How Could Digital Currency Work?

The Bank of England and the UK Treasury have announced a Central Bank Digital Currency (CBDC) Taskforce to coordinate the exploration of a potential British CBDC. But how could a digital Pound actually work? As it happens, this is something that Consult Hyperion knows rather a lot about. Apart from our work on the first British central bank digital currency (Mondex) back in the 1990s, our work on the first population-scale mobile money scheme (M-PESA) in the 2000s and our work on the most transformational contactless payment roll-out (Transport for London) in the 2010s, our practical experience across implementation platforms means that we understand the architectural options better than anyone.

I recently published a paper on the options for digital currency in the Journal of Payment Strategy and Systems. The paper is called “Clouds, Chips and Chains” and it discusses in some detail the evolutionary tree of digital cash — showing how M-PESA, Mondex, Bitcoin, etc related to one another — before it looks at the various practical options for implementing a digital currency.

To understand what these options are, first note that when people talk about digital currency, they generally mean something that can function in the way that fiat currency does. Broadly speaking, we use fiat currency in two ways: in the form of money that lives in accounts (which is almost all of the money in circulation) and in the form of cash. Cash doesn’t live in accounts: it lives everywhere. There is cash in my wallet, in my pocket, in my car, in my kitchen, in my desk drawer. Money goes from my bank account to your Square Cash account. Cash goes from me to you.

We don’t need a new kind of electronic money to implement digital currency. If we want to have a digital currency that can only live in accounts then, well, we pretty much have that now. Just make debit cards legal tender and the problem is solved. But that’s not how digital currency will revolutionise finance and it’s not why a measured and experienced observer such as Tom Noyes is moved to observe that digital currency might not only provide an alternative to the card networks in the mass market but also end run the banks. No, the revolution is not electronic money, but electronic cash.


Just as cash can live anywhere, so can electronic cash. It must be in some sort of digital wallet, of course, but it does not have to be in an account. Right now, I have electronic cash in USB sticks, in the cloud and on my laptop. But in the not-too-distant future, it might be in my car, my phone, my fridge and my hat as well. And, crucially, if I send digital Sterling from my car to your phone, it will go from my car to your phone. It will not go from my car to a payment facilitator, aggregator, gateway, acquirer, scheme, processor, issuer, bank and back again, following the pathways established for electronic money.

What’s more, for a real alternative to cash, electronic cash must be able to function in the absence of network connections. Even if we are out of coverage, I should be able to use my mobile phone to pay for a bus ride or buy vegetables at a market. This is a design principle of the new Chinese digital currency e-CNY as well as the Offline Payment System (OPS) proposal from Visa, both of which require a digital wallet that has access to a secure chip (eg, the secure element in your iPhone). You can’t do this with Bitcoin and, as Mu Changchun, deputy director of PBoC’s payments department said back in October 2019), “even Libra can’t do this” (although Mondex, I cannot resist pointing out, could).

The UK Way

So: clouds, chips or chains? Well, the truth is that we should use all three. We live in an online world where people, things and bots will access the CBDC using the cloud and the CBDC itself will be managed by some form of resilient shared ledger (which I am lazily calling a “chain” for the purposes of alliteration, but it certainly won’t be the Bitcoin blockchain or a anything like it). But as many people have observed, cash that lives everywhere must be able to go from phone to car, from bot to watch, just as cash does: directly, and without the need to access or traverse the banking network. This is the digital cash revolution and it is integral to the design of a population scale digital currency. Indeed, it is how the digital Yuan works now.

As in the case of Mondex, offline device-to-device transfers can work if there is tamper-resistant secure hardware in the loop (ie, a chip). It doesn’t matter if the chip is the SIM or secure element/enclave in the mobile phone, the EMV chip on your bank card or wherever else. So long as it meets certain security criteria, we can architecture the system to allow transfers between devices even when the internet is not available or the mobile network is done. You may remember that Consult Hyperion designed the TAP network in Nigeria in precisely this manner: mobile phones and tablets interacted with smart cards to effect transactions and then when the devices found themselves online they would upload an reconcile all of the transactions.

It isn’t a matter of clouds, chips or chains: it’s a matter clouds for online transfers, chips for offline transfers and chains for resilience (and perhaps programmability). We have all of the building blocks already, there is nothing new that needs to be invented to deliver population-scale digital currency. We’ve done it before and, if you give us a call Rishi, we can do it again.


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