CBDC for commercial banks - Part 1: What you need to know

Read more of this series:

CBDC for commercial banks - Part 2: How to prepare 

Nothing in my memory compares to the momentum we're seeing around digital currency, and I’m no stranger to the space. After leaving Accenture in 2014 to cofound a Bitcoin startup, I returned in 2015 to refocus on CBDC. That's when the most fascinating and fast-moving journey of my career began. 

Most central banks are now deep into experimentation and implementation of CBDC. As global focus intensifies, so do the concerns of commercial banks.  

Make no mistake: Commercial banks have a pivotal role to play and a unique opportunity to shape the course of CBDC at its foundation. In this blog series, I’ll outline what you need to know and how to prepare. 

CBDC is fast-approaching—and here to stay 

Since March, my CBDC conversations have become much more robust. While the primary drivers remain matters of national security and sovereign control over domestic markets, 2020 exposed significant flaws in the way we move money as governments sought to deploy stimulus funds with unprecedented speed and scale. 

The shortcomings of physical cash and coin are all too clear in a pandemic, but our electronic forms of payment are far from crisis-proof. Dependent on message-based reconciliation, they’re vulnerable in situations where bank networks or communications are disrupted, whether systems go offline or are otherwise unable to communicate.  

A tokenized CBDC represents a third form of central bank money that mimics the features of bank notes but in digital form, with built-in properties that can attest to and transfer ownership without network connectivity. This provides several benefits: 

• Diversification: It’s an international standards recommendation that financial market infrastructures offer settlement in central bank money. CBDC as a parallel payment rail would increase resilience and access to central bank money. The European Central Bank (ECB) and the Fed have both stressed the importance of parallel payment systems, with the latter implicitly leaving the door open for CBDC as a resilient payment system in its notice on the FedNow service. Diversification across both public and private operated payment networks has also been emphasized. 
• Settlement: Tokenized CBDCs enable end-to-end, real-time settlement, both cross-border and peer to peer, changing the way people transact. The Bank of International Settlements (BIS) also asserts that global settlement should happen in central bank money, which would include CBDCs (Principle 9: “Money Settlements”). 
• Functionality: One of the biggest innovations CBDCs enable is settlement offshore and as a substitute for foreign exchange reserve assets. As tokenization allows uniqueness and authenticity to travel with each unit of currency, two foreign banks can settle in CBDC, no matter the issuing authority. 

• Coexistence: Regarding all of the above, it’s crucial for commercial banks to note that new currency areas are forming beyond traditional borders every day; private currencies will be better suited for certain use cases and likewise for CBDC. 

A fast-paced digital world needs fast-paced digital money that addresses critical security, scalability, privacy and accessibility concerns. Tokenized CBDC (digital bearer instrument) meets these demands, making it all but inevitable. Our report (R)evolution of Money II delves into these considerations of tokenization and central bank digital currency developments.  

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According to the World Economic Forum, more than 40 central banks are already experimenting with blockchain technology, a key enabler of CBDC. The BIS asserts that 80% of central banks are experimenting with CBDCs, with another 10% close to implementation.   

Among the largest, China, Sweden and France are most far along. A number of smaller banks, including the Central Bank of the Bahamas, are even further established in the space, having already availed themselves of CBDC functionality to solve for weather-related system disruptions and the maritime transport of money. 

It’s helpful to divide the playing field into wholesale and retail (or “general purpose”, as the BIS describes it)—the latter being a good indicator of central bank ambition. (For more on that, take a look at the International Money Fund’s (IMF) recent survey.) 

Retail/general purpose:

• In October, the Central Bank of The Bahamas launched the first-ever nation-wide CBDC in the world, the Bahamian Sand Dollar. 
• Riksbank is creating guiding principles for an e-krona digital currency in Sweden. Since 2019, Accenture has been working with Riksbank to pilot the platform, which includes exploring ways of sending emergency support to citizens during times of national concern. 
• In October, The People's Bank of China concluded its largest pilot project on the digital yuan by distributing online wallets to 50,000 consumers. 

Wholesale:

• With Accenture’s help, Banque de France has expanded its domestic wholesale payments experimentation to include multiple countries transacting offshore settlement of securities trades in CBDC. 
• Through Project Aber, the Saudi National Bank and the Central Bank of the U.A.E. to successfully implement use cases of a dual-issued digital currency as a unit of settlement between commercial banks both across the two countries and domestically. 
• In December, the Swiss National Bank’s Project Helvetia demonstrated the practical and legal feasibility of integrating tokenized digital assets and central bank money. 

Further central bank research and experimentation  

In many cases, government approval is necessary for the development of a CBDC. That work is already under way in the U.S., where the Digital Dollar Foundation (DDF) is exploring legislative change as the Fed sharpens its focus. The UK also recently announced the pursuit of further research into CBDC and the initiation of the d-GBP initiative. 

Other movers and shakers include: 

• Project Khoka – The South African Reserve Bank is working on a CBDC for domestic interbank payment and settlement efficiency  
• The Jasper-Ubin project - Building on previous experimentation using distributed ledger technology (DLT) for domestic interbank settlements, the Jasper-Ubin project is a collaboration between the Bank of Canada (BOC), the Monetary Authority of Singapore (MAS), Accenture and JP Morgan to explore DLT for the clearing and settlement of cross-border and cross-currency payments and securities.  

Next up: How to prepare 

Historically, CBDC is developing at a much faster pace than that of other payment systems. Whereas FedNow debuted decades after the introduction of similar European services, the current landscape suggests the race to CBDC is on among the world’s major central banks. 

In the U.S. at least, the design of a CBDC will likely involve the private sector, and with the two-tier banking system set to remain in place, commercial banks must now step up and forge a path forward. In my next post, I’ll cover what all of this means for you and how you can identify the opportunities ahead.

Read more of this series:

CBDC for commercial banks - Part 2: How to prepare 

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