Harnessing

digitalcurrencies

HowbankscanpreparetheirITestatestoleveragethepowerandpotentialofCBDCs

Caseinpoint-DigitalEuro

Inbrief

?With70%ofcentralbanksaimingtoissueaCBDCwithintheforeseeablefuture,andtheDigitalEuroonthenear-termhorizon,digitalcurrencymomentumisbuilding.

?AsCBDCadoptionwilllikelybemandatoryforbanks,it’simperativeforbankstoget

startedwithstrategicallyaddressingthe

manybusinessandtechnologyimplications.

?LearningfromexamplesofDigitalEuro

preparations,wehaveidentifiedherethreecriticalstepsthatbanksneedtocompletetosucceed.

Withconsumers,businesses,andgovernmentskeenlyinterestedinfast,easy,cost-effective,andsecuredigitaltransactions,momentumcontinuesbuildingfor

central

bankdigitalcurrencies(CBDCs)

.

Asdigitalcurrenciesbackedbycentralbanksare

generallysaferthanotherformsofvirtualmoney

,like

cryptocurrencyorstablecoin,manycurrencyunions

andcountriesareexpectedtomakeadoptionbybanksmandatory,includingintheEurozoneand,likely,theUK.

Inresponse,bankinginnovatorsarealreadyestablishing

theirCBDCstrategies,readyingtheirtechnology

infrastructures,andevenpilotingdifferentaspectsof

digitalcurrency.TohelpfinancialinstitutionsharnessthepowerandpotentialofCBDCs,withDigitalEuroastheleadingexample,thisarticlewilllookatkeystepseverybankshouldaddressinordertoremaincompetitivein

theinevitabledigitalcurrencyfuture.

Progresscontinues

worldwide

Althoughtheattentionofmanybanks,particularly

thoseintheEUandUK,hasfocusedonmeetingotherdigitalizationimperatives,CBDCprogressismoving

forwardapace.

Worldwide,thenumberofcountriesdevelopinga

CBDCnowtops100,with19oftheGroupof20(G20)countriesintheadvancedstages.3Threecountries

havefullylaunchedaCBDC,theBahamas,Jamaica,and

Nigeria3,with70%ofcentralbanksplanningtoissueaCBDCwithinthenextdecade4.

Inall,36wholesaleandretailCBDCinitiativesare

underway.ThisincludestheDigitalEuro5,forwhichtheEuropeanCentralBank(ECB)iscurrentlywellalongthedevelopmenttimeline.Onitsheels,theUKisexpectedtointroduceaDigitalPound.

Harnessingdigitalcurrencies2

3keystepsforCBDCsuccess

Despitetheprogress,thereisstillperilinvolvedwithCBDCs.ThemostclearlydemonstratedexamplewastheEasternCaribbeanCurrencyUnion,consisting

of8countries,wheretheEasternCaribbeanCentralBank(ECCB)halteditsdigitalcurrencyrolloutduetotech∩icaldi代culties,foΓci∩9thedevelopme∩tofanewpilot.6

Forbanks,theprimarytakeawayfromECCU

experienceistheimportanceofstartingearlyandtakingastrategicapproachtodevelopingand

executi∩9di9italcuΓΓe∩cyo阡eΓi∩9s.Toe∩suΓethe

expectedmandatescanbemet,risksareminimized,

andvalueisderived,herearethethreekeystepseverybankneedstotake:

1)Understandtheregulatoryenvironment

Withmanyjurisdictionsstillworkingontheunderlyinglegislation,suchasintheEU,theirassociatedcentralba∩kshaveyetto?∩alizeΓe9ulatio∩s.

However,themostessentialregulatoryelementsarealreadywellestablished,givingbanksasolidstartingpointfordevelopingastrategyandbeginningtheirexecutionphases.Mostimportantly,bankscannot

delaytheiΓdi9italcuΓΓe∩cye阡oΓtsi∩oΓdeΓtoe∩suΓecompliancewiththeexpectedmandateslaterthis

decade.

2)DevelopacomprehensiveCBDCstrategy

Likeanytransformation,successfullypreparing

forCBDCsrequiresacomprehensivebusinessandtechnologystrategy.

CriticaldecisionsstartwithwhethertomerelycomplywithCBDCmandatesorleveragedigitalcurrencies

forcompetitiveadvantagebylayeringvalue-added

seΓviceso∩topofbasicdi9italcuΓΓe∩cyo阡eΓi∩9s.AsthisdeteΓmi∩atio∩a阡ectsallotheΓs,successfulba∩kswillmakethisdecisiontheirhigheststrategicpriority.

Anotherconcernisdigitaldistributionchannels,ascentralbanksplantointroduceCBDCappsforbankstosupport.Inresponse,bankscaneithercreatea

singlechannel,byfullyintegratingaCBDC’sappwiththebank’sapp,orpursueamultichannelapproach,

whereeachappstandsalone.IntheEurozone,a

multichannelapproachwouldrequirecustomersto

juggletheDigitalEuroapp,thependingSCT-InstWeroapp,andthebank’sapp.

Athirdpivotalfactoriscustomerloyalty.Asdigital

cuΓΓe∩ciessi9∩i?ca∩tlyΓeducefΓictio∩foΓcha∩9i∩9institutions,robustlyaddressingloyaltywillbekeytoattractingandretainingaccountholders.

Formanybanks,developingacomprehensivestrategy

willposeachallengeduetoalready-stretched

technologycalendars.Asanexample,Europeananda阡ectedUKba∩ksaΓeimpleme∩ti∩9

PSD3

,

PSR

,ISO20022,andSEPAInstantCreditTransfer(SCTInst).

BankstemptedtoresolvethesituationbytreatingCBDCstacticallywillbeburdenedwithaprotractedevolutionastheyworktoproperlyimplementdigitalcurrencies.

3)AddressthetopITgaps

Unsurprisingly,CBDCintroductionisspawningahostofuniquetechnologyrequirements,adjustments,andmodernizations.Themostcriticalare:

AΓchitectuΓalmodi?catio∩s,asdigitalcurrency

accountswillbeamirrorofthecentralbank,ratherthanactuallyholdingfunds.Thisisfundamentallydi阡eΓe∩ttha∩thecuΓΓe∩taΓchitectuΓeofmost

bankingcoresystems,necessitatingaconsiderableoverhaul.

Accountnumberadjustmentstoaccommodate

changesinthenamingsystemfordigitalcurrencies.Forexample,theDigitalEuroincludesaunique

ide∩ti?eΓcalledaDi9italEuΓoAccou∩tNumbeΓ(DEAN).Inadditiontoaccountnumbersbeing

stΓuctuΓallydi阡eΓe∩ttha∩today’slBAN,di9ital

currenciescanpermitaliases,likeamobilephone

number,requiringbankstoalsomanageanaccountmappingtable.

Processingspeedimprovementstoattainvelocitiesoflessthanthreeseconds,farfasterthancurrentperformancecapabilities,formeetingexperience

Harnessingdigitalcurrencies3

expectations.EvenbankspreparingforSCT-Inst

willhaveworktodo,asitsrequirementisfiveto20seconds.

Paymentenginemodernization,duetoallCBDC

settlementsoccurringinthecentralbank’sledger.Inanutshell,banksmustpreparefordigitalcurrencyaccountsthatcanbefundedanddefundeddirectly

frommultipleprivateaccountsorcommercial

accounts.Thismeanseverytransactionwillbebrokendownintomultiplecomponentsforabank’spaymentsenginetoorchestrateandvalidateagainstthedigitalcurrency’sholdinglimit.Further,thefundingsource

anddefundingtargetscanbeatanotherinstitution.Eventhesequenceofprocessingstepswilllikelydifferfromcurrentnorms.

Inaddition,abank’spaymentenginewillberequired

toconnectwithacentralizedfrauddetection

functionandtherewillbenewprivacy-enhancing

techniques,likepseudonymizeddata.However,thepseudonymizationofthisdatamayoccuroutsidethepaymentengine.

Offlineoperationenablementbyprovidingtheabilitytotransfervaluebetweendevicesabsentanydigitalledgerconnectionand,possibly,communicatingthetransactionstothecentralbank’sledgerlater.

Oneofflineoptionwasrecentlypilotedby

ANZBankin

cooperationwiththeReserveBankofAustralia(RBA)

.Itleveragedblockchainandnear-fieldcommunication(NFC)tocreateapaymentmodelresemblingahybridoftraditionalcashandcardtransactions.

Swiftinteroperabilitydevelopmentforconnectingtotheorganization’snewinterlinkingsolutioncurrentlybeingestablished.Havingrecentlycompleteda

secondphasetrialwith

38institutionsandtwo

consultingpartners

,theSwiftinterlinkingsolutionaimstoconnectCBDCnetworks,existingpaymentsystemsandothernetworks,suchasbank-led

tokenizeddepositnetworks.

TransactionhistoryandreportingupgradestoaccommodatetheCBDCprocessesknownasthereversewaterfallandwaterfall.Essentially,

ifacustomer’sdigitalcurrencyaccountcontains

insufficientfundsforcompletingatransaction,the

neededbalancewillbefundedfromoneormore

externalaccounts,includingbankaccounts.Similarly,ifacustomer’saccountrisesabovetheholdinglimit,theaccountwillbedefundedautomaticallytooneormoreexternalaccounts.Althoughbankswillneedtotrackandreportoneacheventinthechain,customers

willlikelyprefertoviewthevariousunderlyingtransactionsasasingleevent.

Leveragetrustedpartnerships

toachieveCBDCgoals

TonavigatethemanyCBDCnuances,bankscanturntopartnerswithcriticaldigitalcurrencyexperienceandexpertise.Therightpartnerscanassistwith:

?Strategydevelopment:

Helpingtodesignacomprehensiveplanthat

establishesgoalsandaddressesthemyriadbusinessandtechnologyconsiderations.

?Impactanalysis:

AssessinghowCBDCadoptionwillaffecta

bank’sapplications,revenues,risk,organizationalprocesses,andclientrelationships.

?Proofofconceptdesignandcompletion:

ToensureCBDCgoalscanberealized,oneormore

pilotphasesforeachtechnologysolutionwillbenecessary.

?Staffdevelopmentandchangemanagement:

DuetoCBDCcomplexitiesandthenewprocesses

required,robuststafftrainingandchangemanagementarevital.

Harnessingdigitalcurrencies4

Integrationandbusinessembedding:

Multiplenewtechnologies,andtheirrelated

businessprocesses,willrequireintegratingintoabanksexistingenvironment,includingcore

systems,payments,andchannelapps.

SolutionTesting:

Determineandexecuteanend-to-endtestingandproductrolloutstrategyacrossalldigitalcurrencyservicesofferedbythebankandallrelevant

channels.

Harnessingdigitalcurrencies5

Inconclusion

Thetimetostart:Now

Withstronginterestinsaferandmoreequitableformsofvirtualmoney,centralbanksareforgingahead

withCBDCs.Astheseeffortsareexpectedtoincludeadoptionmandates,leadingbanksarerespondingbydevelopingCBDCstrategiesandevenbeginningearlyexecutionphases.

GiventheinevitabilityofCBDCs,alongwiththe

associatedbusinessandtechnologyimplications,

financialinstitutionscannotsitonthesidelines.By

startingtheirjourneysnow,bankscansuccessfully

leveragethisnewtypeofvirtualmoney,developvalue-addedservices,andrealizebenefitsfromCBDCs.

Endnotes

1

CBDC(CentralBankDigitalCurrencies)-statistics&facts

,Statista,Accessed8/5/2024

2

CentralBankDigitalCurrencyTracker

,AtlanticCouncil,Accessed8/5/2024.

3Ibid.

4

CBDCsuccessdependsonpublicandprivatesectorcollaboration

,OMFIF,February2,2024

5

CentralBankDigitalCurrencyTracker

,AtlanticCouncil,Accessed8/5/2024.

6

DCash2.0-CentralBankD