Minutes
Date: 11 December 2024
Item 1: Welcome
Nick McLaren (chair) welcomed members to the third Academic Advisory Group (AAG) meeting. Since the last meeting, the Government had published a National Payments Vision. As part of the Vision, the government committed to continuing ongoing work on the digital pound design phase, which will be critical in providing the necessary evidence base to decide in the coming years on whether or not to build a digital pound.
The chair highlighted the publication of a Bank/MIT research paper studying the application of privacy-enhancing technologies (PETs) to a potential digital pound, with the specific aim of identifying the potential technical challenges, trade-offs, opportunities, and risks of using emerging types of PETs to support privacy. Members expressed an interest in learning more about this research.
Item 2: Subgroups discussion
The Bank proposed that the AAG form subgroups to provide more detailed insights from the academic literature on a range of issues relevant to a digital pound. These subgroups would summarise available evidence, highlight key issues and identify areas for potential further research, if relevant. These subgroups would then present their findings to the full AAG, and the insights could be used to complement analytical work being undertaken by the Bank and HMT.
Members were supportive of forming subgroups and asked if they could include insights from other researchers to complement their work. The Bank expressed support for this, highlighting that it was important to bring as much expertise as possible to support the design phase.
Item 3: Presentation 1 - Payment initiation and transaction costs – Professor Alistair Milne
Professor Alistair Milne presented an in-progress research study, which included an economic model for push vs pull payment initiation methods. He noted that while push payments have been around for centuries, pull payments are a newer concept, made possible by technological advances. The paper explores the benefits (e.g. reduced real-time communication and the costs (e.g. funds pre-commitment) of this. The paper outlines the economic modelling of both payment types and highlights that pull payments have the potential to improve overall economic welfare by increasing the number of welfare enhancing transactions.
Turning to the implications for a digital pound, Alistair proposed that the Bank consider fully integrating pull payments into any future digital pound system. Alistair suggested it could lower costs for users and would be essential for the implementation of some underutilised pull payments, most notably micropayments. He noted that distributed ledger technologies are not necessary for a digital pound to implement pull payments or smart contracts, although they could have other benefits including increased observability or verifiability.
Members asked about the details of the model, and whether or not consumer protections were relevant to the discussion. Some members noted that new forms of consumer protection may be needed depending on the type of purchase. Other members queried the behavioural patterns of consumers of different payment values and the role of smart contracts.
Item 4: Presentation 2 - Navigating the Future of Money: Case of CBDC – Professor Pinar Ozcan
Professor Pinar Ozcan presented the findings of an international research study into the CBDC ecosystem, the role of different stakeholders and the approaches to success. Pinar noted that a retail payment ecosystem involves many more players than those a wholesale payment system, which typically only operate between commercial banks, central banks, and technology providers. A retail system includes many more stakeholders, including merchants. Because of this, Pinar noted the importance of public education and research into the role merchants play within the ecosystem.
Having conducted studies of several central bank approaches to CBDC, the paper concludes that there are four key lessons for central banks:
- Coordinate internal and external leadership at the same time.
- Embrace innovation.
- Involve stakeholders as early as possible.
- Acknowledge that ecosystems take time to form.
Pinar explained that many CBDC projects around the world are progressing slower than private sector equivalents, she believes this makes it difficult for private sector technology providers to operate in the current CBDC development phases. She believes that many central banks are waiting for a ‘second mover advantage’, as being the first to implement a CBDC could potentially pose higher risks.
Members broadly agreed with the lessons presented and noted the importance of bringing in a wider range of stakeholders for the development of CBDC’s. Members noted that successes and failures of some current CBDC projects might related to levels of public engagement.
One member questioned the benefits of a second mover advantage. When considering wider development patterns in technology, there is often advantages to being the first player to develop a successful product. Pinar noted this was an interesting perspective, but central banks were typically more risk adverse than the private sector. Therefore, central banks may be incentivised to wait to ensure the technology is viable.
Members considered the counterfactual risks of CBDC development not moving quickly enough. They asked if the potential reputational risks for a central bank in having potential issues during any development phase outweighed the need for CBDC and the potential risks other forms of new money could introduce.
One member believed technology providers were still able to support the CBDC development even if public statements differ. However, there was general agreement between members that many technology providers were considering developments in stablecoins alongside CBDC. Members also discussed the concept of multi-sided platforms, the actors who may participate in the ecosystem, and their motivations for doing so.
Item 5: Roundtable discussion
Discussion questions:
- What recent and future technological innovations are likely to improve or disrupt the retail payments industry?
- What digital pound design features would best promote innovation in payments and digital finance?
- What role can innovation in money and payments play in supporting economic growth?
The chair thanked the presenters and opened for wider discussion. He highlighted two important aspects of innovation related to a digital pound. The first relates to how the introduction of a digital pound may impact innovation within the wider payment landscape. The second relates to the most effective way to design a digital pound platform in order to incentivise innovation and encourage a range of different wallet providers (payment interface providers, PIPs) to enter the market.
Members began the discussion highlighting the importance of the existing structure of banking and payments, and the power of incumbent and network effects. In the UK, commercial banks may have some advantage due to their existing banking relationships with individual and business customers. This is not always the same in international markets, noting examples like India as well as some countries in Africa where mobile money providers dominate domestic payments. Any CBDC ecosystem must take this starting point into account and adapt the design to integrate with existing methods.
Members then highlighted the chair’s opening remarks about the role for a digital pound in the wider payments landscape. In the UK, the primary motivation for a digital pound is focussed more on safe innovation in payments rather than financial inclusion. If cash use were to decline to a very low level there may be risks from a dominance of commercial bank money in the financial system. Innovation and diversification could come from new private forms of digital money like payment stablecoins. A digital pound could also provide a source of innovation and resilience, as well as the benefits for monetary and financial stability from supporting the uniformity of money. This is an important consideration in times of stress.
One member commented that the Bank’s assessment of the case for a digital pound is looking at different criteria than an individual would when deciding whether or not to use it. Given the Bank would be unlikely to issue a digital pound which wasn’t attractive to individuals and business users, there should also be focus on developing a product that individuals and businesses want to use and then working out how that could be adapted to meet the Bank’s objectives.
One member noted the different stories around CBDC being told in different jurisdictions. Some countries have clear incentives to introduce a CBDC and say so publicly, while others are more moderate in their narratives. Innovation and improvements in payments is the most important adoption driver for households and businesses. The Bank should therefore look to make a digital pound attractive to individuals and businesses with innovative use cases, while maintaining focus on our own objectives as a central bank. Other members agreed, noting that while network effects are important, there is a need to drive demand by building the infrastructure, which in turn incentivises innovation. An example was the competition in mobile app developments, noting that the hardware had to come before the software. A member further noted that mobile phones had standalone value before the development of applications. While many products have become more successful due to the presence of applications, the innovation that applications have brought couldn’t have occurred without the infrastructure. Members discussed whether demand could be driven by use of a digital pound for public sector payments and services. While this could help encourage adoption, members agreed that there was also a risk that this could reinforce concerns around public sector interference in how people can spend their money, and that the public sector should certainly not be mandating usage. One member suggested mandating acceptance of a digital pound might support adoption. The chair noted that part of the objective for a digital pound was to make it easier for new entrants to provide services. Interoperability with other forms of money would also support this.
One member challenged the idea that Big Tech companies are not already involved in payments, citing statistics on the level of mobile payments occurring in the United Kingdom. They noted that one of the early motivations for central banks explorations of CBDCs was the geopolitical risks stemming from the use of new forms of money developed by foreign corporations. The member noted that these risks remain and if use of private sector stablecoins develop quickly, it will force central banks to react on a quicker timeline than planned. Some developing countries may therefore move quicker as they may be more susceptible to these risks than an economy like the UK’s.
Members discussed the types of users that may want to use a digital pound, highlighting the particular pain points in payments for small and medium businesses (SMEs). There is potential to lower the cost of payments, but also to introduce features which reduce burdens of conducting business. However, members noted that some SMEs do not have the same level of detailed knowledge that larger retailers may be able to acquire, and that the public sector would need to provide more educational resources to understand the benefits.
One member questioned whether current payment providers would respond to the introduction of a digital pound by lowering the cost of payments for merchants, producing a positive outcome for society even if a digital pound was not widely used. Members discussed if this outcome would meet the Bank’s objectives.
Members discussed the Bank’s primary objectives and questioned the reason why improving cross-border payments was a secondary objective, given it is an area which currently has a number pain points. Members agreed this was an area which could drive both adoption and innovation.
One member highlighted the importance of the platform model for innovation. Common infrastructure would allow for multiple actors to provide a common form of innovation. The central bank should coordinate different actors within the payments landscape, so all participants are able to provide innovation services. Examples such as Pix in Brazil have done this very effectively.
One member noted the distinction between developing a new form of money and around developing a new payment method. They’re interconnected but if you have an open system then you have created a separate platform that is competing with existing platforms, and this poses additional challenges.
Item 6: AOB and close
The chair thanked members for their contributions and noted the dates of the AAG meetings in 2025. Nick highlighted that the Bank is continuing to consider organising an industry/academic conference in the second half of the year. This conference would likely have a broader focus on the wider payments landscape, and the role of a digital pound in it.
Attendees
Nick McLaren (chair)
Members
Alexander Edmund Voorhoeve, London School of Economics
Alistair Milne, Loughborough University
Andrew Theo Levin, Dartmouth College
Anna Omarini, Bocconi University
Bill Buchanan, Edinburgh Napier University
Burcu Yüksel Ripley, University of Aberdeen
Darren Duxbury, Newcastle University
David Robert Skeie, Warwick Business School, University of Warwick
Davide Romelli, Trinity College Dublin
Dirk Niepelt, University of Bern & CEPR
Doh-Shin Jeon, Toulouse School of Economics
Gbenga Ibikunle, University of Edinburgh
Iwa Salami, University of East London
Jonathan Michie, Kellogg College, University of Oxford
Marta F. Arroyabe, University of Essex
Michael Cusumano, Sloan School of Management, MIT
Pinar Ozcan, Said Business School, University of Oxford
Sheri Marina Markose, University of Essex
Apologies
Danae Stanton Fraser, University of Bath