UK’s CBDC advances with creation of sandbox-like laboratory

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The Bank of England (BoE), the central bank of the United Kingdom, recently delivered a progress update on the design phase of the digital pound, in which it announced the creation of a ‘Digital Pound Lab’ to enable “hands-on experimentation,” as part of its ongoing preparation for a potential central bank digital currency (CBDC).

“Over the course of the past year, we have made progress in the design phase of the digital pound project, laying a solid foundation for the next stages,” said the BoE. “Our efforts have focused on building the evidence required to support a robust assessment of the costs and benefits of a digital pound and to inform what comes next.”

The design phase for the U.K.’s digital pound began in early 2023 when the central bank published a consultation paper exploring the need for a CBDC and proposing a set of design choices. The latest progress update summarizes the work of the BoE and HM Treasury—the government’s Economic and Finance Ministry—since then.

The digital pound design phase consists of four parallel workstreams: experiments and proofs-of-concept (PoC) in collaboration with the private sector; the creation of a “blueprint” for the proposed model and design of a digital pound; a program of external engagement described as a “national conversation”; and an ‘assessment phase’ consisting of the creation of a framework to evaluate the costs and benefits of a digital pound, which will inform the decision on whether or not to proceed to the build phase.

“We have commenced in-depth analysis of end-user payment needs and use cases, assessing whether and how they can be enabled using the digital pound,” the BoE said in its January 14 update. “This includes the needs of individuals and businesses when making or receiving payments, and covers use cases fundamental to any form of digital payment as well as those we believe could differentiate the digital pound from existing options, delivering additional value to end users.”

It added that “through surveys and working groups, we have engaged with individuals and businesses to understand better their existing payment needs and pain points, and are in the process of setting up experiments in the Digital Pound Lab to test the feasibility and requirements of specific use cases.”

The report outlined the next steps toward a digital pound, including ‘design notes’ for the blueprint and the creation of the Digital Pound Lab.

The Digital Pound Lab

The BoE described the Lab as a “technology sandbox environment” that it hopes will “enable hands-on experimentation” with a broad range of private sector partners to test application programming interface (API) functionality, ‘innovative use cases‘ and potential business models for payment interface providers (PIPs) and external service interface providers (ESIPs); the former being regulated private sector firms that serve as intermediaries between end-users and the BoE’s core digital pound infrastructure, while the latter are firms that offer non-payment-related services to enhance the digital pound user experience.

According to the central bank, the Digital Pound Lab will be launched later this year and will “provide a simulated environment to test the potential capabilities of a digital pound, offering critical insights into the feasibility of different use cases.”

It added that this would help assess the digital pound’s workability as “a platform for innovation.”

Design notes

Alongside the progress update, the BoE published the first of its design notes, which will set out the bank’s developing opinions on specific topics related to a potential CBDC. These notes explore matters being considered during the design phase and aim to provide transparency for stakeholders on the BoE’s thinking.

The first of the design notes, simply called “blueprint,” outlined the framework for developing the blueprint. Despite its title, the design note is not the blueprint itself, rather it highlights areas for exploration by the BoE and HM Treasury.

The framework is broken down into four components:

• Product vision and strategy – outlining the proposed digital pound, including how it could meet policy goals and its potential utility for consumers and business merchants;
• Scheme and regulation – the terms and standards for a digital pound’s use and operation, as well as clarifying public and private sector roles and responsibilities;
• Technology – the “conceptual and logical design” of the core digital pound platform and the infrastructure and technologies that PIPs and ESIPs may need to interact with it; and
• Operations – the roles, functions, and service levels required to maintain a “continuously available, secure and resilient digital pound infrastructure.”

“Through our work on the blueprint, we have advanced work on all its key components,” said the BoE. “Once complete, the blueprint will be a record of the proposed model and design of a potential digital pound and will form the basis for assessing the benefits and costs.”

The road to a digital pound

The design phase kicked off in 2023 with a BoE consultation, which received over 50,000 responses.

In January 2024, the BoE and HM Treasury published their responses to the feedback, concluding that it was too early to make a final decision on whether a digital pound is necessary while committing to continued research and design of both a retail and wholesale CBDC.

The BoE and Treasury added that this response was just the start of the project’s design phase and that respondents’ feedback would help inform the continued work on a digital pound in both technology and policy terms.

They also stated that if the decision was eventually taken to go forward with a CBDC, “a digital pound would only be introduced once both Houses of Parliament had passed the relevant legislation.”

In July 2024, the BoE published a discussion paper titled “The Bank of England’s Approach to Innovation in Money and Payments,” in which it emphasized the importance of households and businesses across the U.K. being able to make payments with convenience and confidence, as well as outlining four specific desired outcomes in retail payments: singleness of money, innovation, resilience of infrastructure and the wider ecosystem, and effective governance and funding.

In its Tuesday publication, the BoE clarified that the four outcomes set out in the discussion paper applied equally to private payments innovation and public money, such as a potential digital pound.

In the July paper, the central bank also promised to undertake a series of experiments within the next six months to examine wholesale CBDC settlement compared to the “synchronization” (the coordination of fund transfers between banks to ensure transactions are settled in real-time) of non-CBDC central bank money using the U.K.’s existing real-time gross settlement (RTGS) system, known as the Clearing House Automated Payment System (CHAPS).

Toward the end of 2024, BoE Governor Andrew Bailey hinted that the U.K. could be edging closer to a digital pound for both wholesale and retail payments during an October 26 speech.

Speaking at the Group of Thirty’s 39th Annual International Banking Seminar, Bailey emphasized the need to modernize payment systems, particularly cross-border and wholesale payments, by harnessing digital technology.

“Harnessing digital technology to improve strikes me as having real potential, say in areas like solving late payment for firms by enabling automatic release of funds when goods are delivered and more widely using encryption technology to prevent fraud,” said Bailey, adding that “to do otherwise would risk a failure of imagination.”

Rounding off the year, the BoE published a detailed report on the issue of privacy, titled ‘Enhancing the Privacy of a Digital Pound,’ aimed at informing public dialogue on a digital pound and other CBDCs, as well as to “encourage further research and dialogue particularly on the application of established and emerging technology options to enhance privacy.”

The next steps for a digital pound

In its latest progress update, the BoE was keen to emphasize that “no decision has been made on whether to proceed with a digital pound.” However, the level of detail and planning presented in the report, as well as previous favorable noises from the central bank and its governor suggest a strong inclination toward a U.K. CBDC.

Either way, after completing the design phase over the next couple of years, including taking account of developments in the broader payments landscape, the BoE and the U.K. government will assess the policy case for a digital pound and determine whether or not to proceed, with a digital pound only being introduced with Parliament’s approval and requiring primary legislation.

In an accompanying press release to Tuesday’s progress report, the BoE said that “the earliest we would issue a digital pound would be the second half of this decade,” although, given that it’s 2025 already, this could technically be any time in the next five years.

The BoE clarified this slightly, explaining that “we are now in a design phase which will look at the technology and policy requirements for a digital pound. In the design phase, we will test how it could work in the real world. This will bring to life innovative ways to use it so you can see how it might be useful and relevant to you. We will also carry out detailed assessments to work out exactly how a digital pound would operate.”

At the end of this phase, the central bank said it would have enough information to decide whether to move into a build phase.

Finally, the BoE reiterated that Parliament will also have its say before any digital pound is launched, as well as further public consultations to ensure everybody can make their views heard.

In terms of specific next steps, the BoE said that developing the blueprint will require input from a range of stakeholders. It also promised that, along with HM Treasury, it would continue to engage with stakeholders such as banks, FinTechs, merchants, and charities through existing forums and additional publications.

“Our goal is to ensure they are informed and involved throughout the design phase, and are able to provide valuable input to contribute to our design work,” concluded the BoE.

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