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In its response to the UK’s digital pound consultation, the Payment Systems Regulator (PSR) recommends policymakers consider the lessons learned from authorised push payment (APP) fraud, Faster Payments and the failed Paym service.
Last week (June 22), the PSR submitted a response to HM Treasury and the Bank of England's (BoE) digital pound consultation with a set of recommendations drawing from the regulator’s experience in retail payment markets.
In its submission, the PSR says it “support[s] the ongoing work the Bank of England and the Treasury are doing to explore the digital pound and the opportunities it presents".
“This is an ambitious project, and we look forward to working with the Bank and the Treasury to ensure that the design and implementation of the digital pound delivers in all users’ best interests.”
The regulator says it sees numerous benefits in a well-designed digital pound, from increasing competition in retail payments to serving as an “asset of last resort” if cash availability declines and to being an alternative to systemic stablecoin systems that may have an impact on monetary stability.
To achieve the best possible outcomes, the PSR highlights five key areas that policymakers need to consider.
First, the regulator says the digital pound system should have appropriate user protections and users should have a clear understanding of the levels of protection they have.
The PSR pointed at Faster Payments, and its lack of appropriate user protection, as a part of the reason why APP scams have grown on Faster Payments.
As long as the liability sat with the customer, APP fraud increased continuously and started to fall only when the liability was shifted to first the sending payment firms and now to the receiving banks as well.
Sending payment firms did not have sufficient incentive to address the issue until they had to share the costs, but it still left fewer incentives for the receiving banks to invest in preventative measures.
The regulator’s new fraud reimbursement rules are intended to address this problem by imposing 100 percent liability on banks for APP fraud losses, which are split 50:50 between the sending and receiving bank.
Secondly, the PSR urges the Treasury to address roles and responsibilities early on and decide what role a regulator should play.
This includes work to set responsibilities for a range of activities, from payment acceptance to authorisation, messaging, fee and rules-setting and outlining technical standards.
“The project should explain who will define technical standards, how ecosystem participants can influence technical standard setting, and who is performing key activities (such as KYC and AML),” the PSR advises.
Although such rules may run to hundreds of pages, as the rulebooks of card networks do, the PSR argues detailed specifications and a clear understanding of who owns the rulebook are necessary for interoperability.
The PSR also argues that some of the minimum standards and rules should be set centrally.
“Supervision alone may not be sufficient” and intervention at the scheme level is necessary to make good conduct a condition of scheme participation.
“This is a feature of the governance of the account-to-account systems, the oversight and access regime in the designated card schemes, and one of the contributory factors in driving forward open banking in the UK,” the regulator argues.
Further on, the PSR recommends policymakers ensure they allow for a commercially viable model for new types of firms that will enter the digital pound ecosystem: payment interface providers (PIPs); and external service interface providers (ESIPs).
For instance, the costs of digital pound payments could be imposed on merchants who already pay a transaction fee for card transactions.
The PSR is carrying out a market review over concerns that the card scheme and processing fees are too high and there is not enough competition in the card-acquiring market.
In its submission, the PSR urges the Treasury and the BoE to “consider the strengths and weaknesses of existing commercial models and how the digital pound can compete with other forms of payment”.
The regulator also highlights that it is important that the digital pound is designed in a way that serves the needs of both sides of the market — those who want to make payments and those who want to receive them.
It refers to the ill-fated Paym payments service, which was launched by UK banks in 2014 and allowed for payments using a registered mobile number.
The scheme, however, never really took off and it was shut down this March with only 5.8m users.
According to the PSR, there were several reasons why Paym could never reach great success. For example, some retail banks used different branding and customers had to opt-in to the service.
When designing the digital pound, “there is value in exploring the reasons Paym did not reach critical mass, the factors that contributed to its decline and what lessons the digital pound project can learn from the Paym experience”, the regulator says.
Finally, the PSR suggested that potential offline usage, the possibility for the system to evolve and an open payment approach should be considered when designing the digital pound.
The document was submitted to the joint consultation of HM Treasury and the BoE that ran between February and June.
Although policymakers assure the decision to issue a digital pound has not yet been made, Chancellor Jeremy Hunt and BoE deputy governor Jon Cunliffe have previously said the UK “is more likely to have a CBDC than not”.
The current first phase of the work includes research and exploration, which is expected to move into the next phase in 2025 with design and technical development.
When asked about the BoE’s ongoing work into the digital pound, Cunliffe said if the UK waits until a decision is made, the country will already be five years behind.
