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The Bank of England has responded to its first public consultation on the digital pound with new assurances on user privacy and control — two key concerns among the public.
Last February, the BoE and HM Treasury published a joint consultation on the development of a digital pound.
It was the first time that the question of a retail central bank digital currency (CBDC) was put to the British public, and the consultation attracted more than 50,000 responses.
As Vixio has written previously, only a handful of government consultations have received more responses, highlighting the strength of feeling among the public on this issue.
In total, the BoE and Treasury received 51,529 responses. Of these, 40,885 were received by online questionnaire, 10,603 were received by email and 41 were received by letter.
Almost all (99 percent) of those who completed the online questionnaire identified themselves as individuals, while the remaining 1 percent identified themselves as organisations.
Of the 555 organisations that responded, only 9 percent were categorised as financial service firms, including fintechs and payments firms.
Source: BoE
The BoE and Treasury reviewed all email responses manually, while online questionnaire responses were reviewed through computational analysis, using counting, filtering and grouping of keywords and phrases.
The findings from the computational analysis were then validated by manual review and by an independent external review.
“The majority of the responses commented on the broader societal implications of introducing a retail CBDC, such as the future of cash and the privacy and rights of users of a digital pound,” said Bim Afolami, economic secretary to the Treasury.
“The feedback clearly illustrated that, just as with other forms of money, ensuring trust in a digital pound issued by the central bank would be essential.”
To allay these concerns, Afolami reminded voters that, in May 2023, chancellor Jeremy Hunt committed to introducing primary legislation prior to the launch of a digital pound.
“This legislation would guarantee both users’ privacy and that neither the BoE nor the government would control how you spend your money,” he said.
Such legislation would also be preceded by an additional public consultation, he added.
The BoE and Treasury reaffirmed that a decision on whether to issue a digital pound will be made around the middle of the decade at the earliest.
This will bring to an end the “design phase” and could be followed, subject to parliamentary approval, by the “build phase”.
For the remainder of 2024, the BoE and Treasury will continue to work with stakeholders on CBDC design. Later this year, they will also publish new details regarding experimentation and proofs of concept.
How could a UK CBDC ensure user privacy?
In the consultation response, the BoE reiterated that if it was to issue a digital pound, it would be “at least as private” as existing digital payment methods.
It would not be anonymous, however, given the need to support enforcement of laws and regulations against financial crime.
Personal data would be collected and stored by payment interface providers (PIPs), but this would be anonymised before being sent to the BoE to process and settle transactions.
“PIPs would be required to identify users to protect consumers against fraud and financial crime, as is the case with commercial banks today,” said the BoE.
“Just like opening a bank or other payment account, some level of identity verification would be required when opening a digital pound wallet.
“These requirements would be consistent with those that legally apply today.”
Source: BoE
Further, the BoE has also committed to launching a working group dedicated to privacy issues as part of the design phase.
BoE will not 'program' your CBDC
In addition to financial surveillance concerns, individuals feared that the BoE could program how and where they can spend their digital pounds.
However, in the original consultation paper, the BoE emphasised that neither itself nor the government would have this ability.
“The purpose of a digital pound would be to provide the public with an additional means of accessing central bank money in a landscape of increasingly digital payments,” the BoE said in the consultation response.
“This would not come at the expense of users’ control of their spending.”
The BoE and Treasury said they will continue to provide reassurance on this point during the design phase.
They also emphasised that user consent would be essential for any programmable function, and that only PIPs, subject to a “robust” regulatory framework, could program digital pound payments.
Public-private model wins support
Among organisations, there was “broad support” for the public-private platform model set out in the consultation.
Under this platform, the BoE would provide the core infrastructure and ledger where digital pounds are issued and held and where transactions are settled.
Meanwhile, private-sector PIPs would provide access to the core ledger and would use “pass-through” wallets to provide payment and other services directly to end-users.
As noted above, PIPs would be required to conduct know your customer (KYC) and anti-money laundering (AML) checks on end-users.
Some respondents said that “pass-through” wallets hosted by intermediaries might add unnecessary friction that could increase costs, including for end users, and make the system more vulnerable to attacks.
Others from civil society groups warned that private provision of wallets could concentrate power in the hands of a few dominant firms.
Is a digital pound commercially viable for PIPs?
Among banks and other potential PIPs, a major concern was whether the platform model described above would be commercially viable.
These respondents highlighted the cost of compliance with AML/KYC regulations and the lack of revenue opportunities to offset these costs, without charging consumers or merchants for usage.
Similarly, potential PIPs noted that if they did not hold users’ digital pounds directly, they would be unable to incentivise usage by paying interest on balances.
Lack of financial incentives to become a PIP could therefore reduce private-sector participation, they said.
