Payments Use Cases and Design Options for Interoperability and Funds Locking across Digital Pounds and Commercial Bank Money

TL;DR

This paper analyzes design options for interoperability and funds locking in digital pounds and commercial bank money, focusing on key capabilities across three payment use cases to support functional consistency.

Contribution

It provides a detailed evaluation of design options for supporting functional consistency in digital pounds, emphasizing interoperability and funds locking across use cases.

Findings

FMI can simplify participant experience and platform operation.

Design options vary in suitability for different use cases.

Initial insights support development of a cohesive digital pound ecosystem.

Abstract

Central banks are actively exploring retail central bank digital currencies (CBDCs), with the Bank of England currently in the design phase for a potential UK retail CBDC, the digital pound. In a previous paper, we defined and explored the important concept of functional consistency (which is the principle that different forms of money have the same operational characteristics) and evaluated design options to support functional consistency across digital pounds and commercial bank money, based on a set of key capabilities. In this paper, we continue to analyse the design options for supporting functional consistency and, in order to perform a detailed analysis, we focus on three key capabilities: communication between digital pound ecosystem participants, funds locking, and interoperability across digital pounds and commercial bank money. We explore these key capabilities via three payments use cases: person-to-person push payment, merchant-initiated request to pay, and lock funds and pay on physical delivery. We then present and evaluate the suitability of design options to provide the specific capabilities for each use case and draw initial insights. We conclude that a financial market infrastructure (FMI) providing specific capabilities could simplify the experience of ecosystem participants, simplify the operating platforms for both the Bank of England and digital pound Payment Interface Providers (PIPs), and facilitate the creation of innovative services. We also identify potential next steps.