1. R3 welcome the opportunity to respond to the House of Lords Economic Affairs inquiry into Central Bank Digital Currencies (CBDCs). We believe CBDCs are an area of great potential for governments, industries and consumers and we have been supporting central and commercial banks all over the world to explore and develop their design. Drawing on this experience and our technical expertise in Distributed Ledger Technology (DLT), we have shared some thoughts below to support the inquiry. For the purpose of this response we have focused on retail CBDC, but should highlight that there are also considerable opportunities that can be derived from wholesale CBDC. We hope the comments are helpful and would be happy to meet to discuss them further.

Introducing R3

  1. R3 is an enterprise software company offering Corda, a DLT platform, and Conclave, a confidential computing solution.  We are working with a network of over 300 banks, financial institutions, regulators, trade associations, professional services firms, and technology companies to build cutting-edge DLT solutions. We are headquartered in New York and our single largest office is in London.
  2. Corda has been used in several world-leading CBDC projects. A small sample include projects being conducted by: the Banque de France, Swiss National Bank, and Bank for International Settlements (BIS) in Project Jura; the Monetary Authority of Singapore, South African Reserve Bank, Bank Negara, Reserve Bank of Australia, and BIS in Project Dunbar; the Riksbank in their eKrona project; the South African Reserve Bank in Project Kholka; and Swiss National Bank and BIS in Project Helvetia. Our involvement has enabled R3 to establish world-leading technical expertise in CBDC. We have used this to support projects, publish thought leadership and drive understanding of CBDC through our CBDC Working Group and sandbox.


Question responses


Question 1

  1. The main issues driving the development of retail CBDC can be themed but remain largely a product of jurisdictional factors and preferences. The single largest theme in western nations with mature payment infrastructure is to view CBDC as a possible response to the consumer trend away from cash and towards digital payments. Against this landscape, we have witnessed central banks examining whether a digital by default payment environment that is reliant upon private payment rails provides sufficient resiliency, competition, consumer protection, and facilitates financial stability. Questions are also being asked of the macroeconomic role of public money in the payments space and whether the development of CBDC may facilitate the existing – or provide additional – levers of monetary policy to be replicated in a digital payments landscape. In other jurisdictions, typically in the developing world, we have seen CBDC viewed as a payment option that will facilitate a leap-frogging effect in the domestic payment landscape. This option is being examined as central banks assess how to improve existing payment options, which are typically outdated, inefficient and failing. The issue of financial inclusion is one that is common globally. In our view, the impact (be it temporary or permanent) of Covid-19 in this trend is notable but does not appear a catalyst.
  2. The establishment of DLT-based payment options is also a significant factor in the development of CBDC. This is because of the native utility that the technology represents, chiefly the capacity for peer-to-peer transfer, instant settlement, privacy, programmable money, and cross-border exchanges. Early cryptocurrencies such as Bitcoin demonstrated some of these features. Although such assets are ill-suited for use as a currency and have remained within a niche user base, they have demonstrated what is technologically possible and inspired private entities to issue their own currencies. The most significant being Facebook’s Libra/Diem.
  3. The potential for the issuance of unregulated private currencies has motivated some central banks to accelerate their understanding of CBDC, alongside working with the regulator community to mitigate the potential risks of private currencies – examples include the European Union’s Market in Crypto Assets (MiCA) legislation. Most central banks recognise that the technology has arrived to facilitate the issuance, distribution and transacting of a private currency and have taken the welcome decision to embrace innovation and examine whether public money should offer features fit for a digital future.
  4. In China, the emergence and dominance of private, closed-looped payment systems has led to the development of the digital yuan and is a good example of the pace of the private sector influencing public sector CBDC issuance. The development of China’s CBDC has also been a factor in the examination of the solution by other central banks, with some concerns that currency substitution may be facilitated through the availability of the currency beyond Chinese borders.


Question 2

  1. In its discussion paper on CBDCs, the Bank of England provided a thoughtful outline of the different benefits a CBDC could provide. We believe the categories identified are a useful structure for understanding the landscape of possible benefits. As such we have used this categorisation to structure our own outline:
  1. As with any form of payments innovation, introduction of a CBDC will require careful examination, navigation and mitigation of the risks posed. Chief among these are the risk of financial sector disintermediation and privacy. We explore these in detail, and relevant mitigants, in Question 4 and 5.


Question 3

  1. The UK payment landscape is one of the most mature and successful in the world, however given the challenges emerging from technology led disruptors in the FinTech space and consumer preferences, it is not likely to remain static. Payment trends suggest that the UK may soon arrive at a payments landscape that is dominated by private providers and private money, even as physical cash continues to be an option. We support the Bank of England’s commitment to continuing to facilitate cash payments for as long as the public wishes it. However, as cash use is in decline because consumers have developed new preferences for how they choose to pay for goods and services, both in person and through ecommerce, we believe it is prudent for central banks to examine the payments landscape and access to public money in readiness for cash becoming obsolete.
  2. We note that the unique benefits of CBDCs have been intelligently outlined in the Bank of England’s CBDC discussion paper, and include improving the availability and usability of central bank money.


Question 4

  1. Striking the correct balance between adequate supervision and consumer privacy is a challenge that dominates discussion on this topic. As a technology provider, we are clear that there are many technical choices available to central banks and governments in the design of a CBDC solution that will allow them to strike a balance that fits their jurisdiction.
  2. When we consider the matter of privacy in payments, we generally consider it in two regards: 1) privacy of what, and 2) privacy from whom. When considering the privacy of what it’s useful to consider both the assets themselves and the transaction details as two components that might contain data that should be access restricted. When considering from whom such data should be restricted, it’s useful to consider: the network operator and issuer, the transaction counterparties, and network participants at large. For example, when transacting with a Credit or Debit card your counterpart does not receive details of your personal identity, but that information is still a part of the transaction data that facilitates the payment. Similarly, when you pay in cash the issuer and operator of the cash system does not know about this particular transaction, although it has facilitated it. In both these examples existing systems provide privacy from certain entities but not others. This should provide the starting point in considering the design of a CBDC and how it relates to privacy.
  3. Applying the appropriate degree of privacy is a fine balance. DLT platforms provide multi-faceted ways to strike this depending on the desired trade-off. One design examined by the ECB is the potential for overlay services to supplement the core CBDC design to provide for anonymous transactions to be carried out below a certain value and within a certain time period. These services could be provided by a Payment Interface Provider (PIP), who would perform AML/KYC assurance and issue an anonymity token accordingly. This would allow a user to privately use CBDC much as they would have with physical cash, with their identity and transaction history hidden.


Question 5

  1. As discussed above, the payments landscape is likely to change significantly in the coming years, with CBDC and other potential digital currency offerings facilitating an innovative and competitive financial services sector. The UK’s ambition to embrace open finance and open banking greatly complements this trend. We anticipate that this will boost competition in the sector and facilitate the entry of new players and service innovations.
  2. There are notable concerns that some CBDC models may threaten bank disintermediation. We note that a key focus of central banks across the world – including the Bank of England – is on designing a CBDC system which acknowledges this risk and avoids it. There are a number of policy tools that could be selected to protect against this threat at a regulatory level. At the technical level, the programmability of CBDC could facilitate a number of different technically implemented but policy designed measures to disincentivise or otherwise restrict the use of CBDC. This includes tired renumeration, holding and transfer limits or indeed designing a distribution system that provides a role well suited to the existing financial service providers.
  3. It is important to recognise that understanding the potential scale of adoption of CBDC is key to understanding what kind of impact it will have on the financial sector. Design and functionality will be central to how attractive the payment option will be to consumers and therefore what kind of mitigation measures may need to be applied to avoid negative consequences in the financial sector. At this stage, it is therefore difficult to be definitive on this topic in our submission.


Question 6

  1. As previously highlighted, we believe CBDCs could stimulate competition and further innovation in payments. As an additional payment rail, CBDCs would increase competitive forces in the market and the pressure on existing firms to innovate and improve their services. An open, interoperable CBDC platform could also facilitate the entry of new (including non-bank) players to the market to offer bolt-on, CBDC-related services. The Bank of England’s platform model, and intermediary role that is provided for PIPs, is a good example of how CBDCs could support a competitive ecosystem.
  2. As well as CBDCs potential to influence broader market competition, and the innovation this drives, the technical possibilities they create could also act as a powerful driver of payment innovation. We have touched on CBDCs capability to deliver innovations such as ‘micropayments’, another feature that could drive significant innovation is their ‘programmability’. DLT has made it technically feasible to programme money so that payments only occur when a set of predetermined conditions are satisfied. As well as having a use at a retail payments level, this programmability feature could have applications for use by government agencies e.g., issuing welfare payments or tax. For example, a CBDC could allow for automatic taxation at the point of sale, reducing the level of fraud, the potential for money laundering, and leakage away from the tax system. In 2018 R3 ran a proof-of-concept exercise with Her Majesty’s Revenue and Customs (HMRC) and the Instant Property Network (now Coadjute), which conducted a home purchase using Corda. In this trial the taxation from the purchase was identified and automatically directed towards HMRC.


Question 7

  1. Setting the base interest rate is the core monetary policy tool available to central banks. The effectiveness of this tool is dependent on the strength of the transmission mechanism into the economy and the role of public money in the payments landscape. In an environment where public money is not available to the public this may affect the effectiveness of transmission.
  2. One of the motivators we have observed for CBDC centres around the threat that private currencies or foreign currencies represent should they establish themselves as popular payment option. Whilst currency substitution from these sources will likely represent a different level of threat depending on the country concerned, monetary sovereignty is a topic that regulators are right to examine.


Question 8

  1. CBDCs provide policy makers with the technical scope to change the role and responsibilities of the Bank of England, however change is not inherent or the default consequence to the introduction of a CBDC. The extent to which CBDCs impact the Bank of England’s role is a decision for policy makers and the model they wish to pursue.
  2. We note that the Bank of England, much like its international peers, has so far indicated that a model in which the Bank directly services customers and provides all CBDC-related services – something that would significantly expand its role and operational duties – is highly unlikely. Instead, under the platform model proposed, the Bank of England’s role may shift, e.g. to developing and running the core CBDC ledger, but private sector firms would manage all interactions with CBDC consumers (and responsibility for onboarding and management) and the provision of overlay services.


Question 9

  1. We are strongly supportive of the Bank of England and HM Treasury’s approach to the research and development of CBDCs. In particular we welcome their open consultation with industry and other stakeholders, including most recently over the Bank of England’s CBDC Discussion Paper and HM Treasury’s consultation on cryptoassets and stablecoins. We are keen to share our technical experience of CBDCs to help policy makers understand the full scope of opportunities and risks. We look forward to continuing to support this work through HMT and the Bank of England’s new CBDC Technology Forum, which our CTO, Richard Brown, is a member of.
  2. Engagement with the public will be fundamental to the research and development process of CBDC. The public is an important end user; understanding their payment needs will be critical for helping policy makers navigate the many technical possibilities of CBDC and deliver a proposition that meets consumer needs. It will also be crucial in understanding the likely adoption of the solution and determining whether the need for CBDC truly exists.


Question 10

  1. The threat of currency substitution facilitated by new forms of currency is one of the motivators behind CBDC development in many nations and will likely pose a different level of credibility and concern depending upon local domestic conditions. In the UK’s case, we do not anticipate this representing a significant threat.
  2. We are aware that this is a topic under examination by the International Monetary Fund and have been advising them on the technical features of CBDC which may influence the effectiveness of capital flow management and measures. In our view CBDC may enhance such measures by virtue of providing increased visibility of payments and the movement of money.
  3. Pilots on cross-border payments with CBDCs demonstrate promising potential for reducing the friction and cost of payments between countries, which could be a powerful support for trade and cooperation. The programmability feature of CBDCs could also be leveraged to ensure CBDCs cannot be manipulated to evade legal processes or economic sanctions. For example, CBDC tokens could be programmed to only work in specific geographies, or require conversion into fiat forms of the currency within a specific time period.

14 October 2021