Published: July 24, 2024
Hundreds of central bank digital currency (CBDC) projects are underway globally for retail and wholesale end uses. Treasurers now have to think about the future of money, as digitalisation advances and interoperability becomes key. TMI examines the emerging CBDC area and its impact on treasury.
Value exchange will look different next decade, as private stablecoins proliferate and digital money and marketplaces advance, alongside tokenisation and programmable money. The underlying blockchain and DLT will cause a revolution in financial services (FS). CBDCs are a part of this emerging and overlapping DLT field and may constitute the end game for it.
For most corporate treasurers, the key change in the DLT currency area will be when there is a public digital pound, dollar or euro, a so-called retail central bank digital currency (rCBDC), as opposed to a private Bitcoin (BTC) type cryptocurrency or a stablecoin linked to it, or another digital asset, created in order to reduce volatility. This new rCBDC form of domestic cash replacement money will battle private cyptocurrencies but require cross-border linking mechanisms, however, just as happens with existing digital fiat money. Physical cash itself is likely to be retained at least initially for public acceptance purposes, although further decline as a percentage.
A European Central Bank (ECB)-backed digital euro could be in circulation by 2027, according to a recent update from one of the key participants, Banque de France (BdF). The digital euro is now officially in its preparation phase, although it will have to overcome existing e-wallets and digital money on instant payment platforms to gain widespread traction. MNCs will want it to cross borders. FIs will intermediate, although direct CBDCs via an app are possible, if undesirable.
Wholesale CBDCs (wCBDCs) will perform interbank settlement, FX, and potentially other end uses such as just-in- time (JIT) and autonomous funding for corporates, depending how they are deployed and overlap with other payment and data streams. There are many different DLT-based payment types in this emerging area both public and private (see Fig. 1).
“We are closely monitoring developments on CBDCs,” says Heiko Nix, Head of Cash Management and Payments, Siemens. “At the moment we see only a few relevant applications for Siemens today, mainly in the area of e-commerce and payments via online platforms as cash and card replacements.”
There are regulatory, cross-border, interoperability, KYC compliance, sanctions and other obstacles to overcome before widespread CBDC adoption. Governments aren’t tech companies either and there are also concerns over how tightly they should control money, especially in authoritarian regimes, so full-scale roll-out speeds and public acceptance of these developments are still to be tested.
Both rCBDCs and wCBDCs are, however, still advancing – not least because there are private alternatives and central banks want to retain control. China, for instance, is leading the way with CBDC projects via its digital yuan (e-CNY) pilot, which is already reaching 260 million wallets across 25 cities on transit, healthcare and oil end uses. It is focused on overseas tourist use this year and expanding cross-border applications, potentially presenting a threat to the hegemony of the US dollar.
“Central banks want to keep their monetary policy options open, in particular control of the money supply. That is why they are interested in CBDCs,” explains Alenka Grealish, Principal Analyst, FS, Celent, when discussing how cryptocurrencies and private chains could potentially alter traditional control mechanisms.
Grealish freely admits there are issues around public retail- focused rCBDC projects, which are aimed at domestic consumers, businesses, and governments, but don’t necessarily interoperate cross-border, or with private chains. There is also still some development work to do on wCBDCs, but Grealish maintains CBDCs will happen sooner than you think. Momentum is behind the underlying DLT and central banks need to keep up.
Source: Celent – Blockchain in Action: Payments & Transaction Banking, Alenka Grealish (September 2023)
“At present, according to the widely used Atlantic Council CBDC Tracker, 134 countries and currency unions, representing 98% of global GDP, are exploring a CBDC,” says Pallavi Thakur, Director, Strategy and Innovation, Swift.
In June 2024, global retail (r)CBDC projects numbered 78 on the think tank’s online tracker, with specifically wholesale (w)CBDC projects numbering 41. There are also 33 projects, some overlapping, which are more experimental, less defined or include both domestic rCBDCs, wCBDCs, and a cross- border element all-in-one project.
Australia’s Atom pilot project using Ethereum DLT, for instance, has since expanded to include participation in the cross-border Project Dunbar pilot. This includes South Africa and Singapore, among other participants, to see if they can escape domestic use only lock-in. Singapore is also part of Project Cedar, a wholesale cross-border initiative undertaken with the US. The world’s largest economy is looking at all options in its own less-advanced full spectrum CBDC developmental project.
Swift has its own Sandbox project as well. Phase 1 looked at the organisation’s core cross-border payment application, where it wants to provide an international digital currency ‘connector’ much as it does at the moment. Phase 2 comprised four use cases with partners in the trade payments arena; FX; Delivery versus Payment (DvP); and liquidity savings areas to explore the possibilities of this new technology (see Box 1).
Pilots and research projects abound on the Atlantic Council CBDC Tracker. But only three CBDCs, all retail iterations, have so far actually launched in the Caribbean and Nigeria, with Ecuador rowing back on its project, and El Salvador’s separate rush to adopt the Bitcoin cryptocurrency, which provided the original technology impetus in this area, stalling somewhat. There is sometimes public and corporate resistance. The latter because treasurers are busy doing the day job, while surmising that CBDCs aren’t something they have to worry about as a payment acceptance challenge or interbank settlement mechanism until the next decade, when and if they come to fruition.
In 2021, Swift started investigating CBDCs and the emerging digital money and asset space after identifying a risk of fragmentation due to the different technologies, protocols, and standards used – and a need for interoperability, scale, and easy adoption, if digital islands are to be avoided.
“In 2022 the first phase of our CBDC Sandbox brought together 18 participants from the likes of Banque de France to HSBC on our core use case of cross-border payments,” says Swift’s Thakur. “We got it to a minimum viable product [MVP] stage with a Beta release in March 2023 testing it with three central banks.
“However, the feedback received was that more use cases, outside of just cross-border payments, were desired,” explains Thakur, “so Swift launched our CBDC Sandbox Phase 2 project in Q2 2023, with a results paper published in March this year that outlines how a ‘Connector’ can help reduce fragmentation and barriers to adoption.”
The second phase involved 38 FIs, including seven central banks from Germany, Thailand and elsewhere; financial market infrastructures (FMIs) such as CLS; and numerous commercial banks that span the globe, including Standard Chartered, ANZ, NatWest, and SMBC. The specific multifaceted DLT-based end use cases explored in Phase 2, all still involving embedding CBDCs into the ecosystem, were:
“I don’t think adoption is as far away as some people imagine, however,” says Swift’s Thakur. “It’s not far off if you look at Japan; India, which has reached one billion CBDC transactions already and integrated with its Unified Payments Interface [UPI]; China, which is very advanced, as are Europe with its digital euro, and the UAE, which is involved in BIS’ mBridge project. This initiative, run by the central bank for central banks, is seeking
to establish a multiple CBDC common platform for wholesale cross-border payments spanning to Hong Kong and Thailand initially,” she says, before going on to detail some of the specific projects underway in these countries.
Cross-border digital euro transactions are being discussed. In Q1 2024, the ECB called for applications from vendors to run services for processes including fraud and risk, offline services, the app, and secure exchange of payment information components. These contracts could be worth more than €1bn but are restricted to European suppliers only. They also announced the drawing up of frameworks in case an rCBDC is greenlit by EU national governments and politicians.
According to Thakur: “An ECB wCBDC is also underway, entering trials this year with many corporates involved”, and adds that it “will likely come to fruition earlier than the rCBDC. Both ECB projects are ahead of Bank of England (BoE) and US Fed equivalent programmes”.
“Ultimately, our vision at Swift is to act as a linking mechanism between emerging and classic payment market infrastructures, spanning CBDCs; traditional RTGS platforms, which are getting faster and more modern anyway; and instant payment services, such as India’s IMPS,” explains Thakur, pointing out that theoretically with such a system you could send a digital pound (rCBDC) to India seamlessly (see Fig. 2). Swift’s associated services could run alongside providing routing, tracking, messaging and compliance capabilities.
Source: Swift – CBDC Sandbox Phase 2 Update slides (May 2024)
Of course, other non-Swift rival alternatives may also emerge as incumbents can face challengers when technology disruption occurs. Banks or corporations may want to carry out certain tasks themselves. There are bilateral or regional offerings emerging, plus BIS has its mBridge wCBDC project and its tokenisation Project Agorá (Greek for marketplace) underway with seven central banks and the private sector exploring how tokenisation – another key use of the underlying DLT – might improve the functioning of the monetary system.
CBDCs aren’t standalone objects, at least not if they’re going to be useful. They will have to interoperate and fit into wider changes going on at the infrastructure layer as blockchain, real-time payment and data platforms, T+1 settlement on capital markets, tokenisation and other such technology- driven changes all come to pass.
“Treasurers ‘get’ that there are wider non-currency DLT benefits,” argues Thakur, “especially if the ecosystem can be aligned to include smart contracts in trade finance payments, bank tokenised deposits, and so on. They will all still need to settle, however, which is where wCBDCs should come in. Linkages between lots of different types of digital certificates, assets, money [rCBDCs] and infrastructures will be necessary in the future.”
According to Vincent Lau, Global Head of Emerging Payments, Global Payments Solutions, HSBC: “CBDCs introduce a number of potential benefits for corporate treasurers” – namely opportunities to:
“But this is contingent on regulatory frameworks and interoperability standards aligning,” he cautions.
“As companies adopt emerging digital technology [and enter digital marketplaces] to reach new domestic and international customers, expand their reach among suppliers and bolster supply chain resilience, these digital currencies [including CBDCs] offer an opportunity to bring together the participants in a company’s ecosystems and facilitate the transactional exchange of value,” continues Lau. He stresses that digitalisation and digital currency usage can support new business models and the technology exploration of tokenised deposits, another key overlapping field; plus regulated liability networks (RLNs) involving banks and non- banks on a new FMI; and wCBDC settlement will come into play as well.
“As these technologies and trends coalesce, they can enable payments to travel with the respective business transaction over a digital channel, providing for greater efficiency, higher velocity of payment flows and reduced settlement risk. These attributes will bring corporate treasuries greater value and efficiency in executing payments as distributed ledger platforms and unification attempts move from pilot to full production, as I believe they will.”
Treasurers are still sceptical until pilots enter production and CBDCs join the mainstream, with many preferring to focus on real-time payment tools on modernised ISO 20022-compliant traditional platforms or on tokenisation and private uses and chains for this technology. Siemens’ programmable payments project, carried out recently with J.P. Morgan and its Onyx blockchain-based infrastructure to introduce an automated real-time efficient treasury solution, is one such private example of pushing ahead with what is possible now. As a recent TMI case study shows, deploying the JPM Coin system – not the Coin itself – in conjunction with its blockchain-based bank accounts has already led to enhanced automated treasury efficiency at Siemens.
“Digital currencies, and cryptocurrencies in particular, are very interesting from a corporate treasury perspective. But it is a prerequisite that the advantages clearly outweigh the disadvantages, and of course that there are many real use cases for us,” says Siemens’ Nix, while emphasising that he “doesn’t believe that is universally the case at present”.
That doesn’t mean that the technology isn’t of interest – Siemens’ case study with J.P. Morgan proves it is, and use cases will proliferate. CBDCs themselves, however, are only one governmentally approved type of cryptocurrency and use of the underlying DLT. Additionally, CBDCs are likely to be the slowest to come to fruition as the ‘gold standard’ application creating sovereign fiat money. Hence, why some corporates are exploring private chain options first, awaiting central banks to get in the game.
“CBDCs are particularly interesting for retail and e-commerce business. We think they will compete primarily in use cases where cash or debit and credit cards play a significant role today,” says Nix, when thinking of rCBDCs. “We can see this in China, where Siemens currently has transactions in digital yuan (e-CNY), primarily in HR-related card replacement payments, such as in travel expenses.”
Nix sees clear cost advantages with rCBDCs and predicts more efficient implementations and processing of these payment methodologies in the future. “However, the extent to which additional data benefits are possible through the use of contextual payment data will depend on local data privacy regulations,” he adds. Cross-border interoperability would also clearly be beneficial for MNCs if adoption is to happen.
Retail CBDCs won’t have it all their own way. “Instant payment systems, such as SEPA in the EU, UPI in India, or PIX in Brazil already offer the benefits of 24/7 real-time payments based on fiat money and are very cost-efficient,” says Nix. “What remains is the programmability of CBDCs as a unique selling point (USP).”
In a way wCBDC-like functionality has also existed for a long time – just without the DLT element that is driving explorations today. Central bank digital money has been accessible for interbank settlement via the Eurosystem’s TARGET Services platform, for example, with the T2S (TARGET2-Securities) platform just the latest iteration on capital markets.
The are many other such wholesale platforms around the world, and they are moving towards faster settlement on conventional rails as well, if they haven’t already done so. The potential technology change towards a DLT-based wCBDC, or at least the accommodation of tokenisation and other DLT mechanisms, is what is up for exploration now. Maintaining control by being relevant and atop of modern technology is what the CBDC interest is about for central banks. Potential benefits include increased automation, control and transparency as a distributed, not centralised, ledger model is potentially deployed, if it can avoid undue fragmentation. A unified ledger is desirable in this instance.
According to Nix, the example of e-CNY shows that rCBDCs currently cannot necessarily compete with established instant payment systems, such as WeChat Pay in China, which is much more popular. This is Siemens’ experience of the nascent technology so far.
In interbank transactions, however, Nix currently sees three pertinent options, with wCBDCs to the fore. First, the wholesale CBDC application is relevant, he says, especially the three wholesale experiments being carried out by the Eurosystem. The ECB is presently running a particularly sizeable wholesale exploratory project from May to November 2024. Ten market participants and six market DLT operators have been approved to participate in looking at business cases in the securities settlement cycle. Additional FIs and business cases are expected in Wave 2, starting in July onwards.
The idea is to explore interoperability solutions by experimenting with mock settlement of the cash and asset legs in test environments and to then trial actual settlement of transactions in central bank money in a limited setting, for a limited period. The longer-term vision is to preserve the stabilising role of central bank money, strengthen the efficiency of European financial markets, and avoid re-fragmentation, as and when DLT-based systems have an impact via CBDCs, tokenisation and other associated developments. The ECB says its analysis of unified ledgers will simultaneously continue (cash and assets on the same platform), as will interoperability and hybrid-type experimental approaches.
Second, the usage of commercial bank money tokens (CBMT) can aid interbank and cross-border transactions and data sharing. And third, commercial bank money on blockchain, combined with cross-bank clearing systems, such as Partior might be beneficial for corporates.
Siemens’ Nix likes to broaden the debate to include CBMT and doesn’t just see this emerging technology area as one where CBDCs confront existing payment systems. “Rather, I focus on the question of how the advantages of the crypto world, such as 24/7 real-time and cross-border transactions, as well as programmability, can be integrated into the existing fiat world?”
There is also the overlap to consider between digital assets on capital markets with stablecoins, CBDCs in wholesale application and retail iterations, payment and data stream linkages on DLT-powered trade finance networks, and smart contract functionality to consider. But this article concentrates primarily on the currency uses of the technology. Read more about the tokenisation debate in this earlier TMI feature.
Putting programmability, a USP of CBDCs front and centre and into a fiat world has already been demonstrated by Siemens. But there are many options to explore. Retail CBDCs and wCBDCs have their end uses as value exchange and settlement mechanisms, but as Nix points out there is also CBMT or commercial bank fiat money on blockchain to consider, such as with the JPM Coin system that Siemens has already used on their joint automation and efficiency project. “I see this latter use as a promising concept because it combines the advantages of the crypto world and the fiat currency now, but without their respective disadvantages,” says Nix.
“Fiat money bank accounts on a distributed ledger are treated like normal deposit bank accounts for regulatory and accounting purposes under this model, but offer 24/7 and real-time payments with significantly larger transaction amounts,” continues Nix, as he explains how this function gives Siemens the opportunity to further optimise its global working capital, as seen in its TMI case study.
“We are now leveraging programmability to automate standard treasury processes and dynamically respond to business events using real-time data, rather than relying on predictions,” says Nix.
“For decentralised finance (DeFi) applications and DvP scenarios [or payment v payment as it’s known in FX, a prevalent sector for treasurers], programmability and composability enable the easier synchronisation of payments with the issuance of digital assets, such as bonds, commercial paper or FX options in that arena,” says Nix.
“Additionally, smart contracts represent another aspect of programmability, creating opportunities to link payments to business events between business partners, such as in usage-based business models, so-called pay- per-use scenarios.”
“The advent of DLT, including blockchain, points to an exciting future for money. It has given rise to CBDCs, stablecoins and, more recently, tokenised deposits,” says HSBC’s Lau, while stressing that “tokenisation is among the most exciting immediate trends.”
He continues: “Tokenised deposits have drawn strong interest from central banks and other market participants due to the fact that they combine the advantages and innovations enabled by DLT with the security of a fully regulated financial market infrastructure.” An RLN: Regulated Liability Network is such an example.” BIS’ Project Agorá is an example of the tokenisation drive in FS.
There are many digital currency options, as shown in Celent’s research paper in this area. The various currency-like digital assets on offer are displayed in Fig. 3. Non-Fungible Tokens (NFTs) to prove ownership of a piece of art or another non- currency asset are not displayed in this graph, but are another use of the technology.
According to Celent’s Grealish, tokenised deposits are already available from select banks. “For example, Citi with its Citi Token Services tested last year for cash [liquidity management] and trade [trade working capital finance] are live,” she says. These use blockchain and smart contract technology to deliver solutions that integrate into Citi’s pre-existing global network to deliver cross-border payments, liquidity, and automated working capital finance solutions on a 24/7 basis.”
Bank tokenised deposits span to intracompany funds transfers across different legal entities and many other end uses – it’s not just vanilla payment services, although these are obviously useful for cash managers who can use CBDCs as part of the ecosystem as well.
“Why wait for your central bank, though, when you can already use a regulatory-approved private digital currency to reduce nostro/vostro accounts and when liquidity is now much more expensive in the present high interest rate environment?” asks Grealish, when stressing there are liquidity savings to be made now.
“Some corporate treasuries will wait for CBDCs to go mainstream before getting into this digital money space, but not all,” she adds.
Source: Celent – Blockchain in Action: Payments & Transaction Banking, Alenka Grealish (September 2023)
In Grealish’s opinion, bank tokenised deposits on an RLN is a much more attractive, short-term step than just waiting for CBDCs. “They can already carry out compliant funds transfer, intercompany transactions and so forth.” Applications such as JPM Coin on its Onyx blockchain- based services network or HSBC’s Orion equivalent are already among a plethora of DLT options that can link into the wider payment or funding/investment chain.
The latter HSBC Orion tokenisation platform has already been used for the institutional and retail trading of gold and for the world’s first multicurrency digital bond. In the currency arena, the bank has also taken part in the e-HKD Pilot Programme run by the Hong Kong Monetary Authority (HKMA) to test the possible future implementation of an rCBDC. A HKMA Phase 2 e-HKD initiative is now underway. HKMA is also undertaking Project Ensemble, a new wCBDC designed to render support to the development of the tokenisation market in Hong Kong.
An RLN can almost be positioned as an FMI operating on a shared ledger that can run on central bank money (CBDC), commercial bank money, and other forms of electronic money, which is why it is attractive as an initial step down the comprehensive digital money route. It avoids the volatile ‘wild West’ of digital currencies such as Bitcoin, while awaiting a central-bank-approved equivalent.
CBDCs have privacy, governance, and control issues themselves when you think about how China and the US might approach this DLT-based technology differently, or corporations might use them on payrolls, which is likely to further delay full capability roll-outs while these governance issues are sorted out. Bank tokenised deposits and RLNs are stepping stones in the meantime.
No one wants digital islands to emerge when and if CBDCs do enter the mainstream, which is why Swift’s Connector service and other such cross-border services under the auspices of BIS and others are already under development.
Grealish warns that: “History has shown time and again that interoperability and adoption can take years to achieve. In the meantime, bank tokenised deposits have proven feasibility and could steadily be approved across jurisdictions, thereby offering a private, rather than public, option today.”
“Given the timeline of real-time payments adoption and the current lack of cross-border interoperability, it will be a decade before rCBDCs can offer a viable alternative to the private sector,” asserts Grealish. Wholesale CBDCs may be quicker. There is impetus behind both developments, and it is worth monitoring the sector.
In terms of the impact on existing infrastructures, Grealish comments that: “Competition is a beautiful thing.” Meaning that FMIs will have to change, and central banks innovate, to keep control of the money supply. That is what they are trying to achieve with the multitude of pilots that are underway, some of which are attempting to enter production.
“I think corporate treasury resistance will fall away as education and knowledge about CBDCs increases,” observes Swift’s Thakur.
“People are starting to get beyond the CBDC misconceptions and understand the difference between on- and off-chain ‘cash’ and central bank money, particularly where a wCBDC end use would apply for settlement purposes and where a rCBDC applies for consumer or business transactions,” she adds, while stressing the educational element. The latter rCBDC application can run over a cross-border link [for example Swift’s] and presents a more traditional payment acceptance A/R end use challenge.
“Corporate treasurers will still be able to do whatever they want with their digital money, in whatever forms it comes,” says Thakur in her quest to reassure and educate the marketplace. “Sweeping, pooling and other cash concentration methodologies across multiple accounts can still exist and be a money maker, if so desired, with this new world technology.”
She adds: “It’s a misconception that you need real-time funding as well. You can batch run it and do multilateral netting with CBDCs – we did it across seven currencies in our FX use case involving CLS, where its once-a-day settlement was enhanced to give faster and regionally-specific settlement cycles for the APAC, Europe and Americas regions.” (See Box 1 and online)
The ‘alphabetti spaghetti’ of variously named CBDC pilots underway at BIS, in nation states domestically, in Swift co- ordinated projects and around the world in other initiatives, will eventually coalesce into useful structures, connectors and tools, providing a new ‘grammar’. This will offer control in this emerging field and a new way of doing business. Treasurers should watch this space as the dictionary of finance will soon be updated.
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