Financial news

The Bank of England has a handsome reward for any third party able to provide a proof of concept for a central bank digital currency (CBDC) sample wallet.

The Bank of England this week confirmed via the UK Government’s digital marketplace that it will offer a £200,000 contract for a sample CBDC wallet.

Throughout the extensive post, the central bank details the nature and course of the five-month project, including its ambitions and intended audience.

The bridge to Britcoin

Awareness around CBDCs really got rolling last year in the UK in the aftermath of the Kalifa Fintech Review. The Review, conducted by the titular figure Ron Kalifa OBE, identified key areas of improvement and development within the UK’s fintech sector. The necessity for a review was first put forward by the then-Chancellor Rishi Sunak in his May budget 2020. Consequently, Kalifa delivered his long-awaited review a short nine months later.

While the review itself is no less than 100 pages long, it does underline CDBC development as a key component of the future of UK fintech.

“The introduction of a CBDC would be a significant development which could help support the adoption of new technologies (e.g. blockchain) in financial services,” reads the report. It continues by listing considerations for development projects, including the benefits of both retail and wholesale CBDCs.

Shortly following the review’s publication in February 2021, then-Chancellor Sunak announced the formation of the CBDC Taskforce during the following April’s Fintech Week proceedings.

Sunak’s Britcoin

Comprising of both the Bank of England and HM Treasury (HMT), the Taskforce had produced a discussion paper on new forms of digital money by June 2021.

This was followed by a November statement outlining its ‘next steps’ for CBDC development, including the now-realised key consultation to asset an operational and technology model for a UK CBDC.

As recently as 9 December, Chancellor of the Exchequer Jeremy Hunt disclosed in a statement to Parliament that this consultation will be brought forward “in the coming weeks.” It’s also been confirmed that the Bank of England will release a paper detailing the potential build and design of the digital pound.

It appears that the Taskforce is making good headwind of its movements around CBDCs, but two years after the review, the UK remains without a proper Britcoin solution.

However, it is worth bearing in mind that Sunak’s April 2021 commitment to CBDCs proposed a delivery date of 2025 at the earliest.

When looking back at the Bank’s aforementioned posting on the UK Government’s digital marketplace, it’s clear that the Government, Bank of England nor their combined Taskforce have made any firm decisions around introducing a workable, practical CBDC in the UK. Rather, as underscored by the corresponding post for a sample wallet, it prefers to test the waters for now.

‘A CBDC would be a new form of money that would exist alongside cash and bank deposits, rather than replacing them’; the Bank’s statements confirm.

Additionally, it vows to protect the importance of cash and cash access throughout the potential introduction of Britcoin.

The call for a sample wallet

The Bank of England will award a £200,000, five-month contract to third parties that can develop a sample CBDC wallet.

The Bank emphasises the key deliverables of the project throughout the posting, and thoroughly outlined the direction and intended outcome of its investment.

This includes first and foremost, the delivery of a wallet mobile app, wallet and merchant website. It’s specific about the delivery of a back-end server to host the mobile app and website. This server must also be able to interact with the core ledger API as well as store user data and transaction history.

The Bank also ascertains the functions it wants its sample wallet to perform. Wallet management naturally forms a key component of this functionality and must include methods to update details, view balances, full transaction history and existing locks; among others.

In terms of payment functionality, users must be able to request payments from another person (P2P) through the application of an account ID or a QR code. In terms of business payments,  the wallet must be able to pay online and make requests for payments.

Looking at the sample wallet’s advanced functionality, the Bank of England includes the ability to schedule payments and the ringfencing of funds for budgeting purposes as priorities.

This advanced functionality should also include notifications of payments, payment failures, payment requests and programmable conditional payments.

Holding the horses

Rehashing the earlier point about the Taskforce’s plans for a UK CBDC, the post makes clear that ‘whilst the Bank will not develop a user wallet itself, it may develop payment scheme rules and user experience guidelines etc for the private-sector wallet providers, in addition to supporting core CBDC functionality via its ledger and API’.

So while the Bank solidifies its intentions to not build its own wallet, it hopes that its latest project for a sample will present something tangible for stakeholders. It also intends to use the sample as a prototype surface for future testing.

‘Support future exploration of further functionality which is out of scope here’ lists the post’s aims of the project; citing offline payments or KYC processes for new users as examples.

Project Rosalind

Another key aim of the project is to support the Bank of England’s work within ‘Project Rosalind’. The BIS Innovation Hub is responsible for heading the project.

The project remembers the British scientist Rosalind Franklin, whose work was key to understanding DNA sequencing.

A joint collaboration between BIS’s London Centre and the Bank of England, the project is working to develop an API that could interact with a two-tier distribution model.

Such a model consists of having a central bank as the foundation of the retail CBDC system. However, private-sector payment interface providers (PIPs) conduct customer-facing activities.

Project Rosalind aims to realise how a central bank ledger could communicate with service providers of the private sector to facilitate retail payments securely.

It will also explore some of the functionalities required to enable a set of use cases to be developed by the private sector. Through this experimentation, the project aims to study how best to lay the foundation for building a robust ecosystem.

The Project bares significant relevance here, having been brought into focus as one of the major aims of the Bank of England’s CBDC sample wallet project.

A test to connect central bank core ledgers with PIPs will engage the sample wallet’s front end with the Rosalind API.

The posting confirms that full details of the project will be shared with the successful bidder.

The benefits of Britcoin

Here Gilbert Verdian details the applicability of Britcoin within the UK’s current digital assets landscape. As the founder and CEO of the finance blockchain Quant, Verdian explains how inflation and the activities of the Bank of England have dominated the financial news agenda in 2022, “and are likely to continue to do so in 2023.”

“A well-designed CBDC can help provide a real-time view of risks and currency outflows to help implement specific and targeted measures to prevent financial contagions from spreading further in the event of a crisis,” continues Verdian.

“A digital pound enables consumers and businesses to automate complex and cumbersome processes and implement logic into money. It offers new efficiencies and faster workflows to better meet our needs as our living experience becomes increasingly digital.

“Many critics cite privacy and potentially overbearing government controls as barriers to implementation. They are missing that blockchain technology makes it possible to protect the privacy of individuals.

“Meanwhile, with Project Rosalind, the BIS Innovation Hub London and the Bank of England are looking to the future – testing how to issue, embed and settle CBDCs for retail payments use cases with industry participants. The project includes the private sector in an effort to innovate different payment use cases and applications that use retail CBDCs for a better experience.”

The closing date for application to the Bank of England’s posting close on a festive 23 December 2022.