How can financial institutions lead in the CBDC era?

13 Sep 2023

Thriving in the central bank digital currency (CBDC) era demands financial institutions to have strategic foresight, proactive involvement, and commitment to support clients as they navigate the future.

Central bank digital currencies (CBDCs), the digital counterparts to traditional banknotes, are garnering global interest. With approximately 90 per cent of the world’s central banks currently running CBDC initiatives, these novel forms of currency have the potential to revolutionise the way transactions are conducted and payments are processed.

As trusted players at the heart of the financial services landscape, financial institutions (FIs) are presented with both an imperative and an opportunity. Their role goes beyond facilitating this seismic shift – they’re key in shaping it. Thriving in the CBDC era demands more than passive adaptation from FIs; it requires strategic foresight, proactive involvement, and a commitment to support clients as they navigate the digital economy of the future.

Deciphering diverse objectives in CBDC development

CBDCs represent a unique category within the universe of digital assets. As a digital form of central bank money, CBDCs are issued and regulated by a nation’s central bank, making them fundamentally different from cryptocurrencies like Bitcoin or Ethereum, which are decentralised and not controlled by any central authority.

The potential of CBDCs lies in their ability to meld the convenience and security of digital payments with the stability and regulatory oversight associated with traditional currencies. For policymakers, they represent an innovative tool to address specific national needs and challenges. Shaped by distinct regional contexts and strategic objectives, the motivations that propel their development, however, are as diverse as the countries pursuing them.

For instance, the European Commission’s proposal for a digital euro, set to be introduced as early as 2027, aims to preserve the role of central bank money in an increasingly digital age, warding off competition from alternatives such as global stablecoins.

Meanwhile, with its eNaira, launched in 2021, the Central Bank of Nigeria seeks to foster financial inclusion among the country’s significant unbanked population, as well as streamline remittances, bolstering the economy and the livelihoods of citizens.

India’s digital rupee, which entered a pilot phase in 2022, is underpinned by a different set of aims. Aside from making transactions faster, cheaper, and more efficient, the Reserve Bank of India envisages its CBDC as a tool to reduce the likelihood of fraud and illicit transactions, as well as increase efficiency in tax collection and revenue generation.

Given the variations in CBDC strategies being adopted by different countries, FIs need to engage with central banks as well as other partners at the global and local levels to understand the objectives and implications of an eventual rollout, and the role they can play in the new ecosystem.

Bringing the FI perspective to the table

Despite the high level of activity, most CBDC initiatives today are still in the nascent stages of market development. As these projects advance, FIs have a unique chance to help shape the CBDC models of the future.  In this uncharted terrain, FIs can choose their path.

FIs, with their deep understanding of the markets in which they operate, have the potential to help central banks craft CBDC use cases that are accurately attuned to end-user needs, thereby enhancing the likelihood of successful adoption.

One example of this is Standard Chartered’s identification and conceptualisation of a low-value payments business use case for Project mBridge – a pioneering exploration into the cross-border applications of CBDCs led by the Bank for International Settlements with the involvement of central banks in China, Hong Kong, Thailand and the United Arab Emirates.

Others might adopt a more gradual approach, subtly tweaking their existing capabilities to align with emerging CBDC projects.

However, as progress on CBDCs gathers pace, FIs must transition from passive observers to active participants, contributing to the development of a future-ready monetary environment across the banking and payments value chain.

Translating potential benefits into tangible opportunities

Among the numerous efficiencies promised by CBDCs, arguably the most important for FIs will be their impact in payments and trade.

Under the current correspondent banking network, long chains of intermediation can render the process both costly and slow. FIs bear the brunt of this inefficiency, sustaining relationships with multiple intermediaries, grappling with a high compliance burden across borders, and navigating limited transparency on payment status. By simplifying these intermediation chains, CBDCs can reduce both complexity and settlement risk, as well as speed up the process.

These improvements have already been demonstrated in a real-world context on the mBridge platform. In pilots, international transfers and foreign exchange operations were completed in seconds, a significant acceleration compared to the several days usually needed using the existing network of commercial banks.

The emergence of CBDCs and other Digital Asset infrastructures signal a profound transformation in the delivery of financial services, and FIs must act now to build for this future, especially when it comes to their client product and service portfolio.

For its inaugural Digital Currencies report, East & Partners surveyed more than 850 senior treasury professionals working at major global corporates. Respondents were positive about the potential for CBDCs and stablecoins to smooth their liquidity challenges, and a majority said they intend to prioritise their implementation in trade finance and cross-border payments, areas in which they have experienced long-standing challenges.

However, a majority highlighted a lack of advisory and executional support around the digital currencies from their banking partners – signalling a clear call to action for FIs to step up and provide this to their clients.

Standard Chartered has been active in exploring the opportunities that CBDCs present in commercial contexts. In May this year, the Bank launched a whitepaper in partnership with PwC China to illustrate how CBDCs can meet corporate clients’ complex financing needs, with a specific focus on leveraging their programmability to lower businesses’ operating costs as well as boost the accessibility of trade and supply chain finance.

Laying the foundations for a broader digital shift

With over 80 per cent of corporates surveyed by East & Partners saying progress in the space would make them more likely to encourage clients to accept and pay with digital currencies, the advent of CBDCs is likely to accelerate the broader blockchain-based digital shift in the financial ecosystem.

For FIs, this presents an imperative to not only keep up to speed with developments, but also leverage them to better serve the real needs of their clients.

As part of its strategic initiatives to be at the forefront of this transformation, Standard Chartered has invested in, and integrated, Partior, a blockchain platform designed to revolutionise and accelerate interbank value movements in the digital era. As a founding shareholder, Standard Chartered will enable the interoperability of CBDCs through this vehicle.

At the same time, as global regulatory support for digital assets gains momentum, Standard Chartered has signed a memorandum of understanding with the Dubai International Financial Centre (DIFC) to roll out digital asset custody services for institutional clients around the world.

Co-operating for a digital future

As the landscape continues to evolve, financial institutions of all levels of digital readiness have a valuable role to play. Rather than merely adapting to the inevitable changes, they can take a strategic approach to shaping future developments, or pool their collective expertise through correspondent banking partnerships. For institutions at the early stages of digital transformation, this shared knowledge can be particularly valuable, enabling each and every FI to participate in a more digitised, efficient and inclusive financial system.

Spanning over 40 markets, Standard Chartered’s extensive global network positions it as an important correspondent banking partner for international payments. The Bank is engaged with various central banks, directly participating in and contributing to their CBDC endeavours. With involvement in initiatives including the SWIFT multi-CBDC Sandbox, Project mBridge, Project Dunbar and the eCNY project, Standard Chartered’s role in the evolving world of CBDCs offers its partner FIs a gateway to the future of banking – one that’s secure, efficient, and primed for the challenges of the digital age.