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Expanding the CBDC Function

Central bank digital currency (CBDC) enables new transactions in central bank money and would require banks to adjust and expand their intermediation services. Central bank money is the most important money in any given currency area. Banks distribute it to their private and business clients in the form of bank notes and coins to support smaller, daily transactions, while larger-value transactions are conducted in reserves.

Changes in central bank money are poised to have significant implications for banks amid new approaches to processing payments, new payment possibilities and integration with existing core banking and payment systems. CBDC offers a new range of bank service opportunities that may require a recalibration of national and international banking and payment relations.

Goals and challenges of CBDC in banks

Accenture research and our work in this area have revealed at least five key goals and challenges in the adoption of CBDC that should be core to the transformation process:

#1: Infrastructure

The operation, maintenance, and integrity of the network operating the CBDC platform should be shared among the central bank and banks, similar to the maintenance of the cash cycle. To do this, banks would need to maintain an IT infrastructure capable of processing CBDC transactions on the network at scale.

Banks will need to connect to existing large-value payment systems to exchange reserves for CBDC and maintain electronic vaults to store CBDC. Infrastructure expansion will require the development of user endpoints, including electronic wallets issued to clients and used for their payments and digital transactions.

#2: Prudential safeguards

Banks will remain the intermediary between the central bank, non-banks and other end-users. End-users will need electronic wallets to store and transact in CBDC, while banks will be responsible for issuing electronic wallets on the basis of existing know your customer (KYC) and other prudential provisions.

The prevention of illicit transactions, including money laundering and terrorism financing, would need to be supervised by banks through existing prudential safeguards built into wallet functionality.

#3: Integration

CBDC represents a new format of money and new payment rails that process CBDC payments. CBDC-related functions will need to integrate with existing core banking and payment applications to ensure seamless operations and user experiences across legacy and token platforms.

End-users will need to be able to initiate transactions in both the legacy and the CBDC environments – and be able to cross environments unobstructed.

#4: New services:

Once available, end-users would be able to conduct online and other digital transactions in CBDC. This creates an opportunity for banks to build margins and offer new services amidst the broadening of digital activities. Commercial transactions could be performed in CBDC to reduce settlement risks and lower transaction costs, in the process easing the related risk management provisions.

In international transactions, CBDC could be used to settle large-value transactions and facilitate security settlements with non-resident institutions. This will aid in broadening the opportunities to conduct business on behalf of clients by enabling a deepening of financial markets and an expansion of bank-related services.

#5: Disintermediation

End-users may perceive CBDC as a preferred medium to store value, and may substitute bank deposits for CBDC. As such, banks need to ensure their bank offerings remain attractive to mitigate any possible migration from bank deposits to CBDC.

In the event large-scale migration takes place, banks would need to strengthen their capacity to seek alternative funding sources. The CBDC design will in large part be a key determinant of the relative attractiveness of CBDC compared to bank deposits.

What CBDC means for non-bank corporations

Traditionally, central bank money in a digital format cannot be held by non-bank and other non-financial corporations. CBDC would facilitate a broader distribution of digital central bank money, including to non-bank corporations, through the introduction of retail CBDC, which would make central bank money accessible to non-bank corporations.

Corporations would benefit from this in three ways:

1. As direct users of CBDC they would be able to conduct novel forms of payments, particularly in an international setting, for example, to recalibrate financial relations and payments;
2. As indirect users, where banks would settle on behalf of corporations and pass through possible efficiency gains associated with CBDC; and,
3. As issuers of tokenised debt and equity for new investors attracted by the prospects of CBDC settlement processes.

Six considerations for corporations

Corporations have much to think about when it comes to the adoption of CBDC. We have identified at least six core considerations that should be discussed:

#1: Payments relations

CBDC offers the possibility to establish more direct payments relations and enable peer-to-peer payments in central bank money, reducing risks and costs in domestic and international transactions. Commercial transactions could be settled on the basis of the principles of domestic large-value payment transactions in inter-bank clearing, affording new quality and efficiency in settlement.

#2: Digitalisation of real and financial flows

Corporations have advanced the digital processing of real transactions in supply-chain and other commercial and production settings. CBDC would advance the digitalisation of payments to offer complete end-to-end digitalisation of real and financial flows.

#3: Payments and invoicing

CBDC could allow smaller currencies to play a greater role in international transactions by offering enhanced capabilities and functionalities. Corporations may benefit from using local currencies, reducing exchange rate risks and leading to a possible redenomination of payments and invoicing.

#4: Prudential safeguards

The programmability of CBDC could provide comfort; transactions are compliant with existing prudential safeguards, which enhances confidence and safety in payments. CBDC could offer additional provisions to detect and prevent illicit transactions, including money laundering and terrorism financing. This would help to reduce transaction costs.

#5: Integration

CBDC uses a new payments infrastructure and will need to be integrated with existing payment processes at the end-user and point-of-sale levels. Corporations should provide a seamless user experience between existing and token-based payment systems.

#6: New investors

International investors may very well be interested in the prospect of CBDC being used to settle token-based debt and equity instruments in domestic and international settings. The ease and safety of CBDC settlement could advance financial integration, allowing banks to set similar settlement conditions regardless of location. This would broaden the investor universe.

Bank’s commercial clients are expected to benefit the most from CBDC in international transactions and supply chain settings. Central bank digital currencies could offer a more seamless and secure international payments environment. This would facilitate international financial integration, lower the barriers of entry to high quality payments, and enhance competition in payment services. Corporations would be able to rely on a more diversified payments environment offering a wider array of financial solutions.

In our next post, we’ll examine how technology is supporting the adoption of CBDC at scale. For further reading, please visit The (R)evolution of money II Blockchain empowered CBDC.

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