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Functional Consistency across Retail Central Bank Digital Currency and Commercial Bank Money

Lee Braine, Shreepad Shukla, Piyush Agrawal

TL;DR

The paper tackles fragmentation risks from introducing a retail CBDC by formalizing functional consistency across all regulated retail money. It develops a platform-model framework for the digital pound and identifies a comprehensive set of common operational characteristics that should be shared across forms of money. Through architecturally significant use cases and a structured evaluation of four design options (central bank, PIPs, TSPs, and FMIs), the study finds that no single option can deliver functional consistency alone, necessitating a blended, multi-actor design. The work lays out a path for industry collaboration, prototype development, and extension of the framework to future private digital money forms and other currencies.

Abstract

Central banks are actively exploring central bank digital currencies (CBDCs) by conducting research, proofs of concept and pilots. However, adoption of a retail CBDC can risk fragmenting both payments markets and retail deposits if the retail CBDC and commercial bank money do not have common operational characteristics. In this paper we focus on a potential UK retail CBDC - the "digital pound" - and the Bank of England's "platform model". We first explore how the concept of functional consistency could mitigate the risk of fragmentation. We next identify the common operational characteristics that are required to achieve functional consistency across all forms of regulated retail digital money. We identify four design options based on the provision of these common operational characteristics by the central bank, payment interface providers, technical service providers or a financial market infrastructure. We next identify architecturally significant use cases and select key capabilities that support these use cases and the common operational characteristics. We evaluate the suitability of the design options to provide these key capabilities and draw insights. We conclude that no single design option could provide functional consistency across digital pounds and commercial bank money and, instead, a complete solution would need to combine the suitable design option(s) for each key capability.

Functional Consistency across Retail Central Bank Digital Currency and Commercial Bank Money

TL;DR

The paper tackles fragmentation risks from introducing a retail CBDC by formalizing functional consistency across all regulated retail money. It develops a platform-model framework for the digital pound and identifies a comprehensive set of common operational characteristics that should be shared across forms of money. Through architecturally significant use cases and a structured evaluation of four design options (central bank, PIPs, TSPs, and FMIs), the study finds that no single option can deliver functional consistency alone, necessitating a blended, multi-actor design. The work lays out a path for industry collaboration, prototype development, and extension of the framework to future private digital money forms and other currencies.

Abstract

Central banks are actively exploring central bank digital currencies (CBDCs) by conducting research, proofs of concept and pilots. However, adoption of a retail CBDC can risk fragmenting both payments markets and retail deposits if the retail CBDC and commercial bank money do not have common operational characteristics. In this paper we focus on a potential UK retail CBDC - the "digital pound" - and the Bank of England's "platform model". We first explore how the concept of functional consistency could mitigate the risk of fragmentation. We next identify the common operational characteristics that are required to achieve functional consistency across all forms of regulated retail digital money. We identify four design options based on the provision of these common operational characteristics by the central bank, payment interface providers, technical service providers or a financial market infrastructure. We next identify architecturally significant use cases and select key capabilities that support these use cases and the common operational characteristics. We evaluate the suitability of the design options to provide these key capabilities and draw insights. We conclude that no single design option could provide functional consistency across digital pounds and commercial bank money and, instead, a complete solution would need to combine the suitable design option(s) for each key capability.
Paper Structure (15 sections, 3 figures)

This paper contains 15 sections, 3 figures.

Table of Contents

  1. Introduction
  2. The Digital Pound
  3. Functional Consistency
  4. Design Options to Support Functional Consistency
  5. Existing Designs
  6. Design Options
  7. Architecturally Significant Use Cases and Key Capabilities
  8. User Personas, Use Cases and Supporting Capabilities
  9. Key Capabilities
  10. Evaluation of Design Options
  11. Assumptions
  12. Suitability Ratings
  13. Analysis
  14. Summary and Conclusions
  15. Further Work

Figures (3)

  • Figure 1: The Bank of England's platform model for CBDC provision, comprising a digital pound core ledger, APIs, PIPs, ESIPs and users. Figure adapted from boe-cbdc-cons-paper.
  • Figure 2: Design options that could provide the common operational characteristics required to achieve functional consistency across the digital pound and commercial bank money.
  • Figure 3: Summary of preliminary evaluation of each design option's suitability to provide each key capability. These design options are for provision of key capabilities by the central bank, PIPs, TSPs or an FMI. Note that, for some key capabilities, there is no single design option that is suitable and, instead, a combination of design options may be suitable.