What role will CBDCs play in correspondent banking?
At the 2023 Credit Suisse Transaction Banking Forum, experts shared their experience and first ventures in the field of Central Bank Digital Currencies (CBDCs). The following article is a summary of the panel discussion held at the Forum.
According to the Bank for International Settlements (BIS) about 90 percent of all central banks are experimenting with CBDCs. Why?
Previn Singh: I think G7 economies are quite concerned about Central Bank monetary policy being disintermediated by commercial interests. Today, if central banks want to track inflation or have certain money supply objectives, they have a much more direct role in that process than they might have in the future. Therefore, G7 economies want to make sure that they keep their monetary sovereignty. On the other hand, emerging economies are concerned about financial inclusion. They want to make sure that their citizenry is formally entrained into the financial system and not in a shadow banking system. There are also some other jurisdictions and central banks that care more about gathering data and getting essentially a better data set for future analysis.
Matthias Jüttner: When we talk about CBDCs, we must distinguish between retail and wholesale CBDCs. Many central banks are experimenting with retail CBDCs, which would be available to everyone. They would essentially be tokenized banknotes. In contrast, wholesale CBDCs would correspond to a tokenized form of sight deposits held by financial institutions at the central bank. Many regulated financial institutions already have access to electronic central bank money in the form of sight deposit.
What are the challenges the Swiss National Bank (SNB) has encountered when experimenting with CBDCs?
Matthias Jüttner: There exist different options to settle tokenized assets in central bank money. One option is wholesale CBDCs. With wholesale CBDCs you create tokenized money that is potentially given to a third-party financial market infrastructure, where it is used to settle transactions with tokenized assets. This is different from what we are doing now. Today, we act as account manager and provide banks with central bank money that they use in the Real-Time Gross Settlement (RTGS) system, which we control. To handle CBDCs, we need requirements when delegating competences to a new infrastructure – and, potentially, there will be several different infrastructures out there. Before doing so, we must therefore discuss a lot of policy questions, e.g. regarding control capabilities or access.
What kind of projects has Credit Suisse focused on?
Previn Singh: Among other things, we have worked with the SNB and SIX Digital Exchange (SDX) on CBDCs in the Swiss domestic market. We tokenized digital assets and tokenized Swiss francs and did an “atomic” delivery versus payment settlement. This means we have digital assets and digital money on chain and swap the two things instantaneously with everything recorded on a blockchain. We then further developed this project and essentially took both Swiss francs and euros tokenized as CBDCs. It was complex as it was cross-border in cooperation with the Banque de France (BdF). These two examples were fantastic learning exercises for us. In both cases, the technology behaved as predicted. The real bulk of the work was to make it operate across jurisdictional governance frameworks. It showed that the development of a common rule book with eurozone countries would be very helpful.
These various projects seem to have demonstrated the feasibility of CBDCs. What are the remaining hurdles?
Martin Walder: The most important thing is to know exactly what kind of CBDCs and who can participate. If it is only domestically, it should be quite easy now to establish processes and to integrate CBDCs in existing solutions. We probably don’t even need new standards. If it is cross-border, we need to adapt the existing standards to make them work efficiently. If you want to include retail CBDCs, the biggest hurdle will be to include the needed data which is usually a part of a payment.
Previn Singh: It is never a technology problem, but a question of cooperation. If we are not cooperating, we risk ending up with different geopolitical blocs of CBDCs, different rule books and standards and globally fragmented liquidity. This would add inflationary pressure with potentially negative implications for the economy.
Who is the main innovator in the development of CBDCs and the infrastructure?
Martin Walder: All of us. It is a market-driven innovation. It starts to make sense when you really have a use case with the new technology. For example, there is a lot of discussion around the transformation in SWIFT and cover payments. Today, it is really complicated. Maybe a CBDC could work cross-country and can help to make it less complex. Eventually, you won’t need cover payments anymore. That would be a very concrete use case for a CBDC with a lot of potential.
Overall, are central bank digital currencies more of a threat to correspondent banking or an opportunity?
Previn Singh: It’s an opportunity, but there are some risks we need to navigate along the way. The Bank of England has modelled what happens if certain proportions of our commercial bank deposits moved to retail CBDCs. It would raise our cost of capital. When, for instance, 20 percent of commercial bank deposits move to retail CBDCs our funding rate would be raised by about 20 basis points, which is quite a large number. This is something we should keep an eye on.
