Point-of-sale proof of concept

Summary

As part of the design phase for a digital pound, the Bank of England (the Bank) is conducting experiments and proofs of concept (PoC) in collaboration with private-sector innovators and a range of stakeholders. These aim to assess the technical feasibility and technology and policy implications of potential digital pound design features. No decision has been taken on whether or not to build a digital pound.

The purpose of this experiment was to assess the technical feasibility of using existing point-of-sale (POS) hardware, as currently used in the UK, to initiate digital pound payments. This involved a PoC that used EMV^{footnote [1]} standards to send payment instructions from smart cards to POS devices, and then to an application programming interface (the ‘BoE API’).

While the Bank did not build a digital pound infrastructure, and no real money payments were made, the experiment demonstrated the following from a technology perspective:

• Existing POS terminals in the UK could, in principle, be used to initiate digital pound payments.
• Those terminals do not appear to require modification in order to make digital pound payments.

The experiment also concluded that it is technically feasible to implement offline payments functionality at points of sale using existing POS terminals. But this functionality might require that an offline payments application be deployed to those terminals in order to store offline balances. Therefore, while existing POS terminals may not need to be modified to make online digital pound payments, they might need to be modified for offline payments.

There are several other factors, such as operational, legal and commercial considerations, that will impact design choices around digital pound payments at points of sale. Those factors were not tested in this experiment.

Background

In February 2023, the Bank published a Technology Working Paper, which accompanied the Bank and HM Treasury’s joint Consultation Paper on the digital pound. The Bank and HM Treasury confirmed in January 2024 that further preparatory work was justified to enable us to respond to developments in the payments landscape and to reduce materially the lead time if there is a future decision to introduce a digital pound. The Bank and HM Treasury have therefore moved from the research and exploration phase of work on a digital pound to the design phase, which will result in a decision around the middle of the decade on whether to build a digital pound.

Figure 1: Roadmap for the digital pound project

The objectives of the design phase are to:

• cut lead-times on digital pound development and equip ourselves with the knowledge and capabilities to move into a build phase, if required;
• determine the technology feasibility and investment needed to build a digital pound;
• articulate, in detail, what the technology and operational architecture for a digital pound would look like;
• assess and evaluate the benefits and costs of a digital pound architecture;
• deepen the Bank’s knowledge of central bank digital currency (CBDC) technology and support stakeholder understanding of our technology approach;
• support the development of the broader UK digital currency technology industry through collaboration, knowledge-sharing, experimentation and proofs of concept; and
• provide the basis for a future decision on whether to introduce a digital pound and move to a build phase.

As part of the design phase, the Bank is conducting experiments and PoC in collaboration with private-sector innovators and a range of stakeholders. These experiments and PoC do not indicate a decision to build a digital pound or a final digital pound design. They aim to assess the technical feasibility and technology and policy implications of a digital pound, in order to help the Bank and HM Treasury explore the design of a digital pound, and provide evidence to support a decision on whether to build one. By partnering on experiments and PoC, the Bank and HM Treasury seek to catalyse private innovation in digital currency technologies, encourage innovative digital money business models and support knowledge sharing across the UK fintech sector.

The point-of-sale feasibility study

As discussed in the Technology Working Paper, in order for a digital pound to meet its policy goals, it would need to be useful for everyday payments, including being able to make payments ‘in store’. Today, in-store card payments are enabled through the sending of payment instructions from the merchant’s POS terminal to the payer’s card issuer. This is facilitated by the merchant’s acquirer and the payment scheme associated with the payer’s card.

If a digital pound were to utilise existing POS terminals, this would reduce, or potentially even eliminate the need for merchants to invest in new hardware. Existing POS terminals have wide adoption in the UK, and merchants often maintain the same terminals for several years without changing them. Those terminals are also familiar to merchants, their staff, and consumers, delivering a consistent user experience.

The Bank’s POS feasibility work took place in two stages. First, the Bank commissioned a feasibility study to explore how digital pound payments could be made using existing POS infrastructure in the UK. The study concluded that it would be feasible, from a technology perspective, to use existing POS hardware to make digital pound payments, and highlighted different payment flows that could be used to deliver this. This report covers the second stage of the Bank’s POS feasibility work, a PoC which aimed to validate the findings from the feasibility study.

Project overview

Consult Hyperion^{footnote [2]} developed this PoC to help us test digital pound payment initiation using existing POS hardware. We (the Bank and Consult Hyperion) used the following components to simulate in-store digital pound payments:

• POS devices, namely traditional POS terminals, mobile POS terminals, and a software POS application on an Android mobile phone;
• EMV-compliant contactless kernels;^{footnote [3]}
• Smart cards^{footnote [4]} with EMV applications^{footnote [5]} and different verification methods, namely Consumer Device Cardholder Verification Method (CDCVM)^{footnote [6]} and Online PIN;
• A proxy server developed by Consult Hyperion, referred to as the BoE API; and
• A web application dashboard showing balances, transactions and error logs.

In addition to the components listed above, we developed an application that could enable offline payments on the POS devices.

Figure 2: Mobile, traditional and software POS devices

Implementation

Payment flows

This PoC explored three different payment flows:

• PASSTHRU – where a request for payment is sent to the BoE API via the merchant’s Payment Interface Provider (PIP);
• DIRECT – where a request for payment is sent directly to the BoE API, bypassing the merchant’s PIP; and
• PEER – where a payment is made between two devices without network connection, supporting offline payments.

For each payment flow, we considered sale and refund transactions, and transaction queries.

PASSTHRU

This flow assumes that balance is stored remotely on the core ledger provided by the Bank.

• The merchant’s POS device requests payment.
• The payer taps their device on the merchant’s POS device.
• The payer either authenticates to their device using CDCVM or enters their PIN on the merchant’s POS device.
• A request for payment with payer authentication data is sent from the merchant’s POS to the merchant’s PIP.
• The merchant’s PIP sends this request (authentication data is encrypted) to the BoE API, which routes it to the payer’s PIP.
• The payer’s PIP authenticates the payer using the authentication data in the request.
• Upon successful authentication, the payer’s PIP sends the payment instruction to the core ledger to transfer digital pounds from the payer to the merchant.
• Digital pounds are transferred from the payer’s wallet to the merchant’s wallet and the transaction data is viewable on the web application.^{footnote [7]}

Figure 3A: Sale transaction at POS using the PASSTHRU payment flow

Figure 3B: Sale transaction at POS using the PASSTHRU payment flow

DIRECT

This flow assumes that balance is stored remotely on the core ledger provided by the Bank.

• The merchant’s POS device requests payment.
• The payer taps their device on the merchant’s POS device.
• The payer either authenticates to their device using CDCVM or enters their PIN on the merchant’s POS device.
• An encrypted request for payment, along with payer authentication data, is sent from the merchant’s POS directly to the BoE API.
• The BoE API routes this request to the payer’s PIP.
• The payer’s PIP authenticates the payer using the authentication data in the request.
• Upon successful authentication, the payer’s PIP sends the payment instruction to the core ledger to transfer digital pounds from the payer to the merchant.
• Digital pounds are transferred from the payer’s wallet to the merchant’s wallet and the transaction data is viewable on the web application.^{footnote [8]}

Figure 4A: Sale transaction at POS using the DIRECT payment flow