Treasurers risk losing out on CBDCs

Published: Mar 2022

Central bank digital currencies (CBDCs) are quickly moving from a concept to a reality as dozens of countries around the world are exploring and trialling them. Treasurers need to consider how to get ready – otherwise, they risk falling behind and missing out on the benefits that CBDCs can bring.

Person handing another person money bags

Central bank digital currencies (CBDCs) are now being explored – in some form or other – in more than 100 countries, and treasurers will need to be prepared for their eventual rollout.

“We have moved beyond conceptual discussions of CBDCs and we are now in the phase of experimentation. Central banks are rolling up their sleeves and familiarising themselves with the bits and bytes of digital money,” Kristalina Georgieva, IMF Managing Director, said in a recent speech in Washington.

“These are still early days for CBDCs and we don’t quite know how far and how fast they will go. What we know is that central banks are building capacity to harness new technologies – to be ready for what may lie ahead.”

In the same vein, treasurers also need to get ready for the journey ahead. Urszula McCormack, a partner at law firm King & Wood Mallesons (KWM) and specialist in the digital economy and emerging technologies, describes CBDCs as lying on a spectrum. At one end are the broad projects – such as China – where the digital currency seeks to renew the existing currency and potentially even replace cash. At the other end of the spectrum are projects that are very specific in their use case. One example is Australia’s Project Atom, which has trialled a wholesale application of a CBDC specifically for syndicated lending. “And then there is everything in between,” adds McCormack.

CBDCs are part of a wider story of renovating money, says McCormack. This includes real-time payments, more efficient cross-border payments and generally reducing friction, cost and time from transactions.

“As custodians of their institution’s wallet, treasurers need to know that the whole payments infrastructure is changing all around the world,” says McCormack. She uses an analogy to describe how various jurisdictions are approaching CBDCs: “Some are knocking down the house and rebuilding it. Others are adding a new room, while some are just giving the house a lick of paint,” says McCormack.

In China, for the companies that haven’t already been affected by the e-CNY trial, they need to start making plans. Linghao Bao, Analyst at Trivium China, explains that when it is legal tender, businesses will be obliged to accept it, if their customers want to use it.

“There’s time for businesses to get ready. And the central bank will ask big retail companies to test this first,” Bao adds. This is already happening and a number of large corporations have been involved in the pilots in various cities, including McDonald’s, ride-hailing app DiDi Chuxing, and the e-commerce company reportedly used e-CNY to pay its employees.

Aziz Parvez, head of Asia Pacific Corporate Treasury Sales, Global Transaction Services, Bank of America, comments that some corporates have been trialling e-CNY for utility and tax payments. And when the project is rolled out further, corporates stand to benefit from the efficiencies the digital currency can bring. “A broader adoption of e-CNY would provide comprehensive benefits to treasurers, given e-CNY is legal tender and a digital version of the fiat currency issued by People’s Bank of China (PBoC),” he comments.

Retailers and e-commerce companies are a natural place for the e-CNY to be tested. For consumers, the e-CNY will seem like another payment option – alongside Alipay or WeChat Pay, for example – that is being offered by the retailer at the checkout. It may seem simple for the company to offer this additional option, but there are a number of considerations for treasurers as they understand how this new infrastructure operates behind the scenes. These include how their bank connects to the e-CNY systems, and how the e-CNY is converted into other currencies and held in accounts.

To use the currency, consumers will need to have an e-CNY digital wallet – typically an app on their smartphone – with funds loaded from their regular bank account that have been converted into e-CNY. Banks could offer this as part of their usual mobile banking service, but the e-CNY funds are different from the regular deposit accounts. Technically, e-CNY has the same quality as cash or, in economics parlance, M0 – the money that is in circulation and a liability of the central bank. This is distinct from M1 money that is deposited in bank accounts and is a liability of a commercial bank, and for this reason e-CNY has to be kept separate from regular bank deposits.

It is expected that the e-CNY issuance will occur in layers, with the People’s Bank of China (PBoC) – the central bank – at the top, issuing the currency to commercial banks, who will in turn make it available to their customers. Banks will make it available to both individual consumers and also companies. Also, non-bank financial institutions and other providers will be able to offer e-CNY wallets.

Parvez comments on the features of the digital currency and what it means for corporates and their treasurers: “With e-CNY, the only necessary intermediary would be the central bank. e-CNY would provide the benefits of shortened collection periods, because payments could be completed – finality – at the moment e-CNY is delivered as legal tender. It would additionally ease the process of account reconciliation through the end-to-end electronic solution. As such, the implementation would help treasuries achieve cost efficiencies and better cash flows management,” says Parvez.

For now, the e-CNY is a retail payment system and will have an impact on all types of corporates, although some more than others. Parvez says “the flows could be higher for corporates dealing in business to consumer, and consumer to business” transactions and the impact of the e-CNY would be greater for those companies.

Parvez comments that there are a number of things that treasurers can do to prepare ahead of the formal rollout of China’s CBDC. This includes setting up corporate guidelines to adopt digital wallets to accept e-CNY payments. They can also establish the necessary hardware and software to start accepting e-CNY, for example scanners for reading QR [quick response] codes, and software programs like online e-wallet transfer capabilities.

Also, Parvez continues, the newly-added software needs to be integrated with the company’s existing enterprise resource planning and treasury management system to streamline accounts reconciliation. This is especially important when processing anonymous transactions with missing payer information, he adds. Also, e-CNY adoption entails fewer hardware requirements – such as QR code scanners – so treasurers should focus more on software integration to enable online e-wallet transfer capabilities, offline e-CNY payment function and streamlined account reconciliation, says Parvez.

What would happen to the treasurers who don’t take any of the steps to prepare, or even ignore CBDCs altogether? KWM’s McCormack points out if CBDC use becomes mandatory in a particular market or for a particular type of transaction context – whether by law or contract – treasurers will inevitably need to evolve their own systems and processes, although access will likely still be through their banking and payment providers. When it comes to implementing the systems necessary to handle CBDCs, if they have been slow to react, they may find that they are at the back of the vendor queue, says McCormack.

Another issue, comments McCormack, is the contracts that treasurers have with their banks, for example, are likely to be updated to make sure they are relevant for CBDCs. This can present an opportunity to consider whether new payment or operational mechanisms would better suit their needs.

Could treasurers leave it to their banks to think about this on their behalf? Possibly, but it would be better for them to be ahead of the curve. McCormack says it is important for treasurers to start talking about CBDCs with their banking partners now, and by asking questions they are signalling that they expect their counterparts to have adequate plans and protections in place for handling CBDCs.

There are still quite a few unknowns with the new digital currencies. McCormack says that treasurers will need to grapple with the uncertainty surrounding the CBDCs for some time. In the case of e-CNY, for example, the specific technical integrations that will be necessary have not been made fully public, nor have the full gamut of onshore and offshore applications, and so what it actually means in practice for businesses and users still remains to be seen.

Treasurers are already used to digital payments, but the difference with this infrastructure – notes a recent Oliver Wyman report – is that this system is sponsored by the Chinese government rather than the private sector.

One of the concerns with the e-CNY and other CBDC projects is that the state will have eyes into corporations and will be able to have visibility of all their transactions. “In the case of e-CNY there is a very careful approach about what data is collected, who can see the data and for what purpose,” says McCormack. She explains that data provision is tiered and for low-value transactions there is not much data needed to onboard, whereas for high-value transactions, a lot more information would be needed. “Globally, data privacy and security are always in the top two or three issues that are debated when designing the architecture for CBDCs,” McCormack says, adding that the debate focuses on protecting both personal and professional privacy, as well as protecting the data from cyber-criminals.

Another feature of CBDCs – with them being issued by central banks – is how they can be liberalised and extended into a cross-border, and offshore system. If the Chinese government liberalises the e-CNY – in a similar way as it has done with the internationalisation of the renminbi – it could accelerate the renminbi’s adoption as a global trade currency, according to Oliver Wyman. For now the e-CNY is a retail system, but if its use is extended to cover wholesale payments, and is used by large institutions for cross-border transactions, it could supersede the dominance of the US dollar. If cross-border transactions are in e-CNY, and use the new payment rails, it could bypass the need for SWIFT’s messaging and its correspondent banking network. “A new dawn of currency is upon us, and the time to act is now,” the Oliver Wyman report states.

The e-CNY project is effectively “super-charging a currency and making it super competitive because of how easy it is to use,” explains McCormack. With buyers and suppliers on a Belt and Road project, for example, they could transact via their CBDC wallets. “They can make that payment in a trusted and auditable way – to a degree not available for cash or traditional banking rails. It is an extremely compelling proposition,” says McCormack.

The currency could be used by overseas companies for transactions that don’t reach China onshore, much in the same way as the offshore renminbi – or CNH – has been used. At the moment it is unknown how far the e-CNY will be internationalised and if it will be available for offshore companies to pay counterparts in China or vice versa.

If, however, the e-CNY is extended to cross-border usage it could provide substantial savings. Oliver Wyman’s ‘Digital Currency Battleground’ report estimates that if the CBDC could be used between China and Singapore there would be costs savings of SG$16bn to SG$24bn, or up to 5% of Singapore’s GDP.

With China leading the way in the central bank digital currencies, other markets – and treasurers more generally – need to take note. And a global, interoperable infrastructure for CBDCs is already being considered as other countries explore what the implications of the e-CNY will be. A prototype has already been built for multiple Central Bank Digital Currencies (mCBDCs), which is being developed by the Bank for International Settlements, the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the PBoC, and the Central Bank of the United Arab Emirates.

The mCBDC platform has so far demonstrated how CBDCs can offer more efficient cross-border payments and settlements for treasurers – and their bankers. They are real-time, cheaper and safer and 24/7. In a trial of the mCBDC platform, international transfers and foreign exchange transactions occurred in seconds – a vast improvement on the several days that treasurers are used to waiting for their cross-border transactions to be completed.

For the e-CNY to be broadly adopted and used, there will be a number of factors at play. Parvez notes that the wide adoption of China’s CBDC will depend on the PBoC’s coordination with central and commercial banks around the world. Also, another factor that will be crucial to the e-CNY’s success will be the new system for cross-border settlement, which will be something similar to the current Cross-Border Inter-Bank Payments System (CIPS) but with the ability to issue digital wallets to global users. And finally, Parvez notes, adoption will depend on the new regulatory framework globally.

Once the e-CNY does start to gain traction, however, it will open up new opportunities for corporates. It will be possible to rethink the way transactions are done, and in a sense the e-CNY is underpinning – or facilitating – China’s digital economy. With its clean slate, the e-CNY infrastructure can be built specifically to interact with other cutting-edge technologies, such as the internet of things and artificial intelligence. And, once the e-CNY is in place, it could spur other organisations to innovate with solutions that haven’t been possible before.

“For some treasurers it is unnecessary to think about CBDCs right now. For others it may be quite exciting for them or their group entities to be able to programme payments in a certain way and to explore the opportunities relating to the digitisation of money.”

This echoes the possibilities that Brett Turner, Founder and CEO of Trovata – a provider of an open banking platform that automates cash management – told Treasury Today in a previous interview. He notes the biggest pain for treasurers is still cross-border payments, and CBDCs have the opportunity to do something about it. He notes that with CBDCs, “You can architect modern technology from the ground up and everything else – all this existing technology – becomes obsolete and you get a chance to have a complete reboot of all that,” says Turner.

And he urged treasurers to think about getting their systems ready now: “The time is now to start thinking about your technology and systems environment,” says Turner. “People need to start being ready,” he added.

As the e-CNY trials gather pace, it will become more urgent for treasurers to consider how China’s CBDC – and other digital currencies more generally – will impact them and their treasury operations. For those who don’t act now, they could lose out.

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