Discussions around Central Bank Digital Currencies, or CBDCs, have heated up in recent months, but even if they eventually hit the mainstream, commercial banks are unlikely to be rendered irrelevant by this new form of exchange, according to analysts.
However, banks will have to take steps to be ready for the introduction of CBDCs, which are digital versions of fiat currency and are a store of value in their own right. Central banks that are at various stages of exploring CBDCs include National Bank of Cambodia, People's Bank of China, Monetary Authority of Singapore and Central Bank of the Bahamas. China is understood to be on the verge of launching its own CBDC, a move that could raise the standing of the yuan as a global reserve currency of choice.
Banks will need to prepare for the arrival of CBDCs from a technology and infrastructure standpoint, or risk getting left behind, S&P Global Ratings analysts said in a recent note.
Next year could be an "inflection year" for the adoption of CBDCs, given the range of pilot projects underway, said Csilla Zsigri, senior research analyst of blockchain/DLT and data marketplaces at 451 Research, an S&P Global Market Intelligence company.
The rise of CBDCs will not directly threaten banks, but it could prompt them to do some soul-searching, she said in an email.
"I think CBDCs will force commercial banks to rethink and adapt their business models, and the losers will be those that ignore or don't develop sufficient understanding and experience with the underlying technology, and are unable to adapt their 'modus operandi' to whatever the reality will be."
Commercial banks stay in the picture
In theory, a CBDC would enable central banks to offer a bank account directly to members of the public, cutting out the need for a traditional lender. In one scenario, central banks would administer these accounts directly, thus displacing commercial banks as the main deposit-taking institutions. However, S&P Global Ratings sees this as an "extreme" scenario and one that few central banks would favor, not least because it would be cumbersome to manage and potentially disruptive to the financial system as a whole.
"Central banks will lean heavily toward a model where banks and other financial intermediaries continue to play a strong role," the note said.
Commercial banks need to invest heavily in their tech and infrastructure to make sure that they are compatible with CBDC payments, the report said, adding that some lenders appear better-prepared than others.
"We observe various degrees of technology and stakeholder readiness for CBDCs globally, even in the countries where central banks are currently exploring them," the note said.
Switzerland's 'promising' experiment
S&P Global Ratings' commentary came just before the Bank for International Settlements, along with the Swiss National Bank and SIX Payment Services AG, announced the successful completion of an experiment in the use of wholesale CBDCs in a "near-live" environment. Project Helvetia, a collaboration between the BIS and the Swiss National Bank, explored the feasibility, both technical and legal, of clearing transactions in wholesale CBDCs on a distributed payments platform, as well as connecting that platform back to the regular payments system.
Andréa Maechler, member of the governing board of the Swiss National Bank, said that the outcome of the experiment showed great promise, but that more work needed to be done to clarify the technical specifications and policy implications of wholesale CBDCs.
There are no plans at present for a retail CBDC, or digital money that members of the public can use for everyday transactions, Maechler said at a Dec. 3 press conference.
Separately from Project Helvetia, the Swiss government had explored the possibility of an "e-Franc," ostensibly for retail rather than wholesale use, but poured cold water on the project in late 2019 because it was deemed to be too risky from a financial stability standpoint.
"As things currently stand, the further development of central bank digital currency that is restricted to financial market players would appear to be a more promising strategy [than a retail CBDC]," the Swiss Federal Council said in a statement at the time.
Maechler said during the press conference that she could not comment on the e-Franc project.
Benoît Cœuré, head of the BIS Innovation Hub, agreed that the experiment had been positive but that CBDCs still needed more scrutiny.
"If wholesale CBDCs are to fulfil their potential as a new means of settlement, their design and implications deserve close study and consideration. This is only possible via continued deliberations and experimentations among central banks and with other stakeholders, such as market supervisors and the private sector," he said in a statement.
Given the pace of digital transformation, central banks and other financial institutions will need to make informed policy decisions about CBDCs quickly, Cœuré added.
What comes next?
On central banks' approach to CBDCs in the coming years, Zsigri said she expects that they will be "cautious and prudent" in their approach to implementing any new concept or technology.
"However, we also want them to be open-minded and forward-looking, in order to contribute to a favorable evolution of payment systems and financial instruments, so their role may and should change," she said.