CBDC for commercial banks - Part 2: How to prepare
March 3, 2021
Read more of this series:
CBDC for commercial banks - Part 1: What you need to know
In my last post, I covered the state of central bank digital currency (CBDC) around the world. Recognizing that CBDCs take careful consideration and planning to implement at scale, governments large and small have reached various stages of progress, some having already launched their own. Here, I’ll go over what commercial banks and other financial enterprises can do to prepare.
What will change and what won’t
As you well know, banks are responsible for things like distributing cash, processing payments electronically, safe holding of deposits, and capital lending. That won’t change. Simply put, CBDC is not a payment system, but a new format of money enabling an alternative payment rail that maintains properties of a digital bearer instrument with greater programmability and offline functionality. With that in mind, there’s no reason why banks couldn’t continue acting in these roles in the wake of CBDC.
Secondly, expect the two-tier banking system to remain intact, both to lessen credit risk for central banks and to relieve them of consumer-facing functions they’re simply not equipped to provide. Screening, onboarding, offboarding, servicing, the building and maintenance of technology platforms—no one is better positioned to perform these activities in the CBDC era than the regulated entities who already do so, namely, commercial banks. This assumption is underscored by a recent notice from the US Office of the Comptroller of the Currency (OCC), which clarifies the authority of American national banks to participate in multiparty system networks (the same systems that support CBDC).
So what will change?
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U.S. OCC Interpretive Letter 1174
The OCC signals endorsement for banks to progress DLT
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Tokenization enables CBDC to function in ways other forms of money can’t, which opens the door to rethink and define new processes, practices and opportunities.
- New approaches to processing payments – While commercial banks can expect to continue payment processing, the task at hand is to understand and address how functionality will change, knowing that things like know your customer and anti-money laundering practices will still apply to CBDC.
- New possibilities for payments – Imagine using your phone to pay a small, Fair Trade farmer in Ecuador for a cup of coffee you’re enjoying at a cafe in Chicago. That’s just one of a slew of potential scenarios that commercial banks should anticipate.
- Integrating with new systems – While many of the systems to support CBDC in its various forms have yet to be built, they are nonetheless unavoidable. Plan for significant integration efforts as a result.
- A new range of banking services yet to be imagined – As the world’s CBDCs take shape, our banking services must evolve to meet emerging needs. Picture, for instance, a world in which businesses, households and individuals access CBDC through an electronic wallet they hold with their commercial banks—therein lies a whole new range of service opportunities.
With these prospects in sight, what moves can you make today?
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Flesh out your vision and your strategy
The first step is understanding where CBDC will impact your organization and how you will evolve as a result. This depends on what kind of bank you are and what kind of CBDC ecosystem participant you hope to be. A commercial bank, for example, might see opportunities to provide better settlement via DvP2 or PvP2, while an investment bank might see changes in how it manages collateral or its balance sheet.
While you’re examining key areas of impact, look for opportunities to influence the development of CBDC by connecting with public officials, whether you’re consulting regulators or simply following the progress of advocacy groups like the Digital Dollar Foundation.
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Prepare to build a new infrastructure
There’s no way around this one: CBDC is a new payment rail and you’ll need to create a new IT infrastructure to process CBDC transactions. The upside? It’s a good opportunity to modernize legacy systems you’ve had on the back burner.
What you create depends on how central banks implement their networks, where they’ll be hosted, and how you will participate in the ecosystem, as well as jurisdictional requirements. The challenge for now? We have yet to see what the larger CBDC networks will look like, though Sweden is quite far along with Riksbank having just signed its second year with Accenture on its e-krona pilot project.
In the meantime, evaluate your data architecture to identify systems that may limit your adoption of CBDC. Think about how and when to integrate your existing large value payment systems connections in order to exchange reserves for CBDC. Additionally, the OCC recently empowered national banks to act as custodians for crypto, stable coins and CBDC. As a result, you’ll want to consider creating new services around maintaining electronic vaults to store CBDC as a custodian or depository for large institutions and corporates.
Next, think about how end users will engage with CBDC. Will you be hosting electronic wallets for people, sending tokens on their behalf and acting as an identity provider in the process? Will you be onboarding physical cards tied to user identities and enabling transactions on those cards? These are things to keep in mind while you’re monitoring the landscape.
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Expect to integrate the full application stack, front end to back end
Let’s say the consumer touchpoint for CBDC turns out to be your bank’s mobile app. Not only must your new infrastructure integrate into existing systems to allow onboarding and offboarding of funds, it must also provide a seamless experience for users holding a variety of digital assets—regardless of what form they take. That’s where interoperability becomes crucial.
Customers will start demanding choice over which payment tokens/media they use. Whether I’m using a digital euro or a digital yuan, my money from my country should be compatible with yours in your country. Thus, you’ll need to ensure your services can accommodate a variety of digital assets, vendors, requirements and options.
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Explore enhanced services
Once infrastructure and integration are sorted, you’ll turn your attention to innovation. Tokenization enables rights, obligations and intent to be “programmed” into CBDC. This provides a level of flexibility and utility we haven’t seen before in money, allowing banks to improve efficiency, reduce risk and revamp offerings to mitigate the revenue impacts of CBDC. Naturally, the opportunities vary for each player in the ecosystem.
Opportunities at a glance
- Asset managers: Margin expansion, liquidity improvement
- Payment providers: Data monetization, network analytics
- Retail banks: Financial inclusion, remittance payments
- Investment banks: Automated collateral management, transaction cost reduction
- Commercial banks: B2B margin expansion, counterparty risk
Start planning now
Approach CBDC the same way you’d approach the introduction of any new payment rail offered by your central bank. The difference? CBDC is advancing faster than previous money innovations, hastened by new competitors like agile fintechs that have already set plans in motion.
Start by understanding how things will change and what can be improved across your business. Regardless of your role and how entrenched you are in the existing system, CBDC will hit with game-changing impact—be ready to take the ball and run.
Read more of this series:
CBDC for commercial banks - Part 1: What you need to know
Disclaimer: This document is intended for general informational purposes only does not take into account the reader’s specific circumstances, and may not reflect the most current developments. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this presentation and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit, or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals. Accenture, its logo, and New Applied Now are trademarks of Accenture.
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