“This round table achieved great debate, provided a forum for insightful and differing opinions and concluded with a consensus that there was a need for more clarity from central banks and governments on what they are aiming to achieve with central bank digital currencies (CBDCs). While banks are ready to invest in the relevant and necessary technologies required to embrace the promises of all that CBDCs have to offer, they currently need a clear roadmap of the vision and long-term goals necessary to warrant such an investment at this time.”

- Alistair Brown, VP of Open Banking and Payments at EPAM Systems, Inc.

From asserting that we need to abandon the terminology around central bank digital currencies (CBDCs) to arguing that we need CBDCs to “oil the lines” that are currently underpinning the domestic and international payments ecosystem, a recent roundtable* featuring more than 30 leading voices from a range of institutions across global payments dissected key questions which continue to shape the discussion around the future of CBDCs.

Taking a practitioner’s view on the assumption that CBDC will emerge in some form, requiring integration into existing clearing and settlement cycles/systems, participants were encouraged to share their views around the extensive impact this evolution may bear on financial services. To make the point, rather than dictating how the issues should be addressed, the facilitators simply listed a series of questions to open the floodgates of discussion, for example:

• What will be the impact on current schemes and clearing cycles that financial services are members of?
• What will be the impact on payment management, particularly with regard to liquidity range and deployment?
• What sort of regulatory regimes would a future featuring CBDC sit within? Could it sit within a framework that already exists?
• Is CBDC trying to regulate an unregulated market to stamp some authority on it – would that be a good or a bad thing?

Retail reluctance and wholesale appeal

Strong opinions in favour of wholesale CBDC models were the first comments to come forward from the discussion. “What’s becoming clear in terms of priority is that there is a clear business case for a wholesale CBDC, and we’re beginning to form a better understanding of what that would look like and its benefits,” a participant stated.

While certain outliers (e.g., China) are appearing to push ahead with their models, other approaches such as those being taken by the European Central Bank (ECB) or the Bank of England (BoE), are being shaped in no small way by ongoing projects such as the re-platforming of the Real-Time Gross Settlement (RTGS) service and the Clearing House Automated Payment System (CHAPS). Arguably, one participant explained, once such upgrades have been completed the capability to support technologies like CBDC will be available. Timing of such projects is a key concern for central banks, which bear the mandated responsibility to provide stability around monetary activity and enable innovation which should take place around it. The ECB and BoE are running on similar timelines regarding the balancing of ongoing upgrades with CBDC pilots and testing.

Three key benefits of wholesale CBDC raised throughout the discussion include interconnectivity, meeting the increasingly 24/7/365 nature of markets and atomic instantaneous settlement – especially when it comes to cross-border. Yet, as one participant pointed out, while there may be an appetite for innovation around London’s Square Mile, this progressive and comparatively open financial services culture does not exist in many other jurisdictions. Consequently, despite efforts to share many similarities, we may end up seeing a variety of different “flavours” of CBDC with other high-performing western nations, let alone nations less aligned with western approaches. This is why dialogue is essential.

Several participants concurred that stability must and will come from the close collaboration of key central banks, working together to build standards and ideally develop some sort of common approach around CBDC implementation. How this plays out and influences the environment will be interesting to see.

With a conversation shift toward whether there truly remains a business case for retail CBDC, voices emerged with a high level of scepticism around feasibility. Notably, because while clear political drivers behind retail CBDC exist, business drivers haven’t necessarily developed at the same pace.

Extending beyond the retail versus wholesale CBDC divergence, a secondary layer of distinction was raised, insofar as finding business relevance in developed or emerging markets. The general consensus was formed around the table that a wholesale CBDC within developed markets offers a clear business case if designed and implemented as a private sector answer to CBDC. Additionally, there was strong agreement that the rationale for a retail CBDC exists more clearly within emerging markets, with anti-bribery or international money access cited as key drivers in such contexts. However, retail CBDC within developed markets, and wholesale CBDC for emerging markets, were posited as presenting less obvious benefits.

Agreeing on a business case

Circling back to the top of the conversation, one participant explained that the catalyst for CBDC engagement was arguably pushed to the front when Libra reared its head and central banks clamoured to address how they should best combat a private entity taking global control over the movement of money. Despite best efforts, it appears that this momentum has potentially resulted in fragmentation where a myriad of approaches, platforms and pilots are being explored to address different CBDC use cases.

While we labour the discussion around CBDC aiming to solve cross-border issues, we need to ensure that we are not, in fact, making the entire process more complex than it already is. “We’re at risk of creating a global fragmentation of new money that is just going to add more complexity and challenges to the movement of money.”

This line of questioning progressed into whether, in the case of wholesale CBDC, the challenges tied to correspondent banking could or could not be solved without the need for this “complex tool” of CBDC. Specifically, given the complexity and true opportunity CBDC purports to offer, why not solve the issues we have today with the tools and projects already at our disposal, and give ourselves the time to design a wholesale CBDC with the cross-border dimension and connectivity properly?

To reinforce the point, the speaker added that we should make strong efforts not to rush in the wrong direction with CBDC projects and repeat mistakes (such as fragmentation) that we are already grappling with. If the problem we’re attempting to solve is that of atomic settlement for wholesale payments, does the RTGS renewal project not address this problem? Are treasurers within banks really looking to settle an account over the weekend? Perhaps not, but maybe other players such as Mastercard or Visa are likely extremely interested in such a proposition.

Drawing out the cross-border dilemma, another participant suggested that because the question for a bank always comes back down to “where is my liquidity, and how should I manage it?”, regardless of how effective wholesale CBDC may be for domestic markets, banks are fundamentally trying to communicate and exchange with other markets. The liquidity argument is frequently cited as a strong use case for wholesale CBDC, as it offers the potential to free up huge pools of trapped liquidity in either the cross-border market or across asset management more broadly. However, without direct connectivity or interoperability with CBDC between these markets, how does the solution truly solve this interlinking and liquidity management?

While addressing this challenge of connectivity will take time, a participant retorted that the opportunity offered by instantaneous atomic settlement goes to the core of how financial markets work, and how legal arrangements are established: “Post [2008] crisis, the entire financial system has flipped from being an uncollateralised market to a fully collateralised market and we see that tension today. The fluidity that this type of solution could provide to stressed markets – not as a replacement to gilts, treasuries, or bunds, as the underpinning collateral of the market – but add fuel to financial markets to help them work more efficiently.”  

In an ideal world, the correspondent banking system with all of its idiosyncrasies (some good, some bad), would be significantly simpler than it is today, without the problems of the uncertainty of payment and opacity around pricing. The way to do this, stated a speaker, is to strip out as many intermediaries as possible so that when bank A wants to pay bank B, they don’t have to go through banks C, D and E.

Avoiding past regulatory mistakes

With more than 100 regimes (and therefore regulatory approaches) examining CBDC from different perspectives, socio-economic implications, varied political views and the challenge of building payments networks, the question for a bank remains “where do we place our bets?”

Looking to past lessons may be beneficial to determine this.

Picking up on the comment on the intrinsic need for a network in order to facilitate payments, a participant explained that without some type of “stimulus intervention” it is very difficult to create such a network. “It doesn’t just materialise, and certainly not at the pace and in the direction that makes regulators and central banks happy.” This means that there is likely to be initial regulation in the space, which if history is anything to go by, is likely to be misinterpreted and lead to overly costly, overly complex and inefficient initiatives. These tend to result in losing the original intent of developing competition and dynamism in the marketplace.

Additionally, it would be essential to create a body of some description which sits above any entity or provider to oversee standards creation and ongoing governance of the model. This must provide a balance of a regulatory-driven outcome and commercially incentivised innovation, because “let’s be clear, you don’t define innovation from the centre.”

When considering the potential structures or frameworks that regulation of this space may take, maintaining confidence in the settlement of central bank money remains a key factor. While many different roles both for central banks and regulators will emerge as we move forward, the transparency and resilience of financial market infrastructures will continue to be core objectives to protect the confidence held in central bank money. These lessons from the past are not only essential to heed with regard to any future CBDC, but when approaching the future of payments regulation more broadly.

Who should foot the bill?

When it comes to the provision of infrastructure, if banks collaborate and cooperate to deliver the wholesale settlement piece (as they participate in markets they are naturally required to manage their own balance sheets), one speaker argued that there isn’t really a need for the banks to participate in a separate, standalone CBDC element. “For retail CBDC where we are discussing central bank-issued money to replace cash, it doesn’t seem right that banks should pay for the implementation,” the speaker argued.

An additional observation which adds to this pressure was that the central authorities “have no idea how complex this is,” which will lead to tension around how much banks are drawn into the fray because they are good at executing, versus how much they should be drawn in because it “destroys their business model” and ability to create credit. If looking for projects through the lens of pure societal benefit and outcomes for citizens engaging in e-Commerce, the speaker added that having digital credentials and digital identity will be a far greater benefit than CBDC ever will. “I would like to see the banking industry not pursue CBDC, rather, focus on a digital identity wallet to deliver good outcomes for citizens and consumers.”

Keeping all fires burning

Rounding out the conversation, several participants returned to the practical challenges facing banks today, and the feasibility of adding another large-scale project like CBDC into this mix.

Hundreds of millions of pounds are already being injected into the revitalisation of the UK’s payment infrastructure with the New Payments Architecture, ISO 20022 migration and RTGS upgrades. These projects are being pursued and slathered with resources with good reason, but can we truly afford to load more pressures on top?

This goes not only for the financial institutions having to allocate resources to these projects, but the authorities themselves who may find themselves ill-equipped, spread too thin, or without the necessary understanding, to be able to deliver the potential opportunity of CBDC.

Without mentioning a specific project, we have been let down in certain respects by those trying to oversee ongoing payments upgrades in the UK, and we shouldn’t allow this to happen again with CBDC.

Concluding on a more contemplative note, a participant added that fundamentally, this is a debate about money, not about payments, and talking about money makes it an emotional discussion.

While issues such as privacy, data, social inclusion, financial inclusion, and financial exclusion must not be pushed to the side, there are broader questions which persist around the underlying business cases for CBDC. Practical challenges around implementation remain, and institutions are (perhaps predictably) approaching conversations around the potential of CBDC with extreme caution.

Importantly, while the conversations around retail and wholesale CBDC have evolved dramatically over the past 12 months, with increasingly polarised positions emerging from across the globe, it remains an area of acute interest for all players and institutions with an eye to the future.

We certainly do not have all of the answers yet, but the fact that questions, interest, and importantly, investment, continue to flood into the space, signals that the appetite for a CBDC offering may be unrefined, but is growing increasingly more sophisticated as time goes on.

For more insight into topics with global ramifications impacting the financial services industry, read EPAM’s 2022 Consumer Banking Report.

* Facilitated by Finextra and EPAM at Sibos in Amsterdam, the roundtable followed Chatham House Rules and the recap of this event will not share the names of individuals or institutions who participated.