Introduce your wallet to digital currency

A payments revolution is well underway. Use of cash is rapidly diminishing around the globe; crypto and other blockchain-enabled forms of private money are on the rise. Central banks, who drive monetary policy and financial stability, have for some time been positioning themselves to facilitate and oversee digital currencies within the global economy. The product of their efforts is CBDC – Central Bank Digital Currency. CBDC is a digital currency that is typically (but not always) blockchain-enabled. It is a complement to the fiat (traditional) physical currency issued by a region’s central bank.

Globally, central banks are getting serious about digital currencies. They are creating their own as a way to gain better control over the decentralised digital currencies that are entering the economy, for example Bitcoin and Ether. An estimated 86% of central banks worldwide are currently engaged on CBDC projects; many are partnering with commercial banks in their experiments. For both central and commercial banks, the CBDC space is unknown territory. While the rise of CBDC presents great opportunities to enhance the digital payment and liquidity management landscape, the known and unknown risks that come with such a revolutionary change to their well-established financial system are a cause for concern. That’s no surprise, as this proposition threatens the global cash management and central currency status-quo.

The CBDC proposition threatens the global cash management and central currency status-quo…

CBDC’s progress: let’s take stock

CBDC is still in the experiment phase, but it’s far beyond being considered hype. To get a feel for the extent to which the project is underway globally, look at the progress already made by central banks…

Retail CBDC

This is CBDC issued for the general public and commercial businesses, with possible features such as some level of anonymity, traceability and round-the-clock availability. Recent moves by central banks on retail CBDC include:

• The Bank of England have recently announced significant funding and investment in a CBDC task force, following the publishing of several white papers exploring the opportunities in this space
• The Federal Reserve System have partnered with MIT to research, develop and test a hypothetical digital currency
• The People’s Bank of China are developing a digital yuan, and are progressing at speed with multi-city pilots with an aim to showcase at the Winter Olympics in Beijing.

Wholesale CBDC

This is CBDC for financial institutions who hold reserve deposits with a central bank. It’s used to improve the efficiency of payments and securities settlement whilst reducing credit and liquidity risks. There have been significant developments in central banks’ development of wholesale CBDC:

• The Monetary Authority of Singapore’s Project Ubin was a success, exploring the use of Blockchain and Distributed Ledger Technology (DLT) for the clearing and settlement of payments and securities
• The South African Reserve Bank and a consortium of South African banks have collaboratively run a highly successful CBDC proof of concept (Project Khokha) using Quorum (enterprise-grade implementation of Ethereum) with technical partners Consensys and Adhara 

This investment by central banks is significant, and one which commercial and clearing banks must take note of. Increased collaboration between central and commercial banks should be encouraged, with full-scale launches and adoption expected as soon as 2023.

What does CBDC mean for commercial banks?

It’s not just central banks who stand to benefit from CBDC. The technology also presents opportunities and risks for commercial and clearing banks. For these institutions, CBDC has the potential to:

• Drastically enhance traditionally cumbersome, legacy, operational cash and liquidity management processes
• Reduce the sheer cost of handling cash (which can be c. 0.4% – 0.6% of GDP – with most of this cost falling to commercial banks)
• Provide enhanced security and reliability of cash and payments processes
• Create cost efficiencies in processing

The risk and the opportunity

The CBDC project, although led by central banks, presents an unmissable opportunity for commercial banks. They should partner with central banks, technology providers and other commercial banks to be instrumental in the early stages of CBDC ideation and development. The commercial banks that do so will assert themselves as leaders in cutting-edge financial technology. Early engagement will also allow commercial banks to heavily influence the direction of CBDC, creating fit-for-purpose CBDC solutions and preparing their own operations for CBDC’s launch.

The current phase of experimentation is essential to answering questions that are highly relevant to commercial banks’ functions. How will we marry the blockchain and legacy worlds? Where does blockchain stop and legacy continue?

Commercial banks need to act now and join in the mass uptake of this trend. Failing to do so runs the risk of commercial banks falling far behind their competitors; they will have to play catch-up when the technology is very advanced and more complex to build around and upon. The current phase of experimentation is essential to answering questions that are highly relevant to commercial banks’ functions. How will we marry the blockchain and legacy worlds? Where does blockchain stop and legacy continue? How can we create compelling customer journeys that leverage CBDC? Failure to engage now will result in retrospective exploration of these fundamental questions that all banks need to answer.

What should the commercial banks be doing now?

Commercial banks need to mirror central banks’ willingness to invest in CBDC. Commercial banks must begin (or continue) to define their own CBDC visions, using these as the basis to ensure the appropriate resources, operating models, capabilities and expertise are in place. This early-stage attention will ultimately determine their internal CBDC success.

Early-stage attention to CBDC will ultimately determine commercial banks’ internal CBDC success.

It will also become critical for commercial banks to demonstrate to their respective central banks how they will drive customer adoption of CBDC. This requires strategic planning, testing and tangible proof that their proposition works, both technically and in the eye of the customer. Banks must therefore explore how they can partner with their central banks and emerging technology partners to turn their visions into reality, positioning themselves to be able to reap the benefits from CBDC.

The message from the central banks across the world is clear and consistent: CBDC will be a reality soon, and now is not the time for commercial banks to sit back and wait for it to arrive. The hype is well-and-truly over; now is the time to engage.