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Illustrative Industry Architecture to Mitigate Potential Fragmentation across a Central Bank Digital Currency and Commercial Bank Money

Lee Braine, Shreepad Shukla

TL;DR

The paper addresses the fragmentation risk that can arise when a central bank digital currency ($CBDC$) coexists with commercial bank money. It proposes an illustrative industry architecture that extends the Bank of England's platform model by introducing ecosystem services that provide a common programmability layer across $CBDC$ and commercial bank money, with a cross-cutting set of common policies and standards. The approach relies on a core ledger operated by the central bank, accessible via APIs to authorized Payment Interface Providers ($PIPs$), and on ecosystem services that implement policy, identity, data exchange, and programmability while preserving privacy through pseudonymous identities. The work demonstrates how this architecture supports interoperability, reduces fragmentation, invites competition through multiple ecosystems, and aligns with current UK governance and technology options, with prospective prototypes by industry players such as Barclays.

Abstract

Central banks are actively exploring central bank digital currencies (CBDCs) by conducting research, proofs of concept and pilots. However, adoption of a CBDC can risk fragmenting both payments markets and retail deposits. In this paper, we aim to provide a mitigation to this fragmentation risk by presenting an illustrative industry architecture that places CBDCs and commercial bank money on a similar footing. We introduce the concept of ecosystems providing a common programmability layer that interfaces with the account systems at both commercial banks and the central bank. We focus on a potential UK CBDC, including industry ecosystems interfacing with commercial banks using Open Banking application programming interfaces.

Illustrative Industry Architecture to Mitigate Potential Fragmentation across a Central Bank Digital Currency and Commercial Bank Money

TL;DR

The paper addresses the fragmentation risk that can arise when a central bank digital currency () coexists with commercial bank money. It proposes an illustrative industry architecture that extends the Bank of England's platform model by introducing ecosystem services that provide a common programmability layer across and commercial bank money, with a cross-cutting set of common policies and standards. The approach relies on a core ledger operated by the central bank, accessible via APIs to authorized Payment Interface Providers (), and on ecosystem services that implement policy, identity, data exchange, and programmability while preserving privacy through pseudonymous identities. The work demonstrates how this architecture supports interoperability, reduces fragmentation, invites competition through multiple ecosystems, and aligns with current UK governance and technology options, with prospective prototypes by industry players such as Barclays.

Abstract

Central banks are actively exploring central bank digital currencies (CBDCs) by conducting research, proofs of concept and pilots. However, adoption of a CBDC can risk fragmenting both payments markets and retail deposits. In this paper, we aim to provide a mitigation to this fragmentation risk by presenting an illustrative industry architecture that places CBDCs and commercial bank money on a similar footing. We introduce the concept of ecosystems providing a common programmability layer that interfaces with the account systems at both commercial banks and the central bank. We focus on a potential UK CBDC, including industry ecosystems interfacing with commercial banks using Open Banking application programming interfaces.
Paper Structure (7 sections, 2 figures)

This paper contains 7 sections, 2 figures.

Table of Contents

  1. Introduction
  2. Central Bank Digital Currency Models and Architectures
  3. Illustrative Industry Architecture
  4. Initial Requirements
  5. Logical Architecture
  6. Analysis
  7. Summary and Further Work

Figures (2)

  • Figure 1: The Bank of England's "platform model" for CBDC provision, comprising a core ledger, an application programming interface (API), Payment Interface Providers (PIPs), and users. Figure adapted with permission from boe-cbdc-disc-paper.
  • Figure 2: An illustrative industry architecture including common overlay services across UK CBDC and commercial bank money. There could potentially be multiple ecosystems providing competing services using different platforms and technologies, but using common policies and standards. Ecosystem services may be operated by financial market infrastructures. User 1 has accounts at Bank A and the central bank, User 2 has an account at the central bank, User 3 has an account at Bank B, User 4 has accounts at Bank B and the central bank, and User 5 has an account at the central bank.