Modernising money: the opportunity and risks of CBDCs

Published: Mar 2023

CBDCs offer the potential to transform treasury. From overhauling costly correspondent banking to introducing programmable money and unlocking liquidity, the benefits abound. But risks and unintended consequences could also thwart progress.

The Bank of England and UK Treasury has just fired the starting gun for a British central bank digital currency (CBDC). The ambition to develop a digital currency that would sit in our wallets on smartphones and could be used for shopping much like notes and coins puts the UK in a cohort of other countries exploring and piloting CBDCs.

So far, most of the innovation in CBDCs is anchored in the retail space. CBDCs are still a long way from being used in the wholesale processes that would most impact treasury like correspondent banking and cross border payments, FX or large value transactions between corporates and their suppliers. But the potential for CBDCs to transform treasury is growing increasingly apparent all the while treasury grows more comfortable with the associated technology like platforms based on distributed ledgers to record ownership.

There is nothing for treasury to do now; governments need to decide how to roll out CBDCs and build new regulatory regimes first. But excitement about the prospect of another revolution in payments is growing. “CBDCs are merely the next step in this digital transformation journey. This will absolutely happen,” enthuses Mark Sutton, Senior Manager at consultancy Zanders.

Perhaps the most significant treasury opportunity inherent in CBDCs lies in cross border payments. Built on multiple correspondent banking arrangements, cross border payments are slow, opaque and incur transaction costs and risks that corporate treasury knows all too well.

In a brave new world of CBDCs, a multi-CBDC platform could process international payments, bypass SWIFT and the corresponding banking network, speeding up cross-border transfers from days to seconds. “There is clear evidence we are starting to gain real traction around potential solutions,” says Sutton. “The benefits of moving away from the SWIFT network model to simplified architecture based on distributed ledger technology (DLT) underpinned by interoperable CBDCs are easy to see.”

Linked to this is the potential for CBDCs to transform corporate liquidity. If payments and receivables are all tokenised and settled in real time, it will change the amount of liquidity a corporate treasurer needs to keep in the system because of unknowns around clearing or settlement times.

CBDCs’ programmability could also rewrite treasury strategy, offering compelling solutions and innovative new approaches. For example, a company with euro denominated CBDCs could programme the allocation to respond to a change in interest rates, either automatically paying down loans, hedging FX risk, or consolidating back to the central treasury. “CBDCs will change what a company can do operationally,” explains Jason Ekberg, a Partner of Corporate and Institutional Banking (CIB) at Oliver Wyman. “It opens the door to new strategies in treasury and some corporates and banks are really beginning to embrace how CBDCs could optimise yields.” Other examples include the potential to automatically initiate payments on completion of a given scenario, like the receipt of goods or even the automatic processing of a tax payment at the point of sale.

Other commonly touted treasury benefits include a new flexibility in the currencies corporates use to trade, leading towards more diversified international payments and reducing the reliance on today’s narrow set of national currencies. It’s a compelling value proposition that could replace the primacy of the dollar, the reference currency for the bulk of global trade, argues Zennon Kapron, Founder and Director of Kapronasia. “If trade between, say, a Chinese and Russian company could be in e-rouble and e-CNY that has strong ramifications. Dealing in the US dollar is costly and requires bank regulation that is passed onto corporate clients,” he says.

Amid all the talk of transformation, proponents also inject a dose of reality. SWIFT won’t disappear anytime soon, and third parties and the private sector will play an essential role enabling CBDC roll out and operability. It would be a massive undertaking for the central bank to employ the staff to build and manage the hardware and software of a new payments system – central banks won’t onboard clients or carry out anti-money laundering due diligence, for example. The fact SWIFT is already evolving its business model to support CBDCs suggests the global network will continue to play an important role, says Ekberg. “You only have to look at the pilots SWIFT is carrying out to see they are seizing the opportunity to get on the front foot.”

SWIFT’s current role as a trustworthy, independent third party in the correspondent banking network where it sits in the middle of the different segments and providers in the payments market is much more likely to evolve than diminish, agrees Kapron. “It’s very difficult achieving collaboration around different payments and settlements and requires a set of standards and centralised infrastructure from a third party. SWIFT has never been the problem in correspondent banking – the fees correspondent banks charge is the problem.”

Regulators must also take care to avoid CBDCs triggering unintended consequences. In an ideal scenario, global trade would be conducted in the largest and most liquid CBDCs. But one concern is that it will result in the digital dollar crowding out local CBDCs in jurisdictions outside the US raising concerns about sovereignty. Digital dollars issued by the Federal Reserve and held in emerging markets in a tokenised form would not be visible to the local regulators, unable to see wallets outside their own jurisdiction.

Successful cross border payments and interoperability in CBDCs requires governments with the most significant currencies to get on board, but also interoperable rails in order to enable those flows, adds Dr Ruth Wandhöfer, I-NED, industry expert and published author. “The big currency countries need to enter the CBDC world and enable successful implementation and cross-border interoperability of these systems.”

Other, thorny problems also need solving. Like the fact few banks, no companies nor individuals, will have direct accounts with the central bank. Remember, CBDCs are a digital form of central bank money – issued by a central bank it constitutes a direct claim on the central bank. Today, central bank money exists either in physical cash or in electronic form as reserves held by a few eligible banks in reserve accounts at the central bank. “Countries only allow a small number of banks to hold central bank reserve accounts. For the purpose of settlement, central banks tend to offer settlement accounts to regulated banks, and in some instances non-bank payment service providers,” explains Wandhöfer. “When it comes to CBDCs the majority consensus of G20 central banks is not to offer direct CBDC accounts to consumers, but rather to distribute CBDCs via the existing banking system.”

Perhaps the only way companies and individuals will be able to use CBDCs will be via a complex process of converting money from a commercial money-based account into CBDCs to pay for goods and services. “For recipients of CBDC, such as merchants, some design proposal such as the one for a digital euro, envisage that these de-fund their CBDC wallets at the end of the day, converting CBDCs back into commercial bank money,” she continues.

Transacting CBDCs across borders also poses a raft of questions. Today the foreign exchange market is dominated by commercial banks exchanging commercial bank monies. “Will central banks themselves provide foreign exchange between different CBDCs?” asks Wandhöfer. Perhaps FX transactions would just be handled by those commercial banks that hold reserve accounts in their domestic currency? Alternatively, the process might require connecting banks with reserve accounts directly with a ledger and allowing them to agree FX between each other, she suggests, adding that a minimum beneficial ownership of a CBDC by a foreign bank must be legally permissible.


Another concern is the fact CBDCs offer a safer type of money compared to traditional commercial bank deposits. This could lead to money flowing out of commercial banks – where the majority of money in circulation currently resides – at times of volatility. The Bank of England published a scenario last year in which 20% of deposits may flee from bank accounts to new digital money. “Unless CBDCs are kept in check, also from a quantitative perspective, there is a risk that central banks disintermediate commercial banks and lending, as well as the fintech sector,” says Wandhöfer. “The fintech sector has built new business models and solutions around third-party flows, payments and account information, chiefly triggered by regulation such as the Payment Services Directive 2 over recent years.”

Flows into CBDCs from commercial deposits would also impair commercial banks’ ability to offer credit provision and lending. If digital assets squeeze bank deposits, banks will have less liquidity to lend, and their balance sheet will shrink. Such a scenario would eat into transaction fees and volumes, impacting revenues. “Clearly this is a risk, but people are aware of these risks. The financial system is not something you can take for granted,” says Ekberg.

One solution, suggests Sutton, is for central banks to operate a zero-interest model on all CBDC maintained balances with the central bank. “This would help ensure deposits remain within the commercial banking sector,” he says. To guard against money flowing out of commercial banks into CBDCs, the UK Treasury said it would initially place a limit on the amounts that could be held in the new wallets, even though such constraints would reduce the digital currency’s usefulness as a payment system.


Adoption could prove another challenge. CBDCs may offer a powerful new form of payment but will people take it up? China’s digital yuan app is now available to users in 23 cities but retail customers already using Alipay and WeChat have been slow to take it up. “Even in China, which has been running the largest CBDC pilot thus far, incentivising users to move away from the broadly used applications offered by the likes of AliPay and WePay has been proven not to be that easy,” says Wandhöfer. Perhaps the reason for China’s lacklustre adoption of the e-CNY is rooted in the guiding rationale behind the rollout, says Ekberg. E-CNY was never designed to supplant Alipay or Tencent rather its aim is to provide an alternative source of digital money away from the hands of a few and the ensuing systemic risk. “For China, it was about creating an alternative digital payment method,” he says.

Anecdotal reports from European retailers suggest take up could be just as slow. “It seems corporates in the retail sector are not that keen on CBDCs. They already have dozens of checkout options from Klana to ApplePay and Paypal and new forms trigger implementation and maintenance costs. There is already a lot of choice in the market,” says Wandhöfer. The idea of a government-controlled currency which could potentially be used to control how people and companies spend their money also has people in the west concerned about the risks of a heavy-handed dystopian future. After all, CBDCS give governments unprecedented control and visibility into monetary and fiscal policy – and what the population are doing with their money.

Britta Dottger

Head of Treasury

At Roche Treasury we have always been interested in exploring and experimenting new ways to solve business challenges and service our divisions better. With CBDCs – among others – the future of money could be rewritten. Depending on their design and purpose, digital currencies could enable new customer centric business models and financial inclusion with fit-for-purpose features at its core. As well as tokenised Fiat money, CBDCs may provide significant value to corporates and societies by allowing timelier, seamless and more secure collaboration across central banks, countries, corporates and individuals. Payments and settlements of financial transactions could be faster, safer, less error prone and at reduced costs. New formats of money may offer an opportunity to better align the world’s financial system with the realities and challenges that businesses are facing in the digital age.

CBDCs and tokenised Fiat money from commercial banks offer the opportunity to enhance the financial system to keep up with today’s business realities and challenges. Depending on the design of new forms of money, we could walk away from batch processing and benefit from micro payments and a higher velocity of money. We would be able to support pay-per-use business models and to continuously perform payments and fundraising. Instant delivery against payment would be possible. Intraday limits between banks and corporates could be eliminated. In addition, CBDCs could release treasury from monitoring and managing credit limits of counterparts. This would make daily treasury life enormously easier. In other words, we would operate in a new and different payment and financial markets infrastructure than today.

We are engaging with players in the ecosystem and we are trying to understand what our banks are working on. We are in dialogue with experts, building our knowledge and initiating proof of concepts and pilots to explore these new opportunities. We are building an infrastructure that allows us to handle new forms of money and we are teaming up with blockchain enthusiasts across our company. At Roche we are already part of blockchain ecosystems and use these technologies for our divisions.

Many of our commercial banking partners invest time and effort to embrace new opportunities arising from digital currencies. We sense a broad spectrum of engagement and some scepticism around timely readiness of central banks. Some of our banking partners are exploring digital opportunities beyond CBDCs to leverage new functionalities for their own treasury operations and for their business with corporate clients.

Existing payment systems no longer meet our needs. We still need several intermediaries to conduct a cross-border payment, which makes the process slow, costly and fraud-prone. In the digital age, we would wish to see not only domestic but also cross-border payments be executed much faster. Even with SWIFT, we still sometimes lack transparency where the money sits and where fees are deducted. To settle big volume transactions like M&A or bonds, the settlement day is a challenge and often cumbersome – amounts have to be sliced in tranches to run through the system. Delivery against payment is possible with escrow accounts or when all involved parties use the same bank – which, from a counterparty risk perspective, is not a preferred option. Different payment format-requirements and cut-off times that vary among banks drive costs and complexity at our end.

Depending on the design and characteristics of CBDCs, these currencies could join business transactions as cash/money on chain and automatically execute smart contracts including payments and book entries in individual ERP systems of respective business partners. Saving resources in reconciliation and administrative tasks would enable everyone to focus on innovation and value creation to the benefit of societies.

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