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Ep 16: Why Do We Need a Digital Pound?
117 Plays1 year ago
Dive into the world of Central Bank Digital Currencies (CBDCs) Jannah Patchay (Digital Pound Foundation and Markets Evolution), Varun Paul (Fireblocks), and moderator Emma Pike (H+K Strategies). This episode focuses on the UK's Digital Pound, exploring its potential to transform financial transactions, savings, and investments. We'll examine what sets the Digital Pound apart from traditional money and other digital currencies, its requirements for success, and lessons from other CBDCs. Join us for an enlightening discussion, whether you're a crypto expert or just curious about the evolving landscape of money.
Find out more in our explainers at owlexplains.com
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Transcript
Introduction to Owl Explains Series
00:00:06
Speaker
Hello and welcome to this Owl Explains Hootenanny, our podcast series where you can wise up on blockchain and web3 as we talk to the people seeking to build a better internet. Owl Explains is powered by Avalabs, a blockchain software company and participant in the avalanche ecosystem. My name is Silvia Sanchez, project manager of Owl Explains and with that I'll hand it over to today's amazing speakers.
Central Bank Digital Currencies in Focus
00:00:34
Speaker
Welcome to this Hootenanny, my name's Emma Pike, I'm part of the Owl Explains team and I'm going to be asking the questions for today's session where we're going to be finding out all about central bank digital currencies or CBDCs and specifically we're going to hear about the plans in the UK for a digital pound. We're recording today from London where I have two brilliant guests, Jana Pache from the Digital Pound Foundation and Varunpal from
00:01:01
Speaker
buyer blocks. So let's start with some introductions. Jana, do you want to start just by introducing yourself, say a little bit about the Digital Pound Foundation and about how you started working in the field of CBT? So I'm Jana Pache, I'm the founder of Market Singulation, which is a consultancy specialising in market structure, regulatory strategy and financial innovation.
00:01:27
Speaker
And I'm also one of the originating team members behind the Digital Pound Foundation and now I'm an executive director and policy lead for the Digital Pound Foundation. So the Digital Pound Foundation, or DPF for short, was launched in 2021 as a sort of hybrid trade association, a think tank.
Varun Paul and Digital Money Ecosystems
00:01:50
Speaker
And we are a corporate membership, not
00:01:54
Speaker
of the organisation that advocates for the introduction of a well-designed digital pound in both publicly and privately issued forms in the UK. So we don't have a look at central bank digital currency, which we'll focus on in this podcast, but we also look at other forms of privately issued digital money, ranging from stable coins to tokenised deposits and tokenised e-money and various variants of all of those things
00:02:18
Speaker
And we also advocate for a diverse and effective and competitive ecosystem for all of these new forms of digital money to create a system of future and provide maximum benefit to the economy and society. Excellent. Thank you so much. And over to you. Can you introduce yourself? John, I'm Varun Paul. I'm director for CBDC and financial market infrastructure at Fireblocks.
00:02:46
Speaker
Fireblocks is a technology provider that enables digital asset custody. And so that means we're providing technology to some of the most important financial institutions in the world in their journey to work with digital assets. The technology enables them to custody and transfer any form of digital asset really securely.
00:03:08
Speaker
So in terms of my background, I spent 14 years at the Bank of England as an economist, most recently working on things to do with the future of finance and the future of money, and as head of the FinTech Hub on things to do with CBDCs and digital IDs and AI. And so I'm taking all that experience to the private sector now working
00:03:34
Speaker
invite folks to try and take the technology to central banks all around the world, not just in the UK. And that gives me a really good lens on all the developments in the COD space, CODC space happening at the moment. Excellent. Thank you. So welcome to you both.
Understanding CBDCs and Commercial Money
00:03:50
Speaker
Before we get into really talking about the digital pound, I think it would be great if we could cover up a few basics.
00:04:00
Speaker
Can one of you explain as simply as you can what is a central bank digital currency? How does it differ from the digital money that we already have and why we need them?
00:04:17
Speaker
The Central Bank digital currency has two core features. The first is it is a form of publicly issued money. So it represents direct claim in the central bank itself, as opposed to commercial bank money for privately issued money, which represents a claim on a private entity such as a commercial bank. So there are two main forms of public money available in use today.
00:04:47
Speaker
which were all familiar as cash, so a £10 note, if you represent a claim on the Bank of England for £10, what that means in practice is a bit trickier, but £10 is £10. Then there's also
00:05:08
Speaker
reserves held at the Bank of England which are used for interbank settlement that's less visible to most of us but actually makes up the bulk of public money in use today. So a central bank digital currency represents a digital native form of central bank public money and
00:05:33
Speaker
I think it's worth unpacking what digital native means in this context as well. So most of us will be transacting day to day using cards, bank accounts, things like that. Payment mechanisms that we tend to think of as digital. We no longer think of money as just being cash.
Modernizing Digital Money Infrastructure
00:05:55
Speaker
Yes, it is digital. It represents movements on ledgers between banks and things like that.
00:06:01
Speaker
And wheelbarrows of cash are not being exchanged at the end of the day between these banks. That settlement is all happening electronically and generally in real time as well. But the challenge with all of this infrastructure that exists today is that it is built on legacy assumptions and legacy constraints and a legacy model of money and payments that in many cases assumes at the end of the day that wheelbarrows of cash may be exchanged between banks.
00:06:32
Speaker
It's not digital native. And because of this, the infrastructure that we have today, whilst in some jurisdictions like the UK, is very efficient and fit for purpose and has gone through a fair amount of modernization. Nevertheless, doesn't fully realize the potential of the technology that we have available today. And so new forms of digital money, including central bank digital currency, represent an opportunity to look
00:07:02
Speaker
what we need as economies and societies in terms of money and payments, not only today, but looking into the future and into other technology developments that are happening and how money and payments might be able to support the transition to a more digital economy and things like that. And also to look at the technology that we have available today
00:07:29
Speaker
and to build something that is truly digital native and fit for purpose and can provide a platform not only for payments and exchange of value now, but also for innovation in the future. Did I get that right, though? Absolutely. The key summary there is the who's issuing is the most important thing, as Jenna says. Sorry, what was the most important thing?
00:07:57
Speaker
The most important thing is who is issuing the digital asset, the digital currency. And in this case, for the focus on the digital currency issued by the central bank.
Public Trust in Financial Systems
00:08:07
Speaker
Yeah. Okay. And so why is that so important? Is it because of trust fundamentally? Yeah. Well, as Daniel just described, in those different forms of money, there are different risks associated with all of them.
00:08:26
Speaker
The central bank is arguably the lowest risk issuer of assets like this. We saw, even with the recent banking failures in recent months, that there is a risk attached with any financial institution. Even governments have risks associated with them and so nothing is completely risk-free.
00:08:52
Speaker
But a central bank is supposed to have the lowest risk. So liability issued by a central bank should be as close as you can get to a risk-free asset. And it comes with all that trust behind it, not just because of the backing of the government and then the nation-state, but also because of the trust and credibility that has built up over decades, even centuries, when it comes to a central bank.
00:09:22
Speaker
an argument to be made, which the Bank of England does in its recent consultation paper on the digital pound, that the existence of public money in the form of cash or CBDC in the future
00:09:38
Speaker
and continued public access to public money. So the ability for you and me to actually hold the CBDC and to convert seamlessly between other forms of money like money in our bank accounts and public money is actually fundamental to underpinning trust and confidence in the financial system and the banking system as a whole because without going into perhaps too much detail on the commercial bank money side of things, when you take
00:10:08
Speaker
you know, £100 in cash to a bank branch should you be able to locate one and deposit it into a bank account. You no longer own £100. You have a claim against the commercial bank for £100, but that is not backed by £100 in reserves. It's fractionally backed by maybe £10 in reserves combined with some other assets.
Central Banks' Role in Financial Stability
00:10:34
Speaker
like loans and things like that, and a lot of potential regulation and confidence and trust in the financial services compensation scheme. But it's the ability to then withdraw that into cash now and perhaps CBDC in the future, which is wholly backed by the central bank that underpins trust and confidence in that, in the workings of the commercial banking system, whether or not everyone realizes it,
00:11:03
Speaker
Right. So trust is obviously like a huge, you know, it's a really huge factor here. Both you've spoken about, you know, the long standing reputation of the Bank of England and other central banks indeed.
Technology Choices for CBDCs
00:11:20
Speaker
What about the technology that underpins a CBDC? You mentioned the word infrastructure. Does the infrastructure also contribute to kind of building that additional trust?
00:11:36
Speaker
Yeah, so I think the technology, there are a bunch of technologies that could be used, and the choices they make will be important for both how effective it is, how efficient it is at functioning for delivering payments, but also for delivering trust and reliability and resilience in the system, and also about privacy. So technology does matter here.
00:12:03
Speaker
The final bit about their choice, the technology choice that I think matters here is also how it works with the rest of the ecosystem. It's really important, I think, that... Let me go back a couple of steps. The Central Bank is, as Janna said, the Central Bank here has a responsibility for the provision of money. And what it does in terms of its responsibilities today
00:12:32
Speaker
It has responsibility for preserving the value of money, and it does that through inflation targeting, but it also does that through preserving the value of the £10 note in your wallet, right? So protecting that against forgery, making sure it's highly secure. It has that responsibility today, and in a future world where we're interacting with digital assets, it wants to have a role in provision of money in the future as well.
00:12:59
Speaker
So given that it's trying, that is its core purpose here, and that's the reason it's getting involved in central bank digital currencies, it's important that the technology they use to create a central bank digital currency also supports that vision. So that means it has to be interoperable with other forms of money. It means that it has to work in support of innovation in the sense that other technologies can innovate on top of it.
00:13:28
Speaker
It needs to be fully trusted and reliable and resilient in the same way that the money they provide today is designed to be resilient and resistant to forgery and so on. And it has to be, I think in this case, it has to be future proof as well. But it comes down to can you trust that what the central bank is issuing, just as it is today, can you trust that it is reliable?
00:13:54
Speaker
and it's resilient and it can be trusted. And all those features will be really important and really important to their choice of technology. So there are a few choices. There are a few models that they paint in the consultation paper. One of which uses pretty standard technologies that are available today. You'd call them centralized and call them API driven.
00:14:22
Speaker
Nothing really innovative or special about that, but the word we haven't used yet really is blockchain. And most digital currencies out there today are on the blockchain, are designed to be, they use this to reach a lot of technology and the built-in blockchain. And many central bank digital currencies around the world are built on that technology. In my view,
00:14:48
Speaker
That technology has matured hugely in the last few years and really is ready for the innovation of the central bank digital currency and gives the Bank of England in its digital pound the greatest opportunity to support the future of money and to support innovative use cases that will really transform the way we use money today. So building on that core element of trust and reliability
00:15:18
Speaker
and resilience, they could build a digital pound, which has really neat functions and features that can be built on top of it. And that's the really exciting bit for me. Great. Thank you. Can you kind of build on that a bit, just in terms of what is it? What are the kind of the key capabilities of blockchain that
00:15:44
Speaker
that make it so, you know, such a good choice. Yeah. So for me, it's a lot of people talk about decentralization. And decentralization is a word that is, and it doesn't make sense when you talk about central banks, right? These two things don't go well together. So some people say, aren't CVDCs the exact opposite of what blockchains and decentralized systems are designed to create? And I'd say, well,
00:16:13
Speaker
If you bring them together, you get the best of both worlds. So building on blockchains gives you potentially a bit of resilience from not having central points of failure. But bringing that technology to a central bank means that you can leverage all the trust that has been built up over centuries, as I say, with a central bank. But for me, that is not really the game here. The real game is that your digital first
00:16:41
Speaker
and that you're able to build smart payments, so programmatic features in forms of assets that will really facilitate the future of the ecosystem. Now let me be clear because the Bank of England has said quite clearly that they don't want to
00:17:03
Speaker
programming payment features for what they issue. They don't want the public to have to worry that the government or the central bank is going to force them to use their money in a certain way or stop them from using their money in a certain way. But the private sector can create some nifty programmable
Programmable Payments and Global Trials
00:17:22
Speaker
payments. For example, a really nice use case would be for an individual, can they sweep any savings they have left at the end of the month into a separate pot?
00:17:32
Speaker
and do that in a way that is fully automated? Can they have a way to make micro payments so that they can pay per view of an article in the newspaper? Can we facilitate, for example, the Internet of Things and Web3 payments in the future? And all of those, I think, require
00:18:00
Speaker
a set of technology that is more efficient than we have today. It requires a degree of automation and degree of functional programmability that can be delivered on the blockchain technology. And so that's the really exciting bit for me. Great, thank you. So let's just have a quick whiz around the world then. Where in the world have they already introduced a central bank digital currency?
00:18:35
Speaker
We already have central bank digital currencies in Jamaica, the Eastern Caribbean central bank is a launch fund. That's Bahamas and Nigeria. And we also have a very well-developed pilot, which is either live or nearly live in China. And then we have a series of pilots happening right now in other G20 countries.
00:19:03
Speaker
which I think are worth highlighting. And that highlights India, Australia and Brazil. But the ones that are alive right now, the first ones I mentioned, so Nigeria, Jamaica, Eastern Caribbean, Central Bank and Bahamas. And I mean, I can imagine that the motivations of introducing a Central Bank digital currency might be quite different between some of those countries. I mean, you know, the Bahamas and China, for example, have quite different motivations.
00:19:33
Speaker
Can one of you say a bit more about that? Yeah, sure. You're quite right there. The reasons that differential restrictions have for introducing CDDCs vary quite significantly. And also the policy drivers that they have tend to influence their design priorities with respect to CDDC as well.
00:20:00
Speaker
So for example, the Bahamas was the first jurisdiction to introduce CBDC, the sand dollar, and the big driver there was really logistical. So the challenges around distributing cash across ATMs on, you know, several hundred islands, particularly during a pandemic, accelerated their exploration of CBDC to address those challenges. Others such as the Inara,
00:20:28
Speaker
Nigeria are focused on financial inclusion and expanding access to payments and things like that. Sweden, on the other hand, probably of all developed nations, has experienced the most rapid and dramatic decline in the use of cash and therefore the rates bank
00:20:49
Speaker
the Swedish Central Bank.
UK's Digital Pound and Geopolitical Impacts
00:20:52
Speaker
It's an important priority to maintain public access to public money, as we discussed earlier, and so that's a driver for their exploration. The European Union is really about closer integration, about greater autonomy over payment services and things like that, so slightly more politically motivated
00:21:17
Speaker
project with slightly different desired outcomes and drivers from other jurisdictions and discussion of the digital euro could fill up an entire podcast again.
00:21:31
Speaker
So yes, very different motivations. Cambodia, really interesting example, actually. So the introduction of the Bakam, which is technically not a true CBDC, but rather a synthetic CBDC for the purists out there, was really an attempt to reclaim monetary sovereignty. So Cambodia is a heavily dollarized economy.
00:21:53
Speaker
The dollar is used as a means of transacting day to day in many areas of commerce and stuff like that. And so they wanted to reclaim control of their local currency and encourage greater uptake through the introduction of the become system. And in the UK,
00:22:17
Speaker
where we have relatively sophisticated, in many cases, neurofrictionless payments infrastructure. If you take the case for introducing a digital pound, purely on the cost-benefit analysis,
00:22:32
Speaker
against our existing payments infrastructure, there isn't much of a case for it. And I'll happily say that. The House of Lords Economic Affairs Committee, at the beginning of last year, published their report on CBDC a solution in search of a problem.
00:22:52
Speaker
And unfortunately, the report only considered very narrowly this sort of cost-benefit analysis of CBDC against existing payments infrastructure in the UK. It didn't consider the wider reasons for doing so, both in terms of what we've just discussed, continued public access to public money, underpinned trust in the financial system,
00:23:18
Speaker
the potential for a platform for innovation. But there is a wider geopolitical argument for why the UK should be looking at introducing a CBDC.
00:23:26
Speaker
And that is simply because other jurisdictions are. If China is looking at introducing CBDC and has a fairly advanced pilot, then yes, we should absolutely be. If China was looking at a new variant of nuclear reactor or a new type of satellite, we would be looking at this as well. And in a similar way, the currencies of the future will compete
00:23:52
Speaker
not only on their inherent value and the basic, the counterparty risk, sovereign risk associated with the issuing nation, but also the functionality and features that they offer. And so, yes, if the UK is to remain a leader and global stage, especially in terms of financial services and FinTech and to remain a hub for those things, we have to look at providing the infrastructure that will underpin that.
00:24:18
Speaker
Yeah, absolutely. But I can also imagine that all of these quite different motivations that you've highlighted across different countries is going to lead to central bank digital currencies actually being designed quite differently. If you have different goals, then you're going to design your currency differently. Is that what you see happening?
00:24:41
Speaker
That's a risk, right? Exactly as Jana really well articulated. They have different motivations. And so if you've got a motivation to have a central bank digital currency for the sake of inclusion, you'll design it in a certain way versus one that's designed to do something for efficiency, for example. But one of the biggest drivers, if you look at what the BIS has been publishing, one of the biggest drivers is actually to improve cross-border payments. That's probably actually one of the biggest frictions in the current financial system.
00:25:10
Speaker
because of decades of innovation in different jurisdictions all going about their own things and we've ended up with systems that don't work well together or don't work at the same in the same time because of different time zones and so actually one of the biggest things everyone's hopeful of is that using digital payments that do operate 24-7 and can operate cross borders should try and solve this problem and so
00:25:36
Speaker
Central banks around the world are speaking about this very frequently, and it is a clear goal of this to improve cross-border payments. No clear decisions, I'd say, on exactly how they're going to do that. There are a number of work streams led by some of the BIS committees. But it is a risk that you end up with more fragmentation. And so I think there's a whole wave of innovation trying to design ways of creating interoperability.
00:26:06
Speaker
Now, some would argue that there's already private sector alternatives to CDCs that aren't defined by national borders and actually work better for this. So when you've got a stable coin that can operate in any cross borders, maybe that is a better settlement asset for some of those use cases. And people use that today to send money across borders actually much more efficiently and more cheaply than is capable using the traditional rails.
00:26:34
Speaker
But I do believe that central banks will work together to try and deliver that interoperability between CBDCs as well. Otherwise, I think we'd all argue they'd failed in the cold. If they innovate hugely over the next five years and fail to solve that key problem.
CBDCs vs. Private Stablecoins
00:26:52
Speaker
We haven't really just, sorry. There is a degree of competition then between the central banks and these private stable coins.
00:27:04
Speaker
Do you sense, is there a real tension between central banks and these other players? Well, I think if we go back in time and we look at where, so some central banks were previously, prior to 2019, exploring the concept of CBDC. I think, correct me if I'm wrong, but the Bank of England has started as early as 2018 or perhaps even earlier than that.
00:27:33
Speaker
But I think what really galvanised many central banks was what was then Facebook's announcement of what was then Libra. And this was for a number of reasons. First of all, the potential introduction of a very convenient payment mechanism that could be built into
00:27:54
Speaker
all Facebook owned apps and things like that at the time and had the potential to be used to very quickly go to global usage by what were then 2.3 billion users and basically take all those payments and take all those flows out of the existing financial and payments infrastructure which is well overseen and well understood and things like that. That was reason one. The second was more of a monetary sovereignty thing
00:28:22
Speaker
Again, the impact of introducing this new, very much used payments mechanism on individual countries' currencies was another concern. And then there's another one, which was that Libra was supposed to be backed by baskets of currencies held in reserve if they decided to rebalance or liquidate a currency that could have a serious impact on the given
00:28:48
Speaker
you know, issuing jurisdiction because of the sheer size and scale of that Libra payment system and the reserves. So central banks had numerous sovereignty and security reasons to start looking more closely at both stablecoins and a publicly issued alternative in the form of CBDC. But again,
00:29:11
Speaker
I think in the future, all of these things will coexist. As Bern said, there are many different variants of these new forms of digital money. Stablecoin regulation in many jurisdictions is maturing, coming introduced. Stablecoin issuers will be more tightly regulated. Stablecoins, while they may or may not ever be considered on the same level as money,
00:29:41
Speaker
will definitely become part of that wider payments ecosystem. And there will be different use cases for which tokenized commercial bank to put money or tokenized e-money or stablecoins might be more effective than CBDC in a given application.
00:30:01
Speaker
Yeah, I think that's right. And just to reinforce that point, I do think they have to coexist. And I think they have different benefits because they're designed for different reasons. In the absence of a CBDC, stablecoin can do more. It can fill a gap. That doesn't necessarily mean it's the right thing for all the use cases. But if they design well, I think a system of central banking digital currencies, both retail and wholesale,
00:30:30
Speaker
alongside a set of tokenized deposits issued by banks and holyback stablecoins issued by non-bank registered payment institutions, for example, would be a really rich and diverse and resilient payment system of the future, monetary system of the future. And I think that's where we will head towards. So from going back to the countries that have already launched a CBD seed in, are there any learnings there in terms of adoption?
00:31:00
Speaker
You know, how are consumers behaving? Have they all rushed to adopt this thing? Or maybe some early adopters have and others are slower. Are there any learnings? Or are these economies so different that it's hard to actually draw any conclusions? I think it's definitely learnings to be had. But if you look at, there's been a lot of commentary actually about some of these early issuing central banks and how they haven't reached mass adoption quickly. In fact, a lot of people saying their failures. I think that's unfair because this is designed
00:31:30
Speaker
to be a, you don't want to rock the boat too quickly. In fact, so you've got a, let's say slow adoption in some of the Caribbean countries and part of the lesson to learn from that is you need to make sure A, you've got banks on board and they're happy to issue or receive the CBDC, distribute or receive the CBDC and retailers, merchants who are happy to again receive
00:31:54
Speaker
this thing and park it and then deposit it with their bank and that the whole system works. Also that the population understands what it is and why they're being asked to use it and why it's different to what they already do use. But the flip side is you look at Nigeria and they came under fire for for trying to push it up too quickly and then at the same time trying to
00:32:16
Speaker
redenominate the currency to deal with too much money circulating outside of the banking system. So they wanted to do both at the same time, force people to use the banking system more, force people to use the CBDC more.
00:32:31
Speaker
And they almost went too quickly, too fast. And you had rioting in the streets a few months ago. And so it's really important, I think, that central banks do take this kind of cautious approach. They trial it out. They build slowly. They build adoption. And they build buy-in with the public. Because actually, the way we pay for things is a really important part of the social fabric.
Designing a Consumer-Friendly Digital Pound
00:33:01
Speaker
And if you break that social contract, then you're in real trouble for the wider economy. And actually, in many ways, China has done this really well, I think, because they've gradually rolled this out, they've tested it, and it's reaching quite large scale. But they've not done it quickly.
00:33:23
Speaker
And they did have already, obviously they have different social fabric in China to play with, but it's been an example of how you can reach real scale with the CBDC without doing it rapidly and mandating its use, for example. But lessons to be learned. So I think for what it's worth coming back to the UK, I think the UK has approached to do this slowly, to have a public debate about it.
00:33:51
Speaker
and to work with other central banks to make sure what they're building is not built in a vacuum and to make sure it's built in partnership or in collaboration with the private sector. But those are all really key to success. Absolutely. And to reinforce some of those points, I think there's often this perception that
00:34:15
Speaker
CBDC adoption is all about the end-user take-out, the consumer take-out. But as Boon said, it's about creating a successful ecosystem around it so that the consumer at the end of the day sees CBDC or a CBDC payment
00:34:33
Speaker
as just one, you know, as the most appropriate choice for a given situation. So it's about having merchants and, you know, the ecosystem of payment interface providers, creating novel applications and things like that and making it seem this easy to use. That will ultimately drive end user adoption. And I think also that we'll
00:35:00
Speaker
The CBDC will ultimately be successful when people are paying attention to it, when I'm not thinking, oh, am I using my CBDC wallet or am I using something else? What is the nature of the money that I'm actually using? I'm just thinking, I'm using the most appropriate thing under the circumstances at the moment.
00:35:17
Speaker
When I use Apple Pay, I prefer to use my Amex card in Apple Pay, but sometimes I have to use my Curve card because somewhere does mix up Amex. That's the most I think about it, though. And it should ultimately be similar towards CBDC. People aren't walking around.
00:35:31
Speaker
thinking about the nature of the cash they hold or what's happening to the money in their bank accounts. Should they still be confident in the banking system? All this is kind of seamless. If we have the right legal and regulatory infrastructure around all of these new forms of digital money, then I think we will reach that point, whereas people are agnostic but able to benefit from each of them.
00:35:57
Speaker
So, okay, Jan, I'm going to ask, the Digital Pound Foundation campaigns actively for a well-designed digital pound. So, if you can, from a consumer perspective, what does a well-designed digital pound look like? What are its key components and how would a consumer actually use it?
00:36:21
Speaker
There are a lot of aspects to this. I probably could be able to go into all of them. But again, it's about that trust and confidence, regardless of whether it's public or private, the form that a digital pound might take. Any digital pound, anything that is considered to be a digital pound, needs to have a certain transparency of governance.
00:36:46
Speaker
So people should be able to know and have confidence in what they're actually holding, in who the liability is against, in what recourse they have if something goes wrong, and things like that. And that's what a lot of stablecoin regulation is being introduced to address, for example. And obviously, those risks exist to a far lesser degree with central bank digital currency.
00:37:10
Speaker
They should also be able to know and understand how their data is being used, who's using, who's looking at their data, where it's being sent, and under what circumstances it can be accessed. Privacy is a huge topic in CBDC, and I think in the discussions, in the more public and media discussions around CBDC, it tends to be the task of any discussion.
00:37:38
Speaker
because it's probably the most meaningful to most people. Is the government going to be able to see what I do? Are they going to be able to control my money? Are they going to be able to freeze my money and things like that? A lot of these questions and a lot of the confusion that comes up around how the government or the central bank might be able to access data and
00:38:05
Speaker
I should add, in the UK, the proposal is that neither the government nor the central bank will access personal data. All that will be held by the payment interface providers reflecting the model that exists today with commercial banks. But obviously, all of these are the biggest concerns. And a lot of it, I think, is due to people not understanding how the existing banking system works right now.
00:38:36
Speaker
The commercial bank holds all of their personal data. None of this is passed on automatically to anyone else. But there are provisions for law enforcement to be able to request and obtain data subject to the appropriate due process being followed and things like that. And that will be reflected in the future as well. So privacy, confidence and trust, usability, accessibility, I think.
00:38:55
Speaker
and the fact that right now
UK Values in CBDC Design
00:39:04
Speaker
In terms of CBDC, a private issuer might decide, I am going to focus on certain types of use cases. I don't need to cater for offline usage, or I don't need to cater for financial inclusion or things like that. On the other hand, when you're introducing the CBDC, you do need to think about how you want it to be used by the population. Maybe it is a lower priority to have everyone able to use it. Maybe you do still see cash being heavily used in certain sectors of
00:39:36
Speaker
society and you want the CDC to be something wholly complementary to that. On the other hand, maybe you want uptake to be as wide as possible and therefore you need to consider whether you're going to make it available offline, how you're going to implement that.
00:39:50
Speaker
How are you going to cater for people who don't have mobile phones or mobile devices? And then the financial inclusion, which is a separate non-technical aspect. How are you going to develop a framework and market structure and regulatory structure that supports financial
00:40:08
Speaker
inclusion as an outcome and doesn't create the same barriers to entry as the banking system today. So lots of things like that. It's basically when we say a well-designed digital path, we mean one that is reflective of the values of the UK as a jurisdiction and as the democratic society.
00:40:33
Speaker
Right. Yeah. Excellent. Thank you. And so can you also just explain where we are on this journey? You know, how far we got and when could we expect to see a digital pound actually launch? Do you want to take this one? Sure. So we are on the journey in the UK.
00:40:55
Speaker
There was a discussion paper published a couple of years ago, and a consultation paper published earlier this year, and that consultation was closed. And so the thank you thing has been said, there will be a design phase now, lasting two years, it will take into consideration of all responses. And then at the end of that two year period, so we're talking mid 2025, they'll make a decision of whether or not to proceed with the digital power. So still no decision on whether to do it.
00:41:22
Speaker
that some of the seniors in Central Bank have said that they think it's more likely than not. And if they decide to go ahead in 2025, I think then there's a phase of actually implementing and building it so that you could look at another two or three years. So we're talking about the back end of this decade. But I think there's enough momentum behind it right now. I think
00:41:50
Speaker
as we've discussed already, there's so much innovation happening outside of the central bank space that central banks all around the world feel the need to keep up and innovate. Otherwise, something that is core to core to their responsibilities is being provided by people outside of central banking space.
Blockchain's Impact on Mainstream Adoption
00:42:12
Speaker
And if you were guessing, would you guess that they will go for a decentralized blockchain based solution?
00:42:23
Speaker
Yeah, well, so I think they're going to explore that now. For me, the most important thing here is that they are making the most of all the innovation that's happening in this area, that they are taking advantage of all the years of innovation that's been happening in the digital asset space. Because as I said, that's when you get the best of both worlds. And I think there's many in the digital asset industry that would say that we've developed highly resilient, highly scalable technologies now.
00:42:51
Speaker
both for holding, securing, transferring any digital asset. And then you get all these extra functionality, these extra features, whether it's the immutability of a blockchain, the programmable payments and transactions that you can build on top of that. And so my hope is that we will end up in that world. And yeah, I think we will, although that debate is still to be had in the UK. And I guess my follow up question then is if we do end up there, even though
00:43:21
Speaker
it's a few years away still. Do you think that, or how significant I suppose, a milestone do you think that would be in terms of blockchain and the whole crypto space kind of finding it's almost like the killer use case and going much more mainstream than it has so far? I think that will be the watershed moment.
00:43:47
Speaker
But in two ways, it's not that people out in the crypto ecosystem are saying, I hope that central banks do this because that's when all our coins will go to the moon. That's not the way this works. I think it's a recognition that this is, it's a validation, actually, that the innovation and the technology has real value. And if it gains mainstream adoption, then we will see more and more, as we are now, actually,
00:44:14
Speaker
seeing more of the utility of digital assets, not the speculation, but the utility. So when we're tokenizing real world assets, there's tokenizing financial assets, and we have tokenized money issued by the most trusted institutions in the world to settle those assets, to transact in those assets. So I think it will be a watershed moment, but it will be
00:44:40
Speaker
less it will take the shine off the speculative side. And I think that's a maturing of the industry rather than either a definite to the industry, nor a complete cold star or anything like that. So it's bringing the two together.
Privacy in Digital Transactions
00:44:58
Speaker
And that's what I think is really exciting about this phase. Just can I just go back to one point you said before about privacy? Because I think in order to get to that world, which I think we're heading to,
00:45:09
Speaker
I think it's really clearly important we solve this privacy debate. Even though the Bank of England is very clear up front about the fact that it's designing the CBDC in such a way that hard wires privacy, it ensures that the government and the Bank of England cannot see individual transactions. There has still been a huge amount of nervousness about individual privacy. And I think that means that
00:45:39
Speaker
the Bank of England and the government need to go further, actually. I think they need to say, we're not just going to preserve what you have today, but this technology allows us to be even clearer about it. And we can define it in such a way that it really does hard code privacy. And it says very clearly, these are the transparent rules upon which your payment provider or your bank has to monitor. But these are the clear rules and it's hard coded in, but they cannot be read by anyone else.
00:46:09
Speaker
And we can use technologies like zero knowledge proofs, or we can use different privacy zones that protect in a really rigorous way, individual privacy. And we can go further because we can have, you know, there's so much nervousness about that. There was so much nervousness in the UK about national ID cards for good reason. People didn't want to be identified as a number and tracked. But a digital identity attributes framework, like it's being proposed,
00:46:38
Speaker
Actually, I think, in my view, gives more power to the individual to control the way their identity is managed. It puts the onus on them, the management of their own identity in their hands. And the CVDC alongside that kind of digital identity attributes framework is actually very, very powerful for the privacy of the individual. And so I think we've started that debate and I really hope that
00:47:05
Speaker
we get into some of this and say to the population, look, actually, the way you are tracked today online or in your spending or the way you can be tracked by private companies isn't the way you want the system to work. What you want is more control. And actually, we can help you have that in part, actually, through delivering a CVDC that sets a standard here and sets the rules for what private companies can do as well.
Public Education and Political Debates
00:47:36
Speaker
Yeah, I mean, it sounds like there's a sort of huge education endeavor that needs to happen, actually, in order for people to get beyond these concerns. Definitely. And that's what I said. Lessons from around the world, absolutely. Don't go out and put something out there and say, hey, go and play with this and see what you think. That won't work in this context. It needs to be a journey that the public go on over time and people need to genuinely need to understand it.
00:48:06
Speaker
and need to trust it in order for us to have all these potential benefits that we've been talking about. So yeah, education is hugely important. And just maybe just sort of our final perhaps lesson is, could you say something about what's happening in the US where the prospect of a digital dollar seems to become particularly politically divisive? Yeah, it's funny.
00:48:30
Speaker
I think in a similar way to what we just described about privacy, I think that's a key part of what's going on in the debate in the US. And it's been picked up by both sides of the aisle. And there's concerns that they will, the government and central bank will use a digital currency, A, to spy on people, see what they're spending their money on, stop them from spending money on things they want to spend it on, all that kind of stuff.
00:48:57
Speaker
But actually, it's not like the US has set up what it plans to do with it in a clear way. So it's all speculation and it's all being used as a kind of, it's hyperbole and it's not really found in much fact. So it's being used as a political football right now. That's a shame for the development of CBDCs around the world, given that the US is going to be absent for the next year or two, at least.
00:49:24
Speaker
But if, I mean, we could have ended up in that situation in the UK. Thankfully, the Central Bank here has been on the front foot and said, we're going to have this debate. And this is how we're, what we're not going to do with it. And we're not going to use it to spy on you. So hopefully the US will come out of that in time. I think the US also has some unique characteristics, such as
00:49:47
Speaker
its existing payments infrastructure is already sort of cobbled together, held together with pieces of string and chewing gum and things like that, the whole state versus federal distinction as well.
00:50:04
Speaker
Arguably, on the domestic front, the US actually has a significant amount to gain from the introduction of a domestic CBDC. But also globally, with the US dollar essentially the world's reserve currency, with it being used as the currency of transaction in so much international trade,
00:50:24
Speaker
and things like that, there's a huge opportunity there to maintain the US dollars, you know, supremacy on the global stage as well, which I think President Biden did actually recognize in his executive order last year, where he was, you know, asking Congress to look into
00:50:43
Speaker
a CDC for the purpose of maintaining the US dollars position on the global stage. So there is that recognition. So those are really two huge drivers for the US. And in that respect, it's in their interest as a nation to really, you know, tackle head on the public concerns and issues that they have.
00:51:10
Speaker
because it's going to be so fundamental to their ongoing abilities to remain competitive in the future. So is there, my final, final question, because we really are running out of time here, but is there a bit of a race on between, let's just take the UK, the US and the EU in terms of who is going to release a digital pound euro dollar first?
00:51:38
Speaker
I think we'll see the digital euro first. The EU is very highly motivated in this respect. And the proposals around the digital euro are very mature. They've already worked through the ECB basically can issue a digital euro tomorrow at once. It has the
00:51:56
Speaker
It has the legislative powers to do that already, which are explained in the digital euro proposal. It doesn't need any additional enabling legislation in order to do that.
00:52:13
Speaker
That said, the EU's digital euro, when it ultimately comes out, might not look like most people's idea of CBDC for various reasons. I think in terms of the US and the UK, it would be nice to be able to say that the UK will be a close second to the EU. In reality, I think it's going to be a two-tortoise race there.
00:52:36
Speaker
The tortoise and the tortoise. Excellent. Lovely. Well, thank you so much to both of you for your incredible insights into this complex and still evolving topic. It's been really, really interesting talking to you both. And perhaps we'll have you on again as things develop further. But for now, thank you so much.
00:53:05
Speaker
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