In this section we explore the concept of functional consistency for regulated retail digital money denominated in a specific national unit of account. This includes retail commercial bank money, e-money and new forms of money (such as retail CBDCs, tokenized deposits and regulated stablecoins) but excludes physical currency notes, wholesale commercial bank money and wholesale central bank money.
Bank of England and HM Treasury (2023, p. 25) defined “uniformity of money” as follows: “all forms of money – both bank deposits and cash – are valued equally (‘at par’ or ‘face value’), denominated in a common currency (sterling) and interchangeable with each other”. The CP states that “the stability of the UK economy and monetary system relies on the uniformity of money” (p. 25). Bailey (2023, p. 3) identified “singleness of money” as one of the important foundations of money and defined it as follows: “Wherever we hold our money – in bank accounts, notes and coins, etc – we can be assured that it all has the same value – the pound in my bank account equals the pound in your account. In other words, money is exchangeable at par value.” Garratt and Shin (2023) identified “singleness of money” as a cornerstone of the modern monetary system. However, neither the uniformity nor the singleness of money, as defined above, include certain operational characteristics of money that are important to users (such as ease of use and compatibility with existing payment infrastructures).
Fungibility means that any unit of a given form of money is substitutable for another (Hull and Sattath 2021); for example, one £10 note can be substituted for two £5 notes, and all pounds held in a commercial bank account are substitutable for each other. However, a different term is needed to express the substitutability of units of one form of money for units of a different form of money.
Recent developments in new forms of digital money, such as retail CBDCs and stablecoins, aim to provide users with novel functionalities, such as programmable payments, that may not be available in existing forms of money. While these novel functionalities could allow users to access innovative capabilities (such as conditional payments), there is a risk that this could lead to fragmentation in retail deposits and payments, and could therefore
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negatively impact consumers (eg, through causing confusion) by requiring them to split their liquidity across various forms of money in order to obtain the unique operational characteristics each of them provides, and
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make it more difficult for institutions to maintain stability and manage risk.
We define functional consistency for money as follows: “Functional consistency is the principle that different forms of money have the same operational characteristics.” We believe functional consistency is a desirable principle for the provision of all forms of retail digital money, including digital pounds and commercial bank money. Functional consistency could mitigate the risk of fragmentation and reduce the negative impacts of fragmentation on consumers, thereby facilitating both consumer and merchant adoption of new forms of retail digital money (including the digital pound). It could also support consumer choice in domestic payments by providing common operational characteristics across all forms of retail digital money. Note that we welcome and encourage the development of novel functionalities that are replicable across all forms of retail digital money.
We now identify common operational characteristics that would ensure functional consistency across all forms of regulated retail digital money. As our starting point we take the list of properties of money identified by Hull and Sattath (2021). We suggest that the following initial set of common operational characteristics are required to achieve functional consistency.
- Acceptability:
the probability with which a given form of money is accepted in exchange for goods and services provided (Kiyotaki and Wright 1992).
- Inclusivity:
the degree to which users can access and use a given form of money regardless of their demographics, disabilities, lack of access to technology, skills and geographic location.
- Divisibility and mergeability:
the ability to divide a given form of money into smaller denominations (eg, to facilitate transactions), and the extent to which units can be merged together (Hull and Sattath 2021).
- Ease of use:
the simplicity with which transactions can be conducted with a given form of money (adapted from Hull and Sattath (2021)).
- Settlement time:
the time it takes to settle a transaction in a given form of money (Hull and Sattath 2021).
- Transaction cost:
the pecuniary cost, in the form of a fee, imposed on the payer and/or payee when performing a transaction using a given form of money (Hull and Sattath 2021).
- Reversibility:
the ability provided to a payer and/or payee to reverse a payment conducted using a given form of money, under certain circumstances.
- Payment programmability:
the ability of a given form of money to support both automation and streamlining of the payments process – for example, by triggering payments based on specific events or predetermined conditions.
- Transferability:
the ability of a given form of money to be transferred from one owner to another (adapted from Hull and Sattath (2021)).
- Confidentiality:
the extent to which a given form of money protects users’ personal and transaction data from unauthorized access.
- Integrity:
the extent to which the balance and transaction data for a given form of money is accurate, trustworthy, complete and protected from accidental or unauthorized modification.
- Availability:
the ability for users to access and use a given form of money regardless of any technical or operational failures.
- Identity-based:
the characteristic of requiring users of a given form of money to disclose their identities while conducting transactions (adapted from Hull and Sattath (2021)).
- Fungibility:
the substitutability of any unit of a given form of money for another (Hull and Sattath 2021).
- Interoperability:
the ability for users to exchange units between two forms of money.
- Payment infrastructure compatibility:
the ability to use a given form of money with existing and new payment infrastructures, such as smart devices, point-of-sale (POS) infrastructure, automated teller machines (ATMs) and payment schemes.
- Support for payment types:
the ability of a given form of money to support a variety of payment types, such as real-time, batch, offline, cross-border, pull, split and recurring payments.
Each of the above common operational characteristics can take on a range of values (eg, high acceptability or low transaction cost), but to achieve functional consistency all forms of regulated retail digital money should have similar values for these common operational characteristics.
