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

TL;DR

This paper examines how to ensure functional consistency between a potential UK retail CBDC, the digital pound, and commercial bank money to prevent market fragmentation, proposing a multi-faceted design approach.

Contribution

It introduces the concept of functional consistency for retail CBDCs and identifies design options and key capabilities needed to achieve it.

Findings

No single design option can ensure full functional consistency.

A combined approach of multiple design options is necessary.

Identifies key capabilities and architecturally significant use cases.

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.