CBDCs: Making the basics work
The thoughts of Lee McNabb, Head of Strategy & Research, Payments at NatWest
In recent years, the shift from bank notes to digital money has caused many to question how this impacts the integrity of the British Pound (GBP). As one of the few remaining banks that issues its own banknotes, our over 300 year history has been centred on ensuring that our customers can rely on the money in their pocket.
Facilitating around one in every four electronic payments in the UK, we continue to champion potential and help UK families and businesses to thrive. Whether it is our role in industry initiatives such as New Payments Architecture (NPA), regulatory change such as ISO 20022 or our innovative propositions in areas like Open Banking, we have a broad range of experience and examples of how we are collaborating across the industry to build the digital financial infrastructure of the future.
When we come to think of digital money, our participation on the Bank of England’s CBDC engagement forum is a natural extension of the role that we play as thought leaders for innovation and industry change. We remain committed to investigating with the Bank of England and HM Treasury the rationale for developing a CBDC fit for the UK’s economy though we, the collective ‘industry and regulators’ we, need to be clear on what a CBDC will deliver and the outcomes that are trying to be achieved.
…we need to be crystal clear about how a CBDC will enable features above and beyond what the industry is already delivering.
First on the list, is why a CBDC? will it enable further innovation? how it will enhance the inclusion of the unbanked, support privacy, enable better fraud controls and enhance the cyber-resilience of the UK’s financial sector? These are some of the questions that we at NatWest remain committed to answering. And I would hope that all of these should be questions asked of any innovation – be it through the NPA, Open Banking, e-money, stablecoins or CBDC! In other words, we need to be crystal clear about how a CBDC will enable features above and beyond what the industry is already delivering.
Secondly, how firms offering CBDCs build sustainable business models. There is a recognition across the industry¹ that CBDC business models remain a challenging prospect. It may seem easy for a large firm, like NatWest, to absorb the cost of developing infrastructure and customer propositions for a CBDC – but for many FinTech’s, these business hurdles may prove insurmountable.
Third is the impact of CBDC issuance on the economy and financial stability. The Bank of England has suggested that up to 20% of deposits² could migrate to new forms of digital money. This will have a direct impact on the ability for commercial banks to offer credit to the UK economy – and will directly raise the cost of consumer lending and mortgages. It is imperative that the Bank of England work together with industry in order to properly understand this impact and how the financial industry can continue to contribute to the growth of the UK economy.
There are wider elements of a CBDC design that the industry needs to work through, almost ‘unintended consequences. Financial inclusion is an important deliverable, but how will this be implemented, and will we need a robust digital ID scheme in order to make it work? Enabling programmable money could drive new business models and opportunities, but can it be delivered without customer harm? What about sustainability implications? Data access? Privacy? Lots of topics remain for the industry to get into.
Money is always evolving and the work on CBDCs presents an opportunity to re-evaluate the way money serves the UK economy. Whether a CBDC is the right next step, or we need to leap to something else that will serve the needs of UK consumers and businesses remains to be seen. Whatever the future holds, know that the work undertaken by the industry will continue to help enable the availability of safe, reliable money when and where both consumers and businesses need it.
…the work on CBDCs presents an opportunity to re-evaluate the way money serves the UK economy.