What do CBDCs, digital assets and tokens mean for financial institutions and how can they be safely put to work for the real economy?
The future of banking and finance is being recast by the introduction of blockchain-based technologies. But beyond the buzzwords, what do CBDCs, digital assets and tokens mean for financial institutions, and how can they be safely put to work in service of the real economy?
It is increasingly clear that blockchain technology, digital currencies, assets and tokens will play a significant role in the future of financial services, reshaping the industry through their unique benefits.
Exciting and transformative use cases are emerging, from the establishment of digital currencies and assets as a relevant asset class, to the use of tokenisation to keep track of and validate financial transactions without the need for a paper trail, the introduction of open payment platforms powered by central bank digital currencies (CBDCs), and beyond – and financial institutions need not only keep up to speed, but help their clients navigate the ever-evolving landscape.
“Banks and financial institutions have a strategic role to play in facilitating the new digital era,” says Philip Panaino, Global Head of Cash at Standard Chartered. “But as the global understanding and development of these new tools is still a moving target, we also have to learn to be more flexible and less rigid, adopting the Silicon Valley concepts of ‘fail fast and move fast’.”
Managing a complex environment
The new digital economy is beginning to take shape. Over the next decade, the tokenisation of assets is expected to grow at a double digit CAGR. Meanwhile, according to the International Monetary Fund1, around 100 countries are exploring CBDCs at one level or another, some researching, some testing, and a few already distributing CBDCs to the public.
Explosive growth in digital assets has prompted increasing interest from corporates, but also from governments and regulators: the Monetary Authority of Singapore is ramping up its digital asset oversight efforts as it looks to review legislation, while in March this year, US President Joe Biden established a national digital asset policy focused on priorities such as financial stability and illicit finance, as well as fraud risk.
As corporates and financial institutions alike seek to chart a compliant course into the digital future, banks will prove to be vital partners.
“Banks are well-versed in navigating the markets and are experienced in dealing with complex financial and regulatory structures,” says Panaino. “Standard Chartered is well positioned as a connector between traditional finance and the evolution of digital currencies and assets to advise clients on maximising these opportunities while minimising associated risks.”
He adds that a key area of focus is to continue to work through complex design and policy considerations. These include use cases, data privacy and economic and financial impacts.
Another important avenue is to translate the benefits of CBDCs, digital currencies and assets into tangible improvements to clients’ business processes and lifecycles. “This could take the form of using smart contracts in programmable and contextual payments, such as with trade instruments across the supply chain lifecycle or end-to-end flows in marketplaces,” says Kai Fehr, Global Head of Trade and Working Capital.
“A further area is offering our largest multinational clients integrated liquidity management services across various CBDCs and new settlement venues,” he adds. “We are actively involved in multiple industry and central bank initiatives, especially in multi-jurisdiction arrangements, for example in Hong Kong and Singapore, as well as in the UK Treasury’s CBDC Engagement Forum.”
Creating the underpinnings of the new economy
Digital innovation doesn’t just provide new ways to make payments and to invest. Blockchain, the technology that underlies digital assets, is rapidly being leveraged to support a more inclusive economy, in which e-commerce dismantles barriers to global trade for SMEs and entrepreneurs and technology is harnessed for greater financial inclusion.
“Tokenisation could also allow more efficient trading of all types of assets on digital asset exchanges. For example, tokenising trade finance assets could lead to improved secondary liquidity, which ultimately supports the real economy and lowers the trade finance gap,” says Fehr. And by tokenising payment obligations from buyers to suppliers using blockchain technology, large corporates can gain greater visibility over their supply chains, while the long tail of the supply chain – often made up of SMEs in emerging markets – can access much needed working capital.
One of the most promising current opportunities for the financial sector is the potential of CBDCs to revolutionise international payments. While digitalisation has led to many improvements in payment processes, there are still numerous challenges with low value cross-border payments – especially inefficiencies in liquidity, FX, settlements and operations.
To process global payments, banks and payment service providers must maintain multiple nostro accounts with various banks across the globe – just so they can access different currencies. Each of these accounts is funded separately, resulting in inefficient liquidity and higher cost-of-fund. Additionally, when funds cross borders via correspondent banks, currency conversions take place, and these add high FX costs to transactions – up to 15% of the total cost.
In recent years, the volume of global cross-border payments has been increasing – primarily due to factors such as globalisation, e-commerce and a growing middle class in developing markets. While the large value cross-border payment market segment is well-covered by banks via the SWIFT-based correspondent banking network, the emerging low value cross-border payment segment – which is currently the fastest growing segment in this market – is presently costly and under-served by financial institutions.
“We see increasing demand for efficient, low-risk, instant or near-instant international payments,” adds Panaino. “Settlement and operational inefficiencies are longstanding challenges, and we are participating actively in initiatives to explore improvements and innovations that can benefit our clients – one example being our collaboration with Bank for International Settlements (BIS) and central banks in China, Hong Kong (SAR), Thailand and the United Arab Emirates in Project mBridge.”
Real solutions for the digital age
The mBridge trial platform has validated the proposition that CBDCs can substantially increase the speed of cross-border payments from multiple days to near real-time, while also reducing cost. Building on this proposition, Standard Chartered has identified and conceptualised a low-value payments business use case, which is currently under development.
Initiatives such as these can address the structural challenges faced by banks, payment service providers, businesses and consumers, while enhancing the entire payment ecosystem, enabling financial institutions to better serve the real needs of their clients.
As trusted institutions at the heart of the financial services landscape, banks are uniquely placed to serve and protect their clients amid a rapidly changing world. By bringing together regulatory alignment, risk management and a forward-thinking institutional focus, the banks of tomorrow are safe, dynamic hubs that provide growth opportunities for the digital future.
The possibilities are nearly endless: digital innovation can – and will – expand access to finance, reduce the cost of digital transactions and help more businesses to sell to the world. Innovation in banking isn’t just about tech-forward features for tech-forward companies. Instead, it’s about solving for real challenges to facilitate the economy of the future.
Adapt for the future without compromising on your transactions today. We can ensure consistency of your financial flows, sustainably finance your supply chain, and help you prepare for new opportunities.