Examples of
services they might offer include business analytics, budgeting tools and fraud monitoring.

Subject to appropriate controls and user consents, ESIPs might be granted ‘read’ access to
specific data on the digital pound ledger. A Payment Interface Provider authorised to operate
in the digital pound system would automatically be able to undertake the activities of an
ESIP.

Revenue models will be important for incentivising innovation.

Private innovation depends on the existence of appropriate incentives, and the provision of
infrastructure in support of innovation requires sustainable funding. As such, it is essential
there are commercial opportunities for PIPs and ESIPs in the digital pound system.

Given the wide range of business models and commercial propositions that could offer digital
pound services, it would be for the management of those firms to determine the appropriate
revenue models. Some possible revenue streams that might support the provision of digital
pound services are set out in Table D.2.
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Table D.2: Possible revenue streams that might support provision of digital pound
services

Revenue model Examples

Currently one of the most common revenue models for

Transaction fees levied on
payment service providers, such as acquirers. Affordable fees
merchants
would be needed to ensure access to public money.

Service or transaction fees Fees might apply on high-value, international and

levied on individuals business-to-business payments.

Subject to the legal and policy considerations set out in

Commercial use of data Section D.2, PIPs might use transaction data to improve
existing operations or to offer new customer-facing services.

Subscription or product PIPs might charge a subscription fee for premium services that
fees for value-add go beyond basic wallet functionality, for example budgeting
services. tools.

We welcome feedback from prospective Payment Interface Providers (PIPs) and External
Service Interface Providers (ESIPs), as well as wider stakeholders, on the revenue models
PIPs and ESIPs may wish to adopt and seek their views on the commercial viability of such
services.

We recognise that provision of digital pound services may be ancillary to some firms’ main
business activities, whose principal revenue streams might be generated from other activities
such as e-commerce, media or advertising. This poses the question of whether digital pound
related services must be viable on a stand-alone basis, or whether cross-subsidy or support
from other business activities or group entities may be appropriate. Cross-subsidisation, as a
pricing practice, has the potential to produce both positive but also negative effects for
consumers and the wider market, including leading to market concentration and/or
dependence on associated non-payments activities for the provision of critical digital pound
services.64 We welcome respondents’ views on this, as we will consider this issue in further
detail as the regulatory and operational requirements for PIPs and ESIPs are developed.

Involvement of non-financial firms could boost innovation and choice.

The participation of non-financial firms as PIPs or ESIPs in the digital pound ecosystem,
could bring significant benefits for choice and innovation. That would occur if they integrated
digital pound payments into their wider business, or they harnessed innovative capabilities
from their other activities.

64 Financial Conduct Authority (2016) – Price discrimination and cross-subsidy in financial services.
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For example, micropayments might allow content-sharing platforms and broadcasters to

generate revenues from individual content, rather than relying on subscriptions. Digital pound
wallets might also at some stage be integrated into ‘Internet of Things’ (IoT) devices for
machine-to-machine payments.

Firms from the following sectors might particularly benefit from adding a digital pound wallet
to their services, although this list is by no means exhaustive:

• Media and social media

• Broadcasters and content sharing platforms
• E-commerce and online marketplaces
• Retailers
• Device manufacturers, consumer and home electronics and developers of smart
and IoT devices
• Charities and community groups

Payment Interface Providers (PIPs) and External Service Interface Providers (ESIPs)
would operate within a robust legal and regulatory framework to protect users and
ensure the resilience and integrity of the system.
For the digital pound to command trust and confidence and to uphold the Bank’s mission of
monetary and financial stability, the system would need to be resilient and rigorously
governed and regulated.

PIPs and ESIPs would be robustly yet proportionately regulated to ensure resilience,
continuity of operations and protection of customers.65 The specific regulatory treatment of
PIPs and ESIPs in the digital pound system would be subject to further work by the relevant
authorities. The regulation governing them would be 1) based on the precise activity
performed, 2) proportionate to the risks they pose to themselves and the wider financial
system, and 3) agnostic to the nature of technology.

As operator of the digital pound system, the Bank would likely impose principles for operation
for PIPs and ESIPs, including technical standards, alongside regulatory requirements. Those
principles would be developed as the design of the digital pound system matures and as
likely business models become clearer but might include those set out in Diagram D.3.

65 Currently, in the UK, a number of regulatory authorities have supervisory remit in relation to the payments
sector – see the Financial Conduct Authority (FCA); the Prudential Regulation Authority (PRA); the
Payment Systems Regulator (PSR); and the Bank of England. There is ongoing work by HM Treasury, FCA,
PSR and the Bank to ensure the regulatory regime for payments keeps pace with innovation.
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Diagram D.3: Examples of principles for Payment Interface Providers (PIPs) and
External Service Interface Providers (ESIPs)

• Availability: executing payments instructions on a real-time basis, 24/7 with no

downtime.
• Security and resilience: effective end-to-end risk management to ensure services
are available, secure and protected from threats. This includes plans for orderly
transfer of users to other PIPs in the event of failure.
• Fast and convenient: provide fast, convenient and cost-efficient services.
• Interoperability: support exchange and conversion into other forms of money and
ease of transfer to other PIPs; including adherence to any system-wide technology or
operating requirements for interoperability laid down by the relevant authority.
• User friendly: promote ease of use among all users.
• Inclusion: offer access to payment services for the most vulnerable, or those in
vulnerable circumstances, thereby avoiding unintended exclusion.
• Diversity and innovation: offer products and services that meet, evolve with and
respond to societal changes and needs.
• Privacy: protect user privacy and give users control over who they share data with.

Activities of Payment Interface Providers might need to be restricted to safeguard system

resilience, and limitations may need to be set to protect the digital pound system from
financial and operational threats. This is to mitigate risks that might impair the system’s
functionality and availability for users.
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There could also be a risk of contagion from certain financial activities that a PIP might
undertake with non-digital pound funds, such as credit intermediation. These could threaten
financial or operational resilience, including the PIP’s provision of wallet and payment
services. We would monitor this and consider appropriate mitigants to ensure PIPs are
resilient and not exposed to financial risks that might threaten their operational continuity.

Payment fraud has increased significantly in recent years.

Fraud is a major issue. There were an estimated 5.2 million fraud offences in the UK during
2021, a 41% increase compared with 2019.66 In particular, there has been a substantial
increase in Authorised Push Payment (APP) fraud. These are scams where a payer is
deceived into authorising a payment to a criminal. According to UK Finance, APP fraud
losses increased by 71% during 2021 H1 to £355 million, surpassing the amount of money
stolen through card fraud for the first time. Given these trends, the digital pound would need
to be designed in a way that mitigates the risk of such fraud. Learning lessons from previous
implementations of digital payments innovations would be of paramount importance.

All entities in any digital pound ecosystem would have a responsibility to protect
consumers from fraud and uphold robust financial crime controls.
Protection from fraud is a material consideration for the digital pound and represents a
strategic issue for authorities and Payment Interface Providers alike. The mitigation of fraud
requires effective financial crime controls, particularly rigorous identity verification, and
analytics of user behaviours and payment patterns in the system. However, such safeguards
would have trade-offs for financial inclusion, privacy, and overall system cost, given that
identity verification and transaction monitoring would require resources and technology that
may be expensive, and data and proof of identity that some may struggle to access or
consider intrusive (Section D.2). The authorities will be mindful of this balance as they
explore the digital pound, and it would be a significant consideration in any eventual design.

PIPs participating in the digital pound system would be held to at least the same standards
relating to financial crime as those to which regulated payment services providers are held
today, including to prevent money laundering, terrorist financing, and fraud.

No system is fool proof, and like any digital payment system, the digital pound would be
exposed to fraud risk. A liability and compensation framework for instances of fraud in the
digital pound system would be needed. Further in-depth consideration will need to be given,
by the relevant authorities in consultation with stakeholders, on the optimal liability and
compensation framework for instances of fraud in the digital pound system.

66 See ONS Crime Survey for England and Wales.

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Box G: Alternative models of provision to the platform model

While the platform model is our preferred approach, there are other provisioning models
that have been proposed. We set those out here. While these models do not, at this
time, appear as suited to our policy objectives they are viable alternatives and may
inform some part of any ultimate implementation. The platform model is the basis of an
illustrative conceptual model within the accompanying Technology Working Paper.

An alternative approach is a delegated model.

Another approach would be a ‘delegated’ model. In this model, rather than have all
holdings stored on the core ledger, individual Payment Interface Providers (PIPs) would
have their own ledgers recording customer holdings. Transactions between users with
the same PIP would occur on that PIP’s ledger. For users of different PIPs, the
transaction between them would be facilitated on the Bank’s core ledger. The core
ledger in the delegated model records the movement of funds between different PIPs.
This contrasts with the platform model, where the core ledger would process every
transaction between every user.

We judge that a delegated model is less effective at meeting our criteria. In this model,
the PIP rather than the Bank has a record of a user’s holdings of digital pounds. This
could undermine how clear and direct the user’s claim on the Bank is. This approach
also places greater technical and operational requirements on PIPs. That may be
advantageous in reducing risks of the core ledger as a single point of failure, but could
increase mobilisation requirements, making it harder for smaller firms to act as PIPs.

A bearer instrument model is not appropriate.

Another approach is a bearer instrument model, where ownership of digital pounds is
recorded on individual user devices, and transactions take place between users, with no
interaction with the central bank. This is close to the way cash works at present. Such an
approach presents several challenges. While hardware devices (for example, phones,
wearables, cards) are difficult to hack, if that happens it is difficult to detect and to fix.
Further, there is no trusted intermediary involved in transactions. That could give rise to
‘double spend risk’, where a user attempts to copy and spend the same digital pound
multiple times. Also, a bearer instrument approach, where users never have to check
back in with a central ledger, would lead to completely anonymous payments. This
would go against our design principles for privacy and data protection, as well as laws to
prevent financial crime (see Section D.2).

There is additional complexity for conducting transactions between two individuals over
distance as both hardware devices would need to be updated accurately. For these
reasons, bearer instrument models are not appropriate as the only operating model for
the digital pound, but they may have uses as part of other use cases: bearer instruments
may be the best approach for offline payments, for example.
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Reserve backed stablecoins would be economically similar to the digital

pound, but are not a CBDC.
A non-bank stablecoin could have backing assets held entirely with the central bank.
While this would be economically similar to the digital pound, such a stablecoin would be
a liability of the private-sector issuer rather than a claim on the central bank. Such an
approach has been described by some as ‘synthetic CBDC’ but, given the user’s claim is
not on the central bank, this is not considered a CBDC, and is therefore not under
consideration as part of our models of provision.67

67BIS (2020) – Central bank digital currencies: foundational principles and core features provides further
discussion of the term ‘synthetic CBDC’.
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Box H: Wholesale CBDC

Retail and wholesale CBDC
The Bank and HM Treasury are consulting on a proposal for a retail CBDC that would
allow central bank money to be used in electronic form for everyday payments by
households and businesses.

Wholesale payments are high-value transactions, typically between financial institutions,

including the settlement of securities and foreign exchange. At present, the Bank
enables wholesale settlement through the Clearing House Automated Payment System
(CHAPS) and its Real-Time Gross Settlement (RTGS) service, whose participants
include financial market infrastructures. The balances held within RTGS are a direct
claim on the Bank of England and therefore a form of wholesale central bank money, as
set out in Diagram B.2.

New technologies present the opportunity to innovate in the provision of wholesale

money to financial institutions. Firms and public authorities, including the Bank of
England, have been active in exploring them, through the enhancement of existing
infrastructure or the concept of establishing a new wholesale CBDC platform.

There are many different models under investigation and different potential solutions or
technologies to deliver enhanced provision of wholesale settlement in central bank
money:

• Transparency: using modern data interfaces and automation to allow financial

firms and end users to be informed in real time about the status of payments and
reach consensus for transactions to proceed;

• Availability: providing reliable settlement services on a 24/7 basis;

• Efficiency: minimising frictions in delivery of wholesale settlement;

• Atomicity: complex transactions can be made safer and more efficient by

coordinating movements of assets and funds across different ledgers; and

• Access: expanding the use of central bank money for settlement, both by
increasing uptake among already-eligible institutions and by extending eligibility
to more types of institutions.

In delivering those outcomes, a wholesale CBDC could facilitate the innovation and
experimentation that is taking place in wholesale markets, such as the development of
DLT-based exchanges and settlement systems where tokenised financial securities
could be issued and traded.
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There are three broad approaches that could be adopted to realise these benefits:

1. Enhance existing systems

2. Enable private sector innovation

3. Establish a new wholesale CBDC platform

1. Enhance existing systems

The Bank already provides central bank money in electronic form for wholesale
settlement through its RTGS service. The Bank is improving this service through a
transformational initiative to renew and enhance the current system. 68 At the heart of
this is the delivery in 2024 of a modern, flexible and efficient core settlement engine,
which will be modular, flexible and based on open standards (including ISO20022 for
messages).

Following consultation with industry, the Bank is developing a roadmap for RTGS
beyond 2024.69 This will deliver greater digitisation of wholesale settlement and
represent a fast and well understood approach to realising many of the benefits
commonly associated with a wholesale CBDC.

The key features that will be delivered in the improved service are:

• The Bank will increase the transparency, efficiency and speed of information
exchange through adopting the ISO 20022 standard and through the provision of
APIs, and plans to expand the range of available APIs over time to meet user
needs.

• The Renewed RTGS will be more available and capable of extending near 24/7
operation. The Bank plans to explore which approach to operating hours delivers
most value to industry while meeting our public policy objectives.

• The Roadmap for RTGS beyond 2024 includes proposals to deliver atomicity by
allowing third parties using DLT to coordinate transactions between RTGS and
other ledgers. The Bank continues to explore this via Project Meridian, a joint
initiative with the BIS Innovation Hub London Centre which is prototyping and
testing the end-to-end flow of synchronised settlement.

68 Bank of England – RTGS Renewal Programme.

69 Bank of England (2022) – Roadmap for RTGS Service Beyond 2024.
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2. Enable private sector innovation

Within the RTGS Renewal Programme, the Bank’s focus has been to develop our
roadmap for ongoing improvements to the RTGS service, in line with industry feedback
and incorporating elements from previous proofs of concept and experiments. These
have included:

• DLT Proof of Concept: a project to explore and demonstrate basic functions of

wholesale settlement using DLT.70 The Bank built on this work via a second
exercise working with Baton Systems, Clearmatics Technologies Ltd, R3 and
Token to ensure our renewed RTGS service could connect with systems based
on DLT and other innovative technologies.71

• Cross-border Synchronisation: a joint project with Ripple demonstrating that

synchronised FX transactions in two different simulated RTGS systems can be
achieved, leading to the incorporation of synchronisation functionality into the
roadmap for renewal.72

Building upon this collaboration with industry, the Bank has developed new policies and
structures to enable the benefits of innovative technologies to be delivered by new types
of private sector firms.73

In 2017, the Bank widened access by making non-bank payment service providers
eligible to apply for a settlement account in RTGS.

In 2021, the Bank launched its Omnibus Account policy, which allows an operator of a
payment system to fund their participants’ balances with central bank money.74 The
Bank has already accepted an application for an operator that uses DLT. Omnibus
Accounts will allow private sector operators to provide settlement in central bank money
in ways that deliver the benefits of transparency, availability and atomicity, while also
supporting innovative use cases of central bank money to improve access.

The Bank continues to engage with private sector firms to understand potential new
models of wholesale settlement and how these can be supported going forward.
Alongside this work, the Government announced in April 2021 the creation of a new
sandbox for firms exploring how to use technologies such as DLT to improve financial
market infrastructure. The sandbox will be delivered jointly by the Bank, HM Treasury
and the FCA, and will launch later in 2023.

70 Bank of England (2016) – PwC FinTech Accelerator Proof of Concept.

71 Bank of England (2018) – Baton Systems, Clearmatics Technologies Ltd, R3 and Token proof of
concept.
72 Bank of England (2017) – Ripple proof of concept.

73 Cunliffe (2022) – Reflections on DeFi, digital currencies and regulation.

74 Bank of England (2021) – Bank of England publishes policy for omnibus accounts in RTGS.
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3. Establish a new wholesale CBDC platform

A new platform could enable a wide range of new technological capabilities. However, in
the UK, this approach would have a long lead time compared to the renewed RTGS
which will start delivering in 2024.

The global central banking community continues to experiment with technologies

associated with wholesale CBDC (including establishing new infrastructure). The Bank
engages closely with such initiatives to evaluate whether wholesale CBDC technologies
offer benefits to the UK and, if so, whether they might best be delivered via the renewed
RTGS service, or whether new infrastructure might be needed. In particular, the Bank is
closely involved with the work of the BIS Innovation Hub, especially its London Centre,
so is well positioned to understand and learn from the range of experiments and
approaches being trialled internationally with regard to wholesale CBDC, and wholesale
settlement more broadly.75

Diagram D.4: The Bank of England’s vision for RTGS

Consultation questions

3. 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?

75As at July 2022, 28 central banks were investigating CBDC with wholesale applications in some capacity
(proofs of concept or research). Auer et al (2022) – Rise of the CBDCs: drivers, approaches and
technologies.
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Section D.2 Data protection and privacy

The digital pound would be subject to rigorous standards of privacy and data
protection. This is fundamental to trust and confidence in money.
Individuals' privacy, user control and the proper use of personal data in line with UK data
protection laws are of paramount importance to the public, the Bank and the Government.
Research by the Information Commissioner’s Office (ICO) shows that the public continues to
be concerned about issues relating to the storage and use of their personal data. 76 Those
issues have become more important as the UK economy has become more digital. Access
to, and use of, personal data has also become increasingly commercially valuable for firms,
making informed choice and control around the sharing and use of data by consumers
critical.

Transparency and clear understanding of the rights and tools around personal data will
promote good data use, which is critical to the success of the digital pound.

76 ICO (2021) – Information Rights Strategic Plan: Trust and Confidence, page 14.
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All digital payments made by individuals today, such as card payments or bank
transfers, generate personal data.
Digital transactions like debit card purchases or bank transfers generate personal data in
relation to location, time and date, method of payment and transaction value. Digital
transactions account for the majority of transactions in the UK today.

These personal data are held and used by providers – banks and other payment firms
– for anti-fraud and financial crime reasons.
Personal data from bank account transactions is used and stored by firms to comply with
legal and regulatory data capture requirements in the UK’s Anti-Money Laundering (AML)
and Combatting the Financing of Terrorism (CFT) Regimes. For example, those regimes
require that users’ personal data is captured by firms in order for them to carry out the
customer due diligence, or sufficient monitoring required to detect money laundering. 77 Firms
also have to comply with data capture requirements in the UK’s Payment Services
Regulations 2017.

Access to these data is governed by applicable UK data protection laws, which are
supported by ICO guidance.
As with all personal data controlled and processed – including personal data from bank
account transactions – firms also have to comply with UK data protection laws.78 Subject to
UK data protection law, such personal data can also be used and stored by providers to
manage commercial relationships, develop marketing activities as well as develop and tailor
products and services.

Law enforcement agencies or competent authorities which seek to access and

process personal data for the primary purpose of law enforcement have to do so on a
fair and lawful basis.
Today, law enforcement agencies and competent authorities can seek to access personal
data held by firms, for example bank account transactions data, so long as the primary
purpose is law enforcement. This purpose is defined in Section 31 of the Data Protection Act
2018 as the prevention, investigation, detection or prosecution of criminal offences or the
execution of criminal penalties, including safeguarding against and prevention of threats to
public security.

Firms that hold personal data can also share those data provided that there is a lawful basis.
For example, firms might share personal data where there is a need to report a crime or
comply with a formal request or court order from a law enforcement authority.

77 The UK’s AML and CFT Regime includes the Money Laundering, Terrorist Financing and Transfer of
Funds (Information on the Payer) Regulations 2017, and the Funds Transfer Regulation 2015.
78 UK Data Protection Law includes the UK General Data Protection Regulation, the Data Protection Act 2018

and the Privacy and Electronic Communications Regulations 2003.

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Before sharing individuals’ personal data, Article 6(1) of the UK GDPR requires that firms
must be satisfied that sharing personal data with a law enforcement authority is lawful. This is
because firms are obliged to protect the personal data of individuals that they control and
process.

The digital pound would have at least the same level of privacy as a bank account
and would also allow users to make choices about data use.
Responses to the Bank’s 2020 Discussion Paper emphasised the importance that users
place on having privacy in their transactions. Security and privacy were often cited as
aspects on which there should be little or no room for compromise. The Bank and
Government agree, and this perspective informs our proposals for the digital pound’s design.

We therefore propose that the digital pound is at least as private as current forms of digital
money, like the money in a commercial bank account or e-money. Digital pound users will be
able to make choices about the way their data is used. We are supportive of, and encourage,
firms to offer services that enable holders to opt for enhanced privacy functionality and exert
greater user control of personal data. The digital pound will be set up in a way that enables
this.

Diagram D.5: Privacy objectives for the digital pound

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As set out in Diagram D.5, the key objectives of the digital pound in the context of privacy
and data protection are that:

• Neither the Government nor the Bank would have access to digital pound users’
personal data except for law enforcement agencies under limited circumstances,
prescribed in law, and on the same basis as currently with other digital payments.
• The digital pound would not be anonymous because the ability to identify and verify
users is needed to prevent financial crime.
• Users should be able to choose from a range of wallet services – varying levels of
identification would be accepted to cater to different preferences and ensure that the
digital pound is accessible for all.
• Users should be able to vary their privacy preferences to suit their needs, within
parameters set by the law and the Bank and the Government as part of system
design.
• Enhanced privacy functionality could result in digital pound users securing greater
benefits from sharing their personal data.

The Bank of England, as operator of the payment system, would not have access to
personal data.
Our proposal for the digital pound foresees that Payment Interface Providers (PIPs) would
manage user wallets, but the Bank would run the digital pound infrastructure by operating
and maintaining the core ledger.

PIPs would anonymise personal data before any sharing with the Bank (Diagram D.6). It is
crucial that, from the Bank’s perspective, these data would be anonymised and not be
considered personal data. The Bank will conduct tests, and evaluate the legal, technical, and
operational standards needed to operationalise such a system in the next phase of its work.

Access to some data may be useful in the running of the core ledger, and to support
innovation. We propose that while the Bank would not have access to users’ personal data, it
should have access to anonymised transaction data and aggregated system-wide data. This
would provide an overview of the total transactions – for example, volumes and values –
taking place over a given period.

Those data could also provide insights that may support innovation and improve the provision
of services to both digital pound users and PIPs. The Bank and HM Treasury will consult on
what data might be collected and for what purposes in due course.
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As is the case today with private forms of digital money such as bank accounts, law
enforcement agencies and competent authorities could only access digital pound
data where there is a fair and lawful basis. This is in compliance with data protection
laws.
Law enforcement and competent authorities may need information on digital pound
transactions to carry out law enforcement or intelligence investigations. In the same way and
on the same basis as currently for existing commercial bank accounts, any law enforcement
or Government agency that seeks to access and process digital pound users’ personal data
from PIPs would have to do so on a lawful basis in compliance with the Data Protection Act
2018.

Outside these instances, and as is the case for other existing forms of digital money including
bank accounts, the law enforcement agencies and competent authorities would not have
access to digital pound users’ personal data.

Diagram D.6: Users will interact with intermediaries, rather than directly with
the Bank
 Page 72

The digital pound would not be anonymous because, just like bank accounts, the
ability to identify and verify users is necessary to prevent financial crime. Payment
Interface Providers (PIPs) would gather and have access to personal data.
Just like opening a bank or other payment account, some level of identity verification would
be required when opening a digital pound wallet, in order to prevent financial crime. These
requirements would be consistent with those that legally apply today and in the future for
financial and payments institutions. The UK Digital Identity and Attributes Trust Framework,
including the confidence levels outlined in Good Practice Guide 45, could be used by PIPs
and users to support access to a digital pound.79

PIPs would hold the direct commercial relationships with users. To establish and maintain
these relationships, PIPs would require identity information of wallet account holders, which
would allow them to carry out KYC checks and comply with AML regulations. They would be
responsible for ensuring their compliance with data protection law and the preservation of
digital pound users’ privacy rights. Digital pound users would continue to be able to protect
their personal data to today’s legal standards and future data protection rights.

Small cash payments are anonymous but larger value transactions require more data
collection to help mitigate financial crime.
Cash, as a physical form of money, has lower amounts of data collection than other forms.
However, the UK AML and CFT Regime dictates that additional information about the payer
must be collected for large-value transactions made in cash.

The digital pound would have lower frictions than physical cash, so carries higher
risks of abetting crime. It is not therefore appropriate to allow such anonymity for
digital pounds.
The physical, as opposed to digital, nature of cash means that it is harder to make large
payments with, or store large amounts of, cash than it is to do the same with digital money,
which in itself acts to limit the scale of its use in financial crime. In this regard, the digital
pound would be more similar to a bank account than cash and hence it would be
inappropriate to allow large-scale anonymous transactions in digital pounds.

However, we are supportive of exploring ways to allow small numbers of small value
transactions in digital pounds to have higher levels of privacy.
It may, however, be appropriate and possible to allow low values of digital pounds to be
spent with lower data collection requirements. We are supportive of firms exploring this in two
ways: tiered identity verification and enhanced privacy controls.

79 The Trust Framework creates a set of rules and standards to facilitate common recognition and
interoperability of certified digital identities. This allows an individual to bind personal information to their digital
identity and share this information as needed. The system allows for information to be established with varying
levels of confidence. These levels of confidence are stipulated by a combination of the number of pieces of
identity evidence, the strength and validity of the evidence, their activity history, and identity fraud.
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Digital pound users should be able to choose from a range of wallet services. Varying
levels of identification would be accepted to ensure services are accessible for all.
An important way in which different services can be provided to users, reflecting differing
preferences and to ensure accessibility for all, is to support and encourage tiered access to
the digital pound.

Tiered accounts – allowing customers to make low value digital payments with lower KYC
requirements – exist in the payments market today. Many existing payments firms develop
and shape their customer value propositions around what is legally permitted by linking the
strength of user identity verification to access and payments functionalities.

For the digital pound, tiered access would allow for different levels of user access and
functionality based on the amount of identification (ID) a user is willing or able to provide. The
stronger ID information a user provides, the more types and higher values of payments they
would be able to undertake. For example, users might be able to open a basic digital pound
wallet with limited ID, which would allow for limited functionality, low-value payments. For
more advanced and higher value services, users would provide more or stronger forms of ID.
This tiered approach would link the strength of a user’s proof of identity to the transaction
amounts and types permitted in their digital pound wallet.

Basic access to the digital pound wallet with limited identity verification can be designed so
as to be consistent with existing legal requirements in the UK AML and CFT Regime and the
Payment Services Regulations 2017. To support access to the digital pound, HM Treasury
and the Bank would be supportive of the private sector developing and offering basic tiered
access to all users and welcomes views from respondents on this point.

Digital pound users should be able to vary their privacy preferences to suit their
needs.
HM Treasury and the Bank of England would seek to provide for a digital pound that offers
users control over their personal transactions data. This is consistent with the UK’s National
Data Strategy and the Government’s aim to create an environment where data is
appropriately usable, accessible, and available across the economy, while protecting
people’s data rights and private enterprises’ intellectual property.

Some private providers currently offer the option to shield some personal data generated
when making some forms of digital payments for privacy or security reasons, for instance
with prepaid and disposable cards. For these services, providers must collect the data that is
required for legal purposes, for example in the course of AML checks, but (unlike in many
other services) they do not collect additional data. Subject to user agreement, the data which
digital pound users decide not to shield could be used by Payment Interface Providers for
commercial purposes, for example to provide additional value-added services.
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The digital pound should be designed to enable PIPs to offer such services. Users’ control
over personal data generated by their transactions could be achieved by designing a system
that supports good data protection and privacy by design which includes privacy-enhancing
techniques. This is explored in more detail in the Technology Working Paper.

Any commercial use of personal data would need to comply with UK data protection laws.
Informing digital pound users of their rights, the value of their personal data and putting at
their disposal the tools to control that data might provide users with the opportunity for
additional choice or convenience and would help build the trust that will be essential to the
uptake of the digital pound.

Enhanced privacy functionality could result in digital pound users securing greater
benefits from sharing their personal data.
The UK has been at the forefront of the successful execution of increased data sharing to
benefit consumers. For example, Open Banking enables customers to direct their banks to
securely share their data with third-party providers and has led to the emergence of
innovative services and benefits for customers.

Research commissioned by the ICO found that choices over personal data are very important
to consumers who want to understand what they can do with their personal data, for example
preserving or maintaining their privacy or even securing economic value from its use. There
is public appetite for trading personal information for access to products and services.80

The UK’s National Data Strategy recognises that a data ecosystem which removes barriers
to responsible data-sharing and use has the potential to transform almost every part of our
society and economy. Mission 1 of the Strategy is focused on unlocking the value of data
across the wider economy. Lawful use of digital pound data – governed by choices made by
users of the digital pound – could contribute to this strategy.

Consultation questions

4. 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?

5. What are your views on the provision and utility of tiered access to the digital pound
that is linked to user identity information?

6. 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?

80 ICO (2021) – Information Rights Strategic Plan: Trust and Confidence, page 5.
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Section D.3 User experience for households and businesses

Diagram D.7: the user experience of the digital pound

People and businesses would be the main users of the digital pound.
The digital pound would be designed for households and businesses to use for everyday
payments – both in-person and online. This section set outs aspects of design that are
relevant to individuals using the digital pound (for more information on how businesses might
use the digital pound, see Box I).
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The digital pound would support two essential types of payment:

• Person-to-business (P2B) – both ‘in-store’ (such as buying groceries in a supermarket)

and ‘online’.
• Person-to-person (P2P), such as sending money to a friend.

The Bank’s recent consumer research found that most (88%) P2B in-store payments are
made using debit and credit cards, but cash is still relevant for two in five consumers.81
Online, card payments are most popular (74%), while other options such as wallets like
PayPal provide an increasingly used alternative. That is likely because convenience and the
speed of notice of receipt of payment are the most important factors in the payment
experience.

There may be scope to improve existing methods used by individuals to make transfers.
There are generally fewer methods available for P2P payments compared to options for
when individuals pay businesses, and current P2P payments can be inconvenient. The
Bank’s consumer research found that 81% of respondents made a P2P payment, mostly by
online bank transfer.82 The digital pound could offer an easy method of P2P payment and
add to the current choices available.

All UK residents would be able to hold and use digital pounds. Non-UK resident individuals
would be able to hold and use digital pounds when visiting the UK (for example, as tourists),
and when outside the UK for payments with either a UK or non-UK resident. To ensure
consistency and equal treatment, non-residents’ holdings of digital pounds would be on the
same basis as residents.

Non-resident access would involve two requirements. First, a recognition regime to determine
which non-UK Payment Interface Providers and External Service Interface Providers could
offer digital pound wallets and other services. That would ensure that UK standards of
resilience, consumer protection, AML, KYC and any other legal requirements are upheld.
Second, the UK authorities might reserve the right not to grant access to digital pounds for
non-residents from certain high-risk jurisdictions. That includes potentially considering the
Financial Action Task Force’s list of countries judged as having weak regimes to combat AML
and CFT.

81Market research (Annex 3).

82As part of the Bank’s market research with YouGov and London Economics, 72 participants took part in a
discussion forum. This included a seven-day payment diary. See Annex 3 for further information.
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Payments in digital pounds may involve a variety of devices.

Users should be able to make and receive digital pound payments in a range of ways,
including, but not exclusively:

• Smart devices, in particular smartphones, but also desktops, laptops, tablets,

wearables, and Internet of Things (IoT) devices;
• Smart cards, similar to existing payment cards today;
• E-commerce websites and applications; and
• Point-of-Sale (PoS) devices, including those that exist in stores today.

Ultimately, the specific devices and form factors would be developed by private providers.83
The Bank would still have a role in defining aspects of how they operate, and ensuring they
meet necessary standards for accessibility and inclusion.

Users would be likely to make digital pound payments using smartphones or cards.
Based on current trends in payments, we expect that most users would access their digital
pounds via a wallet hosted on their smartphone. Users would be able to sign up for a wallet,
which would allow them to manage their balance and make payments. Payments could then
be made either by placing a smartphone near a reader, much like with card or mobile
payments today, or by using the digital pound wallet to send a payment to another person or
business (Diagram D.8). Payments would be quick, with immediate confirmation that the
payment has been processed alongside updated balances.

Digital pound payments under the proposed model could also use options such as physical
cards, which would help support financial inclusion and accessibility. That is because not
everyone has a smartphone, and some people find them difficult to use.

Initially, using digital pounds would be designed to feel like existing payment methods. It
would need to be designed to work with existing online and in-store payments technology,
such as card readers. That would mean that merchants would not have to buy new
infrastructure, encouraging adoption.

Encouraging innovation is a priority for the digital pound. We expect that innovators could
develop new devices and ways to pay which offer more convenience and functionality. That
might include devices such as wearables (for example, smartwatches or wristbands) and IoT
devices (for example, smart speakers, intelligent fridges or TVs).

83 Form factors include, for example, smartphones, tablets, wearables, smart cards etc.
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Diagram D.8: The digital pound would be compatible with different devices to
ensure it can be used for making and accepting payments.

Although in-store, online and person-to-person payments would be the initial focus of
the digital pound, that may broaden out in future.
All payments should be able to be made using the digital pound so long as they are lawful,
observe any restrictions (for example, maximum user holdings – see below) and comply with
regulatory obligations laid down by authorities. Subject to a payment being lawful, the Bank
would be neutral in processing it, and does not envisage applying any limitations on
payments on ethical grounds.

Over time, we would expect the digital pound to enable a broader range of payments than
those commonplace today. That is especially important given the evolving payments
landscape and our wish to facilitate innovation. Examples of those payments might be split,
batch or micropayments.84 We also intend to do further exploration of offline and cross-border
payments.

84 Split payments are where one payment instruction has multiple beneficiaries. Micropayments are payments
for very small amounts.
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We do not propose to develop a digital pound that enables government or central

bank-initiated programmable money. As discussed in Part B, payments programmability
could provide enhanced functionality for users to set rules on their payments. While it may be
possible to program the digital pound so that it could only work in certain ways, this is not
relevant to HM Treasury and the Bank’s policy objectives for the digital pound. Further, this
functionality could damage the uniformity of the CBDC and cause user distrust. For these
reasons, HM Treasury and the Bank will not pursue government or central bank-initiated
programmable functions.

However, during our research, stakeholders highlighted the potential benefits of

programmability for innovation and user experience. HM Treasury and the Bank would
therefore permit Payment Interface Providers and External Service Interface Providers to
implement such functionalities themselves, but they would require user consent and not be at
HM Treasury or the Bank’s direction.

Like a physical banknote, the digital pound would be unremunerated.

Our vision for the digital pound is similar to that of a digital banknote. Accordingly, we
propose that the digital pound, like banknotes, would not be remunerated. This means it
would not pay (nor charge) an interest rate. That is for three reasons:

• First, the digital pound is intended to be a means of payment, like cash or a current
account. It is not intended as a savings product, so it does not need to be
remunerated. Not remunerating the digital pound would also mean it would not
compete with bank accounts as a way to hold savings. This would reduce impacts on
the banking sector.
• Second, using the digital pound for monetary policy reasons is not a motivation for its
introduction (Part C and Box F). That means there is no current need for the digital
pound to be remunerated.
• Third, to achieve its objective as a monetary anchor, the digital pound would need to
be widely available and useable, but does not need to be the dominant form of money
for retail payments. Remuneration is therefore not required to incentivise its uptake.

Any decision to revisit the approach to remuneration after the digital pound is
introduced would be preceded by a review with full consultation.
Were the approach to remuneration to change after the digital pound was introduced, it would
follow consultation and the Bank would provide adequate lead time, so that holders of digital
pounds were able to exit from, or enter, the system in an orderly manner, if they wished to.
That would allow them to switch their funds held in digital pounds into other forms of money
such as commercial bank deposits and cash.
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The Bank would place some limits on holdings of digital pounds, at least during its
introductory period. An individual limit of between £10,000 and £20,000 is proposed.
Although the digital pound should be widely available for retail use to achieve its objectives
(Part B), it must also be designed in a way that manages any risks to financial and monetary
stability. As set out in Part C, those risks largely stem from any large and rapid outflows from
bank deposits into digital pounds, and from wholesale use disrupting the function of critical
money markets. These risks would depend on uptake of the digital pound, which is difficult to
predict and may vary during the introductory period and times of stress.

A limit on individual holdings would be intended to manage those risks by constraining the
degree to which deposits could flow out of the banking system. That is important during the
introductory period as we learn about the impact of the digital pound on the economy.

That limit would, however, be set in a way that supports wide usability of the digital pound.
For example, users may want to use their digital pound wallet to receive their salary, which
may vary over time and may include bonuses or overtime payments. Any limit would also
need to consider the roll-over of any balances from the previous month. So the limit should
be set in a way that ensures there is enough headroom to accommodate these, as well as
supporting transactions. Technical solutions will also be required to ensure that incoming
payments that would otherwise breach these limits do not fail. For example, one mechanism
might be functionality for incoming funds that would take a user’s holdings of digital pounds
above the limit to be automatically ‘swept’ into a nominated account where it can be held in
another form of money, such as a commercial bank deposit.

We judge that a limit of between £10,000 and £20,000 per individual is likely to strike an
appropriate balance between managing risks and supporting wide usability of the digital
pound.

Chart D.9 combines monthly data on income distributions and estimates of potential variation
in non-regular incomes and roll-over balances, to show how various limits on digital pound
holdings could affect usage depending on users’ income.

For example, a limit of £10,000 would allow 75% of UK income earners to hold their salary,
pre-existing balances as well as an illustrative 10% bonus or overtime payment. Incomes
vary by region, age, and gender, so a limit could be more restrictive for some individuals than
others. A £20,000 limit would allow 95% of income earners in the UK to use their digital
pound wallet to receive their salary without regularly reaching their holding limit. That would
improve usability but be less effective at curbing outflows from bank deposits.

We seek feedback on the proposed holding limit of £10,000–£20,000 per individual. We also
recognise the limit may vary over time to take account of developments in the period leading
up to, and after, any launch.
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Chart D.9: A limit between £10,000 and £20,000 would allow most people to receive
their pay in digital pounds (a)

Sources: Office for National Statistics, XpertHR and Bank calculations.

(a) Monthly disposable (post-tax) income from the Household Finances Survey (HFS) (April 2019 – March
2020); an illustrative bonus of 10% of annual salary (based on a salary survey from 2017) is applied across the
entire income distribution; bonus assumed to be paid as a lump-sum in a single month; the monthly roll-over
balance is estimated from monthly income less expenditure.

We also welcome views on a lower limit, such as £5,000.

A lower limit, such as £5,000, would be more effective at curbing the potential for large and
rapid bank deposit outflows. That would provide a stronger safeguard against risks to
financial stability, including those which could arise were there also other new forms of digital
money, such as stablecoins, to which deposits could flow out to at the same time.

But a limit of £5,000 could prove less useful, as only about one third of people would be able
to comfortably receive their salary and bonus as digital pounds.

We welcome feedback from respondents to this consultation on the optimal holding limit for
the digital pound, to reach an informed decision in future.
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Limits would be in place at least during transition. They could be amended in future.
Limits would be in place at least during the transition period. That period, which may last
several years, is when uncertainty about demand for the digital pound would be highest and
the Bank would be learning about how the economy reacts to its introduction.

Any future changes to limits would follow consultation and include an assessment against our
guiding principles of: adoption and use of the digital pound; developments in the UK
payments landscape; and whether other means of managing financial stability risks could be
used instead.

Moving between digital pounds and other types of money must be fast and easy.
Households and businesses currently use a mix of bank deposits and cash and can move
between them with relative ease. It must also be simple, fast and convenient to move
between the digital pound and other forms of money, in particular cash and bank deposits.85

Interoperability is supported today by infrastructures, for example LINK and ATMs for
switching between cash and bank deposits.86 As we continue our in-depth technology
research, we will review the extent to which existing and prospective infrastructures, including
the renewed RTGS service and the New Payments Architecture (NPA) can support
interoperability for the digital pound.

The Bank’s accompanying Technology Working Paper discusses the options for enabling
interoperability between the digital pound and cash, and the digital pound and bank deposits
respectively.

85 The physical nature of cash makes moving between it and other forms of money more challenging than digital
money, but it is important that the aim remains to achieve simple, fast and convenient movement. This is likely
to require working with existing cash distribution market participants.
86 LINK.
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Box I: Corporates and the digital pound

The digital pound is designed for use by households and businesses. Most of the user
experience set out in Part D reflects the likely use by individuals, rather than businesses.
Corporate use of the digital pound is still being explored and would particularly benefit
from further input from stakeholders on the issues set out in this box.

The principles for corporate use of the digital pound are similar to that of individuals.
That is, the digital pound should be used for everyday payments, it should be fast and
easy to use and to move between other forms of money.

How many digital pounds should corporates be able to hold?

Similar to individuals, there would be limits on the amount of digital pounds that
corporates can hold but the proposed amount is still being explored.

For retail payments, businesses would need to be able to accept any payments made by
their customers in digital pounds. As with individuals, though, there would need to be
restrictions on corporates. That would safeguard against risks to monetary and financial
stability from switching of wholesale deposits currently held with banks and diversion of
corporate funds that would otherwise be invested in other financial assets.87

Given the larger size of corporate balance sheets, any limits would need to be
significantly larger than the £10,000–£20,000 proposed for individuals. But corporates
also vary in size and in the volume of transactions they undertake. That makes it more
challenging to design a one-size-fits-all limit for corporates. It may be necessary to set a
relatively high limit to ensure they can receive payments at peak times.

Technology solutions might support a lower corporate limit, safeguarding against risks to
financial and monetary stability, while not impairing corporates’ ability to make and
receive payments. For example, holdings above the level of the limit might be
automatically ‘swept’ into a nominated bank account. This might occur at a set
frequency, for example, at the end of, or at regular intervals during, the day. Or, if the
transfer to bank deposits was near-instantaneous, on any incoming balance that would
breach the limit. That might allow for a low limit for corporates, even towards zero.
Whether such automated transfers are both desirable and feasible will be an area for
further research.

87 This would also avoid individuals registering as a corporate to avoid the individual holding limit.
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Which types of corporate should have access to the digital pound?

The digital pound is for retail payments and not for financial market activity. The most
direct way of maintaining a retail focus would be to restrict which types of business could
hold digital pounds. For example, financial firms’ access could be restricted to prevent
wholesale financial activity being conducted in digital pounds given the disruptive impact
this could have on core financial markets.

In practice, distinguishing which type of business should or should not have access to
the digital pound is challenging. Large non-financial firms may still be active in financial
and money markets which could be deemed to be ‘wholesale’ activity. And financial
firms may need to make payments considered to be ‘retail’, such as paying their staff or
paying out insurance claims to customers.

The Bank will explore this issue through a combination of research and engagement
with private sector firms.

Non-resident individuals would have access, but whether, and to what extent,
non-resident corporates have access to the digital pound will also be subject to further
work.
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Box J: Financial inclusion

Tackling financial exclusion, particularly as financial services become more
digital, is a priority for the Government.
Financial inclusion means that everyone, regardless of their background or income, has
access to useful and affordable financial products and services such as banking,
payment services, credit, insurance, and the use of financial technology.

Tackling financial exclusion across the UK is an important priority for the Government. It
means ensuring that people can access useful, affordable financial products and
services whatever their income or background and at all stages in their financial lives.

Advancements in technology, societal changes and economic trends foster innovation

and provide opportunities to make products and services more inclusive and accessible.
However, they may also result in new risks for consumers – especially those who are
vulnerable. These risks need to be mitigated by adequate and flexible policy
development, effective regulatory frameworks and consideration of inclusive product
design.

The Government works closely with regulators, industry and the third sector to advance
financial inclusion. And it recognises that fair and affordable access to relevant financial
products and services is vital in people’s everyday lives, whether that is opening a bank
account to receive an income, accessing credit, securing insurance, or retirement
planning.

Building people’s financial capability so they can use and maximise their use of financial
products and services is also important. Government policy on financial capability
focuses on ensuring that people can access the guidance and advice they need and
have the confidence and skills to successfully engage with their personal finances.

Government initiatives have continued to make progress on financial

inclusion.
Over the last year, the Government has continued to make significant progress on
financial inclusion. The UK has a vibrant financial services sector and levels of financial
inclusion are high compared to many of its international counterparts.

For example, the Government’s work on access to banking and bank accounts is critical
to allow people to manage their money effectively, securely, and confidently. The nine
largest personal current account providers in the UK are legally required to offer basic
bank accounts to customers who do not have a bank account or who are not eligible for
a bank’s standard current account. As of 30 June 2021, there were over 7.2 million basic
bank accounts open at the nine designated institutions.88

88 Gov.UK (2022) – Basic bank accounts: July 2020 to June 2021.

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In the longer-term, access to cash is key to the Government’s work on financial

inclusion. The Government is legislating to protect access to cash and ensure that the
UK’s cash infrastructure remains sustainable. Covid-19 has increased the pace of
digitisation and the adoption of alternative ways of making payments, but the
Government recognises that millions of people continue to use cash across the UK,
particularly those in vulnerable groups.

Other examples of the Government’s recent work on financial inclusion include the
legislation that has been introduced to enable credit unions to offer a wider number of
products and services and the piloting of a No-Interest Loan Scheme.

The digital pound could provide an extra option for some financially
excluded groups.
There are multiple factors that contribute to financial exclusion and those who are
financially excluded are typically less engaged with the financial services industry. It is
therefore challenging to determine the likely level of appetite for the digital pound among
this group. But the introduction of the digital pound has the potential to encourage
innovative approaches from industry to tackle some existing financial inclusion issues.
For example, consideration of how to get payments to people who do not have a bank
account. It could also provide greater functionality for those with specific vulnerabilities
and greater product diversity in the market.

CBDCs have been launched in some other countries with a view to tackling financial
inclusion issues around access to payments. But these benefits are unlikely to present
themselves in the same way in the UK, given our established and well-functioning
payments infrastructure.

Adoption among the financially excluded could be hampered by an

unwillingness or inability to use digital payments. Digital inclusion therefore
needs to be promoted alongside financial inclusion.
With the ever-increasing digitisation of financial services, it has become clear that some
financial exclusion is ultimately driven by digital exclusion. Some individuals may not
have the digital skills or access to the right technology required to navigate and access
financial services and products such as online banking or payments. It is estimated that,
in February 2020, 4.7 million adults were digitally excluded, representing almost 10% of
the population (Chart D.10).89 The link between a lack of digital skills and connectivity
and financial exclusion was further demonstrated by the Covid-19 pandemic which
highlighted the need for access to digital infrastructure and skills necessary to fully
participate in society and the economy.

89 Financial Conduct Authority (2020) – Financial Lives Survey.

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The digital pound should be designed in a way which can provide for those who are
digitally excluded to avoid driving further exclusion of this population from innovative and
valuable new financial services.

Chart D.10: Almost 10% of the population are classified as being digitally
excluded

The digital pound must be simple and straightforward to use, using familiar
methods and devices. And it must be understood and trusted as a form of
money.
The digital pound may have limited potential to accelerate financial inclusion in the UK.
But it is a way to provide another option for certain financially excluded groups and could
lead to innovative approaches that improve access to financial products and services.

There are several challenges that need to be overcome for the digital pound to be
accessible to those that are most financially and digitally excluded, which are being
considered as a part of its design. For example:

• It will need to be as simple and straightforward to use as possible.

• As a new form of money, understanding and trust among the public is crucial. The
roles of Government, the central bank and industry will need to be set out clearly.

• Because the digital pound might be harder to access for those without the internet
or smartphones, offline capabilities or other solutions are being explored.

• In line with the current approach to basic bank accounts, the application process,
access points, and means of identification need to be designed to help people
access services.
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The needs of vulnerable people are being considered in the design of the
digital pound.
Financial inclusion and the needs of vulnerable people are being considered by
HM Treasury and the Bank from the initial design stage of the digital pound. Our aim is
that it should be designed, developed and implemented carefully so it contributes to
financial inclusion to the extent it can, by seeking to ensure the needs of all users,
including vulnerable individuals, are explored throughout.

Cash is expected to continue to play a role in society, particularly for those who are older
or more vulnerable, for some time. In February 2020, the FCA found that 5.4 million
adults relied on cash to a very great or great extent in their day-to-day lives.90 The digital
pound would not seek to replace cash or cause further financial exclusion for groups
who rely on and prefer physical financial services infrastructure.

Further design considerations for the digital pound could include the use of tiered
wallets, explored above, which may offer an opportunity to tackle some of the financial
inclusion issues driven by ID requirements. Using tiered wallets, users with limited forms
of ID could open basic digital pound wallets allowing limited, low-value payments. This
could provide a more accessible gateway into digital payments for some of the
financially excluded.

90 FCA (2021) – Financial Lives Survey, page 36.

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Box K: Lessons learnt from our engagement with civil society

groups
Throughout the exploration phase we have engaged with multiple civil society groups,
both bilaterally and in different multilateral fora such as the CBDC Engagement Forum
and ad hoc roundtables. The purpose has been to identify drivers of financial exclusion
and explore whether the digital pound could present opportunities to mitigate them.

• We heard that, for many people, the physical nature of cash is a key feature for
budgeting purposes, so digital alternatives like the digital pound could struggle to
deliver the same functionality.

• We discussed how trust and familiarity were key reasons to use cash for certain
groups of people – the role of trusted intermediaries was identified as very
important for a potential roll out of the digital pound, as especially vulnerable
individuals would need support from trusted third parties to become comfortable
with a new payment method; we discussed the possibility of civil society groups
becoming wallet providers (Payment Interface Providers) for vulnerable groups.

• Consumer protection was considered crucial for adoption of the digital pound by
vulnerable groups, as they could be at risk when using a new payment method.

• Overall, civil society groups thought the digital pound was not necessarily the only
way to tackle financial exclusion and that existing policies could be improved to
achieve some of the inclusion goals.
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Box L: Lessons learnt from the Engagement Forum

As part of our strategy to engage with industry and consumers, in 2021 the Bank and
HM Treasury set up the CBDC Engagement Forum. The objective of the Engagement
Forum is to gather input from a diverse cross-section of expertise and perspectives to
inform the Bank’s exploration of the challenges and opportunities of CBDC. The Forum
membership includes financial institutions, technology and fintech firms, academics, civil
society, merchants and consumer groups.

The Forum has discussed a range of topics, including potential use cases for a retail
CBDC, opportunities to tackle financial exclusion and co-existence with other forms of
money.91 Themes from these discussions have been considered in this CP.

Some Forum members were sceptical about the current need for a retail CBDC in the
UK, which they considered to already have an efficient payments system. However,
members recognised its potential to spur innovation and largely supported the idea of
CBDC as a basic but extensible platform to allow the private sector to innovate. They
agreed a flexible platform should allow innovators to shape and accommodate future
use cases that could be difficult to anticipate today. The Forum has also emphasised the
need for clarity around policy choices and the technical and regulatory parameters
authorities would put in place for CBDC for the private sector to start identifying potential
use cases and commercial opportunities within the CBDC ecosystem.

The Forum also reflected on the opportunities that CBDC could offer for
person-to-business (P2B) payments and the conditions that would need to be in place
for a retail CBDC to be adopted by consumers and merchants. It was argued that
achieving widespread adoption of new payment methods was very complex, but
programmability, smart contracts or micropayments could drive demand for CBDC
payments.

Financial and digital inclusion has also been a topic of interest for Forum members, who
discussed the obstacles that some individuals face to access basic banking and
payment services, especially in an increasingly digital economy. Members looked at
some of the main drivers of exclusion and discussed how CBDC as a new payment
system could tackle those. While the Forum identified opportunities, it also
acknowledged that a CBDC would not be a ‘silver bullet’ and that its effectiveness to
tackle exclusion would depend on a range of policy and regulatory questions that would
need to be addressed by the Bank and the Government.

91 Minutes from the meetings can be found on the Bank’s website.

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Consultation questions

7. 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?

8. 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?

9. 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?

10. 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?

11. Given our primary motivations, does our proposed design for the digital pound meet
its objectives?

12. Which design choices should we consider in order to support financial inclusion?

13. 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.
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Conclusion

The Bank and HM Treasury judge it is likely that the digital pound will be needed in the future
and that it would offer benefits. The digital pound could sustain retail access to central bank
money, support confidence in the different forms of money used for day-to-day payments,
and promote innovation, choice, and efficiency in payments in an increasingly digital world.

The digital pound, as described in this paper, would have much in common with cash. Like
cash, the digital pound would be provided by the Bank; safe, simple, convenient to use;
widely accepted; and easily understood. It would be designed for everyday payments, rather
than savings and so, like cash, it would not pay interest.

The case for introducing the digital pound depends to a significant degree on how the
payments landscape evolves in coming years. In particular, the extent to which cash use
further declines, whether new forms of privately-issued digital money emerge and how they
interact with existing forms of money and payments.
 Page 93

It is too early to take a decision on whether to build the infrastructure for the digital pound. At
the current time, while we judge the digital pound is likely to be needed, we cannot know this
with certainty.

As such, the Bank and HM Treasury judge it is important we move to the next stage of our
development of the digital pound. We will invest in the ‘design phase’ of our roadmap,
meaning that, while no firm decision has been taken on whether to build the digital pound, we
will step up our development work, build the necessary skills and put in place the technical
capability to introduce the digital pound in a timely manner, in the event a decision is made in
future to do so. And, even if we decide not to proceed to build a digital pound, our technology
explorations, and collaboration with the private sector will present benefits to the wider UK
fintech community.

The next stage will involve the development of a comprehensive architecture for the digital
pound, and associated experimentation and proofs of concept in partnership with the private
sector. We expect at the end of the design phase that the Government and the Bank will
decide whether to proceed to build the digital pound. The legal basis for the digital pound will
be determined alongside consideration of its design.

Responses to this consultation will inform the next stage of work and constitute an important
step towards making a final decision on whether to build a digital pound. The Bank and
HM Treasury welcome feedback on the questions posed in this CP by a range of
stakeholders.
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Consultation process

The Bank and HM Treasury invite views on the questions listed below. Respondents should
provide answers by 7 June 2023. The consultation period will run for a period of four months.
After this, the Bank and HM Treasury will assess the responses. These responses will inform
our future work and exploration of the digital pound.

Consultation questions

1. Do you have comments on how trends in payments may evolve and the opportunities
and risks that they may entail?

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?

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?

4. What are your views on the provision and utility of tiered access to the digital pound
that is linked to user identity information?

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?

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?

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?

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?

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?

10.Given our primary motivations, does our proposed design for the digital pound meet its
objectives?
 Page 95

11.Which design choices should we consider in order to support financial inclusion?

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.

Who should respond?

The Bank and HM Treasury welcome responses to any of the questions, but do not expect
respondents to provide an answer to every question. We are keen to hear from a wide range
of stakeholders, which includes community or charitable-focused organisations, the
payments industry, businesses, and the general public.

You can respond to this survey through our web form.

Alternatively, the Bank and HM Treasury can be contacted in other ways.

By email:

[email protected] or [email protected]

By post:

Digital Pound Consultation

CBDC Unit
Bank of England
Threadneedle Street
London
EC2R 8AH

Or

CBDC
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

By telephone: 020 3461 4878 (Bank of England)

Should you have any additional requirements, please contact us through one of the above
channels and we can provide this in accessible formats.
 Page 96

Privacy notice: Bank of England

By responding to this consultation, you provide personal data to the Bank of England (the
Bank). This may include your name, contact details (including, if provided, details of the
organisation you work for), and opinions or details offered in the response itself.

The response will be assessed to inform the Bank’s work as a monetary authority, as a
supervisor of financial services firms and as the central bank of the United Kingdom, both in
the public interest and in the exercise of the Bank’s official authority. The Bank may use your
details to contact you to clarify any aspects of your response.

We will retain all responses for the period that is relevant to supporting ongoing financial
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your personal data, your rights or to get in touch please visit Privacy and the Bank of
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Information provided in response to this consultation, including personal information, may be

subject to publication or disclosure to other parties in accordance with access to information
regimes including under the Freedom of Information Act 2000 or data protection legislation,
or as otherwise required by law or in discharge of the Bank’s functions.

Please indicate if you regard all, or some of, the information you provide as confidential. If the
Bank receives a request for disclosure of this information, we will take your indication(s) into
account but cannot give an assurance that confidentiality can be maintained in all
circumstances. An automatic confidentiality disclaimer generated by your IT system on
emails will not, of itself, be regarded as binding on the Bank.
 Page 97

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Data subjects
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Personal data collected is likely to include individuals’ names and email addresses. It is
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HM Treasury will use your personal data to record your comments and views and take your
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HM Treasury will use your personal data to record your comments and views and take your
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The personal data will only be made available to those with a legitimate need to see it as part
of the consultation process.
 Page 98

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Information provided in response to this consultation may be published or disclosed in

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Information in responses to consultations will generally be published and therefore retained
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Personal information in responses will be retained for three calendar years after the
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How to submit a Data Subject Access Request (DSAR)

To request access to personal data that HM Treasury holds about you, contact:

HM Treasury Data Protection Unit

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 Page 99

Complaints
If you have any concerns about the use of your personal data, please contact us via this
mailbox: [email protected].

If we are unable to address your concerns to your satisfaction, you can make a complaint to
the Information Commissioner, the UK’s independent regulator for data protection.

The Information Commissioner can be contacted at:

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Any complaint to the Information Commissioner is without prejudice to your right to seek
redress through the courts.

Public Sector Equality Duty

HM Treasury and the Bank, in the exercise of its public functions including its banknote
issuance and other functions relating to the proposals in this paper, is subject to a statutory
duty set out in the Equality Act 2010 (Equality Act) to ‘have due regard’ to equality
considerations, comprising the need to: (a) eliminate discrimination, harassment,
victimisation and any other conduct that is prohibited by or under the Equality Act; (b)
advance equality of opportunity between persons who share a relevant protected
characteristic under the Equality Act and persons who do not share it; and (c) foster good
relations between persons who share a relevant protected characteristic and persons who do
not share it (the Public Sector Equality Duty or PSED). For the purposes of issuance of the
digital pound, there are significant policy and technological decisions which would need to be
taken to ensure fair and equitable access. As part of the policy development process, the
Bank and HM Treasury will have due regard to the equality considerations set out in the
PSED, including conducting Equality Impact Assessments.
 Page 100

Annexes

Annex 1: The digital pound and international risks

The digital pound might improve cross-border payments. But it may also increase the
UK’s exposure to economic shocks from abroad.
The UK, as an open economy, could benefit from a digital pound that improved cross-border
payments (for example, cheaper or faster payments for international trade or remittances)
(Box D). But a digital pound, or a new form of privately-issued sterling digital money, could
change the structure of the financial system in a way that increases the UK’s exposure to
foreign shocks.

First, it could make UK banks more reliant on wholesale funding. The availability and cost of
that funding could be more susceptible to foreign economic shocks because it could be
provided by foreign investors or denominated in foreign currency.92

Second, an increase in UK bank funding costs could increase the cost, or reduce the
availability, of their lending to the UK real economy. This could prompt households and
businesses to borrow more from abroad. That could include borrowing from foreign banks,
foreign non-banks, or UK non-banks that might be funded by non-UK investors or hold
portfolios of global assets.93 Reliance on such institutions for funding the UK real economy
would also make it more vulnerable to foreign shocks.

Non-residents’ access to the digital pound could amplify capital flow volatility, but the
impact would probably be limited.
Non-residents’ holdings of the digital pound over and above non-residents’ existing holdings
of sterling assets, could amplify capital flow volatility. That is because the digital pound might
be vulnerable to sharp inflows or outflows in response to shocks from abroad. The magnitude
of movements in such holdings and their impact would probably be limited, however.

First, a digital pound restricted to ‘retail’ uses would likely not have a significant impact on
capital flow volatility. That is because capital flows into and out of the UK are dominated by
much larger and more volatile flows between financial institutions.

92 Ivashina et al (2015) found that banks with greater reliance on wholesale funding cut their lending by more
during the euro-area sovereign debt crisis.
93 Hoggarth et al (2013) discuss how lending to the UK economy by foreign bank branches resident in the UK

was more volatile than that by UK-incorporated banks around the time of the global financial crisis.
 Page 101

Second, there could be an offsetting channel, if non-residents held digital pounds instead of,
for example, UK bank deposits. This could reduce the impact on UK credit conditions of
shocks to foreign demand for sterling assets. For example, lower foreign demand for UK
assets would be in part absorbed by lower foreign demand for digital pounds so the fall in
foreign demand for UK bank deposits (and thus their lending) would be lower.

Widespread use of non-sterling digital money could compromise the UK’s monetary
and financial sovereignty.
If a new form of non-sterling digital money were used for a significant amount of retail
transactions in the UK, it could compromise the UK’s monetary and financial sovereignty –
the UK authorities’ ability to achieve price stability through monetary policy, and to regulate
financial institutions and payments systems that are systemically important in the UK.

Widespread use of non-sterling digital money could compromise monetary sovereignty

because if sterling were no longer the unit of account for a significant portion of UK retail
transactions, monetary policy would affect a lower proportion of money in the UK and
become less effective at achieving the inflation target.

Financial sovereignty might also be compromised if the Bank were not able to co-operate
sufficiently with the lead supervisor of foreign-operated private digital money. That might
prevent the UK authorities from regulating and supervising such a systemically important
non-UK payment system.

Widespread adoption of a non-sterling digital form of money in the UK is unlikely but

its impact would be very significant and be beyond the tolerance of UK authorities.
Digital payments in the UK are already widespread, so it is judged unlikely that UK
households and businesses would see a compelling case for switching to non-sterling digital
payments services, especially since this would carry foreign exchange risks. Furthermore, G7
Finance Ministers and Central Bank Governors pledged in 2021 that ‘CBDCs should be
designed to avoid risks of harm to the international monetary and financial system, including
the monetary sovereignty and financial stability of other countries.’ So, any future CBDC
issuers, at least in G7 countries, have committed to design them in such a way that would
avoid the risk of currency substitution in other countries.

It is possible, however, that non-sterling digital money would offer attractive new functionality
in the future. Non-sterling digital money could become widely adopted if it tapped into existing
digital networks to offer new propositions. That is judged unlikely but, if it materialised, the
impact would be very significant and so this scenario is beyond UK authorities’ risk tolerance.
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By reinforcing the use of sterling for UK payments and enabling new payments functionality,
the digital pound could pre-emptively reduce the chance of widespread adoption of
non-sterling digital money in the UK. That would help preserve the UK’s monetary and
financial sovereignty.

The UK’s strong macroeconomic policy framework – including an independent,

inflation-targeting central bank – also reduces the risk that non-sterling money might come to
be used widely for payments in the UK.
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Annex 2: Impact of the digital pound on the Bank’s balance

sheet
The digital pound could make the Bank’s balance sheet larger and affect the level of
central bank reserves, with potential implications for the volatility of short-term
interest rates. This can be managed by deploying the tools available to the Bank to
ensure the demand for its liabilities is met.
The Bank’s balance sheet plays a central role in the delivery of the Bank’s statutory policy
objectives to maintain monetary and financial stability. The Bank’s balance sheet is used to
implement monetary policy by ensuring market interest rates are aligned with Bank Rate, to
purchase assets for monetary policy or financial stability purposes, and in the provision of
liquidity insurance.94 These actions affect the size and composition of assets and liabilities on
the balance sheet.

Today, most of the Bank’s liabilities consist of on-call wholesale balances held by eligible
firms (mainly banks) known as reserves (we use the term ‘banks’ hereon to refer to all eligible
firms for simplicity). Banks hold reserves to make wholesale payments in sterling and to meet
their regulatory liquidity requirements.

The aggregate supply of reserves and their price is controlled by the Bank and is central to
the implementation of monetary policy. The Bank supplies sufficient reserves so that
commercial banks have little need to bid up money market rates above Bank Rate to borrow
reserves. At the same time, remuneration of reserves at Bank Rate means that banks have
no incentive to lend excess reserves at a lower rate (Diagram E.1).

Were households to switch commercial bank deposits to the digital pound, they would be
exchanging one asset for another. For the Bank’s balance sheet, this will initially affect the
composition of its liabilities: it will reduce the amount of reserves on the Bank’s balance sheet
but increase the level of digital pounds by the same amount.

The ultimate impact of this switch on the Bank’s balance sheet will depend on where this
leaves the quantity of reserves relative to banks’ demand for them. As long as reserves
remain above the minimum level demanded by banks at the prevailing level of Bank Rate
(Diagram E.1), the switch from commercial bank deposits to the digital pound would change
the type of liabilities on the Bank’s balance sheet. But it would leave the overall size of the
Bank’s balance sheet unchanged, as all demand for the Bank’s liabilities would be met.

94Bank of England– Understanding the central bank balance sheet. See Hauser (2022) for further detail on
how the balance sheet can support the Bank’s monetary and financial stability objectives.
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Diagram E.1: The demand curve for reserves

If demand for the digital pound caused reserves to fall below the minimum level
demanded by banks, the Bank would intervene to provide more reserves, resulting in
a larger balance sheet.
The switch from commercial bank deposits to the digital pound could cause the amount of
reserves in the system to fall below the minimum level demanded by banks (Diagram E.1).

All else equal, banks are likely to respond by seeking to borrow reserves in money markets,
increasing the rates they are willing to pay to do so and thereby causing short-term rates to
rise relative to Bank Rate. In this scenario, and under the current monetary policy framework,
the Bank would increase the supply of reserves to the banking system through its Short-Term
Repo Facility to ensure banks’ demand is met and therefore that short-term market rates
remain close to Bank Rate.95

Alternatively, the Bank may choose to deploy longer-term lending operations. In either case,
the creation of reserves would result in an increase in liabilities on the Bank’s balance sheet.
This would be matched by an equivalent increase in the assets held by the Bank, leading to
an overall increase in the size of the Bank’s balance sheet (see Diagram E.2).

95In pursuit of monetary stability, the Bank would stand ready to supply reserves on demand to move total
reserves further to the right in Diagram E.1 and move market rates closer to Bank Rate.
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Small changes in the level of reserves are not a new challenge for the Bank to manage.
Banknotes, for example, also have the potential to absorb reserves or affect the size of the
balance sheet. The Bank has several mitigants in place to manage these balance sheet
changes, as it would do for the digital pound. The post-QE monetary policy framework would
continue to be robust to changes in the level of reserves.96

Diagram E.2: Illustrative central bank balance sheet with the digital pound (a)

Source: Bank of England.

(a) This chart is purely illustrative. The steady state composition and size of the balance sheet, at the point
where the digital pound is introduced, is highly uncertain.

96 The Bank recently published an Explanatory Note setting out its framework for ensuring short-term market
interest rates remain close to Bank Rate as the APF is unwound and reserves begin to fall.
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Annex 3: Market research

In early 2022, the Bank commissioned YouGov and London Economics to carry out market
research on payment preferences and behaviours. This research comprised quantitative
surveys to consumers and small and medium-sized enterprises, and a consumer-focused
forum where respondents completed payment diaries, questionnaires and tasks. There were
also in-depth telephone interviews with individuals who lacked digital confidence or access to
the internet. The results were categorised into three main topics: attitudes and current
payment behaviour; how people pay and store money; and the future of money.97

Attitudes and current payment behaviour

Participants had a range of confidence levels in managing their finances. Most (87%) relied
upon established traditional financial institutions with which they regularly interacted, rather
than newer digital banks or cryptoassets. This was the same across both online surveys and
telephone interviews. Those who indicated low confidence with technology preferred physical
bank branches over digital methods for accessing banking services.

Participants expected to be able to use a variety of payment methods and were frustrated
when unable to do so. Safety and convenience were the most important factors when
choosing new payment methods or a new current account. Debit cards were the favoured
method for online and in-store purchases, as they were considered convenient, fast, and
easy to track. While cash use has declined, it was still used by a significant number of
consumers in our research – around 40% used cash at least once a week. The safety and
control, its physical presence and familiarity made cash the most trustworthy form of payment
for some participants.

How people pay and where they save money

While consumers often used a mixture of different payment methods for their day-to-day
spending, security and convenience were the most important factors when deciding which
payment method to use. Their preferred method was also influenced by the value of the
purchase and whether it occurred in-store or online.

97Research conducted in February/March 2022. Nationally representative sample of 2,022 consumers (1,922
online and 100 by phone) and 1022 SMEs (all online). Seventy two consumers participated in the online
qualitative study.
 Page 107

Those who used the internet less often were more likely to use cash regularly. These
participants were also less likely to switch to another payment method. When they did, they
valued recommendations from family and friends. Many, most notably during telephone
interviews, feared that online banking and mobile payments could be hacked. These
participants preferred the physical safety cash provided them with.

Future of money and cryptoassets

There was a broad negative reaction to cryptoassets across consumers. Very few found
them to be safe or trustworthy. There was also some scepticism towards Big Tech
companies, especially with regards to data protection. When offered the choice between a
publicly provided form of digital money (similar to the digital pound) and one provided by a
technology firm, there was a slight preference towards the public offering.

Initial attitudes towards the digital pound

The market research used the terms ‘e-GBP’ or CBDC to describe a digital form of money
with similar features to the digital pound outlined in this paper. Those features tested (safety
of funds, widely accepted and easy to use) generally appealed to consumers. But there was
uncertainty around the role an ‘e-GBP’ would play alongside existing payment methods and
how it differed to cryptoassets. There was also some confusion as to whether ‘e-GBP’ was to
be used for savings, investments or payments. Like the results around current financial
products, those who were more confident with technology found it more appealing than other
participants.

Participants were also introduced to a hypothetical digital money account.98 They were asked
how they felt about this digital money account and to react to its features using a ‘thumbs up’
or ‘thumbs down’ feature (Diagram E.3).

98This study was conducted with 72 participants. Participants were able to give positive, negative or
neutral/unsure reactions to any of the features and visuals in the exercise as indicated in Diagram E.3.
Participants who gave at least one negative reaction also gave at least one positive reaction.
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Diagram E.3: Feelings about the features of a hypothetical digital money account

Most reactions were positive. Participants generally liked that it was provided by the Bank,
that it was fully protected, and that it was a widely accepted means of payment.
Overwhelmingly, the only feature disliked was the fact it did not pay interest.

Thirty per cent of participants said they would be likely or very likely to use the account. And
some who were not likely to use it said they would be more likely to use it if it became
popular among friends and family, or if more retailers accepted it as a means of payment.
Generally, the participants unlikely to use it were those who did not want to use digital money
at all.

Participants were also asked to name up to five features they would find appealing if this
account were to be offered. The most mentioned were perks, rewards, discounts or a high
interest rate. Some cited speed and visibility of transactions, budgeting tools and ease of use
as other desirable options.

In a separate exercise, the same participants were asked to react to the idea of a CBDC after
reading a short explainer. Around 20% said that they found CBDC appealing or very
appealing, especially if it was offered alongside other payment methods rather than replacing
them. Some (42%), however, were unsure, citing misunderstanding or lack of information
about how it worked. A third of the group had concerns about money becoming less physical
and being more reliant on the internet.
 Page 109

Additional qualitative research was undertaken to identify whether consumers distinguished

between public and private forms of money and how they defined these concepts. The study
revealed a strong consensus about the current importance of physical currency (banknotes
and coins) in society. However, understanding of the difference between public and
privately-issued forms of money was generally low. The ultimate issuer of money was
considered less important than other features such as universal acceptance, safety or
familiarity.99

When presented with hypothetical scenarios, participants appeared to prefer uniformity in

money, prioritising wide acceptance as a form of payment. This could be associated with
some of the characteristics of public money. General sentiment towards the Bank of England
was broadly positive, with most considering it to be a trustworthy institution. Initial reactions to
Big Tech firms introducing financial services in retail payments were mostly negative. Those
who self-identified as not being digitally confident appeared less concerned by whether
money was public or private, as long as there was a physical option (like banknotes)
available to them.

In the design phase the Bank will consider using consumer research projects where they may
best contribute to the design phase of the digital pound.

99Additional research with YouGov involved six text-based focus groups and 10 in-depth telephone interviews.
This exercise explored whether attitudes to public and private money differed according to social group, age
range, geographical location, and digital confidence.
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Annex 4: Lessons learnt from our engagement with major

financial institutions
Given the importance of banks for the financial system, the Bank and HM Treasury have
engaged extensively with them on the opportunities, risks and design choices for the digital
pound.

For the most part, financial firms sought further clarity from the Bank and HM Treasury on the
public policy case for the digital pound and the commercial opportunities it could enable.
While banks recognised the potential of the digital pound to enable innovation, make certain
processes more efficient, and improve cross-border payments, they questioned whether
those features were exclusive to a central bank-issued digital currency, or could be also
achieved via private sector innovations and improving existing payments infrastructure.

Some UK banks have already started thinking about the future of the payments landscape
and many are actively exploring how to interact with new forms of digital money and
decentralised finance (DeFi). Banks with a large international footprint have presence in
markets where CBDCs are being piloted and have shared insights from those projects with
the Bank and HM Treasury.

Banks noted the outflow of retail deposits into digital pounds would need careful
management, especially in transition. Banks warned about the risks of relying too much on
wholesale funding to replace consumer deposits flowing into the digital pound. The
assessment of these risks varied between financial institutions, and between traditional and
the newer digitally native institutions. To address these concerns, some are looking into
options to manage potential disintermediation risks, such as exploring how digital pound
deposits might be recycled back into the banking sector.

Some banks discussed risks that stablecoins pose to the financial sector, such as limited
interoperability with other forms of money, and within DeFi. They considered that the digital
pound could be a way to mitigate those risks. Some also saw the potential of the digital
pound to enable innovation and improve efficiency in payments. Banks also mentioned the
possibilities of CBDCs improving cross-border payments.

Generally, banks anticipated being involved as providers of pass-through wallets to give their
customers a full set of payment options.

We will continue to engage with financial institutions throughout the next phase of work on
the digital pound, both bilaterally and through multilateral outreach with specific industry
groups.
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Glossary and abbreviations

AML – Anti-Money Laundering.

APF – Asset Purchase Facility.

API – Application Programming Interface.

APP – Authorised Push Payment.

ATM – Automated Teller Machine.

BIS – Bank for International Settlements.

CBDC – central bank digital currency.

CFT – Combatting the Financing of Terrorism.

CHAPS – Clearing House Automated Payment System.

CP – Consultation Paper.

CRD – Cash Ratio Deposit.

DeFi – decentralised finance.

DLT – distributed ledger technology.

ELB – effective lower bound.

ESIP – External Service Interface Provider.

FCA – Financial Conduct Authority.

FPC – Financial Policy Committee.

FX – Foreign Exchange.

G7 – Group of Seven.

G20 – Group of Twenty.

GDPR – General Data Protection Regulation.

HFS – Household Finances Survey.

HQLA – High Quality Liquid Assets.

ICO – Information Commissioners Office.

ID – identification.
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IoT – Internet of Things.

KYC – Know Your Customer.

LINK – the UK’s largest cash machine network connecting virtually all the UK’s ATMs.

NPA – New Payments Architecture.

ONS – Office for National Statistics.

P2B – person to business.

P2P – person to person.

PET – Privacy-Enhancing Technologies.

PIP – Payment Interface Provider.

PoC – Proof of Concept.

PoS – Point-of-sale.

PRA – Prudential Regulation Authority.

PSED – Public Sector Equality Duty.

PSR – Payment Systems Regulator.

RTGS – Real Time Gross Settlement.

SME – Small and medium-sized enterprise.

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