Submission to UK Lords Economic Affairs Committee by SICPA SA, 15 October 2021


SICPA is a leading provider of secured authentication, identification, traceability and supply chain solutions, headquartered in Switzerland and operating globally. SICPA technologies protect the majority of the world’s banknotes, identity and value documents. SICPA is a long-trusted advisor and innovator to governments, central banks, high security printers and industry with over 80 years’ experience in security systems for central banks.  We have conducted applied research on central bank digital currencies (CBDC), focusing on solutions for retail “digital cash” that balance privacy and oversight, complement physical cash and respond to the core requirements of central banks, as specified by the Bank for International Settlements (BIS).  We are pleased to be able to respond to this inquiry and share our insights on the potential of CBDC in the UK context.


  1. What are the main issues driving central banks to explore CBDCs?


1.1           BACKGROUND

According to the IMF, 110 countries are currently exploring the concept of Central Bank Digital Currency (CBDC).  The main driver is to support central bank objectives of providing a safe, trusted form of money to meet public demand and maintain sovereign monetary stability.  Two forms of CBDC are under consideration: retail (for the general public) and wholesale (for banks and financial institutions).

Retail CBDC - The current form of money issued by the central bank and used by the public and merchants is banknotes or coins. A retail CBDC or digital cash would coexist with physical cash, at least in the short to medium term, with the primary purpose of meeting public demand for accessible, affordable and innovative payments and stores of value both online and online.

Wholesale CBDC – A form of digital currency reserves (not unlike today’s electronic central bank money) to be used by financial institutions holding a bank account at the central bank. The primary purpose of wholesale CBDC would be to improve legacy infrastructure and create more efficient inter-bank payments.

This submission focuses on retail CBDC - Motivations for CBDC vary globally depending on individual nation state needs and national CBDC solutions will be developed and tailored accordingly. Motivations may also evolve depending on national policies, the economic situation or global events.

1.2           UK CONTEXT

The relevant drivers for retail CBDC are:

Currency confidence - A central bank’s role is to meet public demand for risk-free money ensuring confidence in the currency. Decline in the use of cash for payments (if not overall cash in circulation), has accelerated over the past 10 years and through the COVID-19 crisis due to the preference for digital payments over cash in the context of a touch free” society. In the UK, fewer than one in five payments is now made with cash and 85% of people use contactless. The UK has also experienced a decline in cash distribution infrastructure (e.g. ATMs, bank branches) while the costs of cash processing, handling and dispersion continue to rise. Declining cash use potentially undermines the central bank’s objective to provide trusted and inclusive legal tender and maintain sovereign monetary stability.

Growth of electronic payments and private money - The past decade has seen a dramatic increase in new forms of electronic payments (such as Google Pay and Apple Pay), increasing use of privately-issued commercial bank money and the emergence of alternative stores of value and means of payment, such as crypto-assetsPublic demand for efficient, lower-cost 24/7 payment systems, domestically and cross-border places increasing pressure on nation state-issued currencies to compete with innovative alternative options. Rising adoption of private sector forms of money operating outside the control of nation states, including crypto-assets and so called ‘stablecoins’, and the lack of competitive public alternatives, present a potential threat to monetary sovereignty and the ability of central banks to implement policy.

Meeting future payment needsProviding an efficient, resilient and inclusive digital means of payment on top of which the private sector could build innovative solutions to meet the changing needs and demands of the public, stimulating competition and quality of service in payments.

  1. What are the main benefits and risks of a CBDC?


Accessible finance - There is an opportunity for CBDC to improve financial inclusion by reducing the cost to transact and increasing access to banking services. A sovereign CBDC payment system could provide the cost-effective alternative to existing payment services, enabling broader participation in the digital economy.

Backup means of payment - In countries like the UK, CBDC would serve as a resilient backup to other payment systems. While physical cash currently fulfills this need, declining cash use means that physical cash circulation and usage may drop to such low levels that it becomes an impractical backup (e.g. in the event of commercial bank failure, environmental disaster or a cyber-attack on existing payment system rails).

Digital bridge CBDC is an opportunity to address digital inclusion and the provision of a means of payment for digital goods and services for people without requisite technology to access them. A well-designed CBDC could provide a better payment experience for everyone meeting the central bank’s mandate to provide public good money that satisfies public demand.

Safety and security – Commercial banks securely hold deposits, insured to a reasonably high value, while cash-carrying individuals take responsibility for the physical security of that money. A CBDC provides an opportunity to remove that risk and offer safer access to and holding of cash. This is a compelling benefit for merchants and vulnerable groups.  CBDC can combine privacy and safety for individuals transacting digitally while offering more efficient oversight and compliance to combat crime.

Corporate payments - Business holding amounts can easily exceed insured bank deposit limits yet readily accessible liquid assets are needed and a cost-effective payment method desired. Companies are diversifying their holdings and exploring crypto-assets as a store of value. CBDC offers an alternative liquid asset that could be held securely or quickly exchanged. Central banks would be able to calibrate incentives for using sovereign currency over alternative forms of money to store and exchange value.

Overcome legacy infrastructure costs - Existing payment rails can be slow and expensive due to reliance on legacy infrastructure. Cross border payments, for example, are inefficient and correspondent banking arrangements poorly serve emerging market economies. CBDC is seen as an opportunity to satisfy public demand for effective means of payment and contribute to international financial stability and growth. CBDC also potentially provides sovereign issuers with a more efficient and cost effective way to manage the money supply than physical cash alone.

Build a platform for financial innovation There is an opportunity to build on top of CBDC through programmable features and interoperability with emerging technologies such as smart contracts, automated financial services and identity and supply chain credentials.


Disintermediation of financial institutions As a claim on the central bank, CBDC creates a risk for disintermediation of commercial banks, if citizens decided that they are more comfortable holding money in digital cash rather than in the form of deposit (private money) in a commercial bank. This risk can be mitigated through careful design and policy choices to manage CBDC demand.

Operational riskIntroducing a system that does not interoperate with legacy systems could potentially create a silo that struggles to operate in a rich and dynamic financial landscape. Any CBDC proposal must be able to interface with both existing and emerging systems to offer the public utility and choice and stimulate private competition.

Economic risksSome CBDC solutions, as seen in pilots, introduce bottlenecks regarding throughput and availability. This is not acceptable for digital cash transactions which need to be instant and cannot fail. Failure or frustrating user experience caused by slow speeds could result in low adoption and discontinued use or at worst loss of faith in the currency and potential devaluation.

Security risksAny CBDC will be a target for cyber attack by both criminal and foreign nation state actors. No solution can guarantee absolute security, especially as we begin transitioning to the age of quantum computing. The design of any CBDC must therefore be adaptable to update and meet evolving security threats, disincentivise malicious behaviour, minimise attack surfaces and build in resilliance and recovery mechanisms.

Public understanding and demand - While the benefits of CBDC are much-debated in financial institution circles, there is less clarity on the perceived need for CBDC from the public’s perspective. A general lack of public understanding about the monetary system, public and private currencies and the role of the central bank is a potential barrier for widespread adoption of CBDC.

Costs and availability of expertise – Given the early stage of discussion it is difficult to assess business models and costs for building the infrastructure, requirements for updates and internal and external staffing needs for the development and implementation of CBDC, compared with current costs of physical cash. Central banks currently exploring CBDC are necessarily taking an ecosystem approach involving collaboration between the public and private sector.

Opportunity cost - There is also risk of not pursuing CBDC when other nation states are moving ahead. Is it riskier to embark on an ambitious project, or allow new private fintech providers to potentially compromise national financial sovereignty?

  1. Could the proposed benefits of a CBDC be achieved through improvements to existing payment systems?

Improvements to existing systems in the private payments’ sphere (speed, efficiency, innovative consumer features) have prompted discussion around the need for CBDC, focusing on the central bank’s exclusive mandate to provide digital currency to all, enabling a more inclusive, resilient and efficient payments infrastructure that safeguards monetary sovereignty. Central banks are considered best placed to improve the safety and efficiency of public payment systems through a CBDC that:


  1. How should the Bank of England and HM Treasury address concerns over privacy and traceability of payments when exploring CBDC design? 


Central bank mandate - The central bank is mandated to provide a public good form of money. Banknotes and coins offer the ability to transact privately within certain value limits, above which regulatory requirements for identity checks are legally enforced. Many CBDC projects are looking at how a digital currency could better support public privacy in payments whilst still meeting compliance requirements. While citizens are increasingly sensitive to privacy concerns, governments are enforcing greater compliance (CFT, AML and KYC), creating a potential challenge for widespread public adoption of CBDC.


Hybrid models - While CBDC should be hard to abuse, it should also retain the privacy characteristics of physical cash. Some approaches privilege privacy over oversight and vice versa. A hybrid model, based on the amount of money changing hands, is often requested.  There is also exploration of how to meet both aims by building provisional anonymity into retail CBDC to guard against crime while safeguarding individual privacy, enabling strong oversight and recourse for law enforcement, all required components if CBDC is to achieve its promise as a public good.


  1. What effects might a CBDC have on the financial sector?

Financial inclusion - CBDC has the potential to help wider parts of the population have access to digital means of payment and support the financial sector in extending new financial tools and services to underserved communities.

Reducing costs Decline in use and costs of physical cash and branch infrastructure along with increased automation may support the financial sector in reducing costs and improving efficiency that can be passed on to consumers.

Disintermediation risks Balancing incentives for adoption of CBDC with risks of disintermediation will have to be carefully considered by policy makers. An interest-bearing retail CBDC may create risk of deposit leakage into CBDC while a cash-like design mirroring the characteristics and lifecycle of banknotes would reduce this risk. A commonly cited approach to overcome disintermediation risks is to maintain the two-tiered banking structure already in placecentral banks issuing CBDC to commercial banks or other financial providers which in turn handle distribution to the public and manage associated compliance and due diligence requirements. While central banks have said they do not wish to engage in daily banking and due diligence, the rising costs and ineffectiveness of compliance regulations have prompted financial institutions to regard CBDC as an opportunity for central banks to provide them with a technology that can help to alleviate this burden and improve the ability to fight financial crime.

  1. What effect might a CBDC have on competition and innovation in the payments and fintech sectors?

Complementary and competing systems - Existing central banking systems, like the Real Time Gross Settlement (RTGS) and Large Value Payment System (LVPS) are the backbone of the banking system. These are complemented by a variety of other interconnected delivery, clearing and payment systems which are either public, private or shared responsibility. Individually and together, these are anchored in an existing legal and regulatory framework, ensuring the governance and uniformity of rules across the board. A new or complementary system such as CBDC will have to fit within the same framework or within a new regulatory dimension that clearly articulates how it complements or competes with the existing systems.

Interoperability - To ensure compatibility and interoperability with existing and alternate financial system infrastructure, CBDC development should be based on shared open standards, and interoperate with related financial services and monetary system standards.

Innovation in payments - Current innovations in private money and crypto-assets are enticing the public away from sovereign currencies. Features driving CBDC adoption include improved financial management, easier means of transaction and cheaper cross border remittances and exchanges. CBDC can offer a low cost, safe harbour by competing with these innovations while backed by the central bank. CBDC offers a potential platform from which alternatives to other forms of money can be crafted. The core technology building block can provide a public good money on top of which private business can offer competitive innovation and enhanced functionality in payments and value storage, through programmable features and automated payments, flexibility that is only partly possible today with private account-based money.

  1. How might a CBDC affect monetary policy?

Monetary policy should not be dictated by technology choices. However, CBDC propositions offer opportunity for greater agency and agility in enacting monetary policy. Whilst clear decisions remain to be made by central banks, there are several key policies that regularly surface as points of discussion and are being considered as potential features.

Issuance - Multiple sources point to CBDC (both retail and wholesale), being a liability on the balance sheet of the issuer. If CBDC is a liability of the central bank, the resulting digital token will be an asset available to the public, like banknotes and coins, and constituting a part of the monetary base. Synthetic’ CBDC’s (issued by an intermediary), under consideration by some central banks, are arguably not central bank money but rather a liability of the intermediary.

Interest bearing - Although banknotes and coins are not interest bearing, CBDC theoretically offers this ability, although there are arguments against this due to the risks of disintermediation if CBDC were considered a preferable store of value. Interest bearing attributes of CBDC are therefore a variable option that will not be uniformly adopted across nations or over time.

Tax avoidance – CBDCs can enable the elimination of tax avoidance as protocol-based AML and compliance can be enforced at transaction level.

Volatility in foreign exchange rates As with physical cash, CBDC offloads the risk to the holder. If retail actors desire to store value, or transact in foreign currency, the volatility is not in scope of CBDC.

Money supply - Greater visibility of transaction volumes and velocity in real time can be used by central banks to better manage monetary supply, with data supporting more informed and higher fidelity policy decisions.

  1. How might a CBDC change the Bank of England’s role and responsibilities?

CBDC form - The chosen form of CBDC (token or account) will dictate potential changes to the role and responsibilities of the BoE. If the central bank were to manage centralised databases with transaction and user data this would extend the responsibilities of central banks to securely store personally identifiable information of public users. Equally if an account-based form of CBDC were chosen, the responsibility for onboarding and managing users would fall either with the issuer or a nominated third party.  This has the potential to dramatically change the role of central banks that traditionally do not interface with the public.

Role of public-private partnerships If the lifecycle of CBDC is jointly managed through public-private partnerships, the design choices of a CBDC could offer less dramatic shifts in role and responsibility and reduce risks. For example, a token-based bearer CBDC could be designed in such a way to closely mimic the lifecycle of banknotes today while offering the innovative advantages promised by digital currencies. An ecosystem of private partners could be developed to take on responsibilities of developing and managing component features that support such a sovereign-issued currency. Additionally, interoperability with a citizen digital identity system would allow central banks to leverage concurrent sovereign efforts in developing e-Government solutions.

  1. How should HM Treasury and the Bank of England engage with the public on the research and development of a CBDC?

CBDC as public good - A CBDC’s success is dependent on widespread adoption. As such any design must meet the needs of the public and offer benefits for use in a rich landscape of financial tools. To understand the diverse demands of different demographics, research interviews and testing must be undertaken. A robust merchant network to accept payments is also vital and engaging with industry and essential services to consider constraints and feasibility of roll out will be an important and ongoing task throughout the design and development process.

Learning from others - There is an opportunity to learn lessons from some of the frontrunners e.g.: the ECB’s public consultation on the digital euro in 2020, China’s experience of piloting its CBDC in different public settings (ongoing), the implementation of the Bahamas digital sand dollar (issued October 2020) and the Eastern Caribbean Central Bank’s digital DCash (issued March 2021). Marketing and educational materials customised for diverse groups will be key in driving understanding and adoption. The UK’s Positive Money initiative could be a potential partner for the development of a public-facing campaign around CBDC.

  1. How might CBDCs affect the economic foreign policies or geopolitical influence of different countries and economic areas? Are there implications for the effectiveness of economic sanctions?

CBDC development in other countries The threat of ‘digital dollarisation’ is compelling nation states to strengthen the global standing of their currencies and act against external competition. First mover foreign national CBDCs could be attractive to UK citizens wishing to adopt non-domestic forms of currency. In parts of the world where there are high levels of foreign investment, cross-border digital currencies could dominate. Considerations include developing a national CBDC that supports sovereign objectives and contributes to the international financial system without impeding the ability of other central banks to provide monetary stability.  An understanding of the constraints and risks of having parallel currencies in single jurisdictions is also required. Central banks may impose certain constraints on CBDC to prevent economic leakage, or to promote it (e.g.  as a tool of foreign policy). A combination of monetary and fiscal policy and careful design of CBDC features/incentives to manage demand would make it possible for central banks to balance these needs and respond to dynamic economic and political requirements.

Political sanctions and new payment rails Current global reliance on the dollar and US payment systems enhances the ability to implement sanctions as cross-border payments depend on two pieces of critical infrastructure: SWIFT and a web of correspondent banking agreements. China (CIPS - cross-border interbank payment system), Russia (SPFS - financial messaging system) and the EU (INSTEX - Instrument in Support of Trade Exchanges) are actively developing alternate payment messaging networks, in order to reduce reliance on SWIFT. This may reduce the effectiveness of economic sanctions in countries that develop their own digital currencies operating on sovereign-maintained payment rails.

15 October 2021