Are CBDCs any closer to making a starring role in the story of corporate treasury? A TMI TreasuryCast, supporting HSBC’s 2022 Sibos Spotlight series, sought to separate the facts from the fiction. Technical expertise was supplied by Søren Mortensen, Director, Global Financial Markets Transformation, IBM, and Mark Williamson, Managing Director Global Head of FX Partnerships & Propositions, HSBC.
For anyone given to doubting the real-world use of CBDCs, their practical application took another great leap forward late last year when HSBC and IBM announced successful end-to-end testing of direct securities and FX transactions between two digital currencies.
The test was part of a complex programme, initiated by Banque de France, that is exploring the potential of the digital euro. The details are in the inset box, but essentially it blended public and private cloud environments with on-premise data sources, using IBM Hyperledger Fabric and R3 Corda DLTs, integrated by IBM Research’s open-source Weaver interoperability tool, to breathe practical life into the CBDC concept.
For those yet to familiarise themselves with CBDCs, HSBC’s Spotlight TreasuryCast for 2021’s Sibos brought the basics firmly into the treasury realm. But in the world of technology, a year is a long time. So, 12 months on, mindful of HSBC’s successful project with IBM, how close to a reality is CBDC adoption in treasury in 2022?
With awareness at least of what CBDC stands for, and an increasing understanding of the different approaches and types of CBDC (wholesale and retail, token-based and account-based, and domestic and cross-border), potential users appear now to be applying themselves to deeper research and experimentation.
But as the movement towards CBDC adoption starts to take shape, Williamson notes a number of new variables arising. Emerging economies are typically looking at domestic and retail use only, as a means to perhaps service their unbanked populace, whereas some more advanced economies are focusing on CBDC use in their wholesale markets. “Globally, this is creating some misconceptions as to the best place to start,” he observes.
With many central banks now actively experimenting with CBDCs (some 85% of all, globally), Søren says while most projects are retail-focused, the wholesale side has moved at pace over the past year. Indeed, he believes many wholesale projects (mostly in industrialised nations) have progressed conspicuously beyond those of the retail space.
Williamson naturally sees HSBC’s work with IBM as a major move forward in this context. However, he does see some interesting work being carried out in emerging territories, with a number of projects and pilots gathering momentum. Indeed, he cites the huge steps forward being taken in China, as the authorities not only expand CBDCs into retail – with public transport a focus area – but also seek ways of adoption into supply chain payments. “With millions of wallets in use, and billions in digital yuan distributed into the economy, China is now looking at additional use cases and the extension of CBDC into the broader population,” he notes.
Of course, there are other creative instances around the world, says Søren, “but picking the most interesting projects is difficult because much of the work is bound by secrecy”. From his own experience, he is able to say only that the level of progress in some markets is more advanced than is observable in the public sphere. He also confirms that CBDC development, and work on value propositions in individual jurisdictions, “is something the central banks and governments are taking very seriously”. The timescale for a broad-based CBDC reality is, he feels, “becoming shorter”.
Architecture of a successful project
The HSBC and IBM project referred to in the introduction focuses on wholesale activities and the connectivity between central banks and commercial banks. It was designed to show how CBDCs can bridge geographic borders and time zones, DLT platforms, asset classes, and the divide between digital and real-world currencies.
It started with Banque de France issuing on day one a euro-CBDC bond in the primary market. HSBC bought that CBDC bond, placing it into its digital vault. It then sold it on the secondary market to one of its clients. On day two, HSBC received a coupon payment from Banque de France, and as per the HSBC client’s standard settlement instructions, HSBC converted the coupon CBDC amount into a ‘synthetic CBDC’ (backed by reserves held at the central bank) and paid it into its retail bank account.
The test was based on a platform that had been created by the participants to issue, trade, and settle securities on blockchain against CBDCs. The scope covered wholesale, retail, token-based and account-based, domestic and cross-border activities. It also contained primary and secondary market and foreign exchange movements.
There is also a point at which interoperability between different blockchain systems, and traditional processing networks, had to be managed to ensure data exchange was seamless throughout. This was an essential element to solve because it has always been understood by the project team that different DLT technologies and domestic networks will be in evidence as new CBDCs emerge.
The real aim here is to give each central bank full visibility over the circulation of its currency, across all participating networks, notes Søren. “Unlike many other projects that consider interoperability between two networks, we have pushed the limits. We have proven that payments can be made across all variables, and that central banks can still have visibility over the movement of their currencies. This gives the flexibility for CBDCs to operate on any platform.”
Testing and teamwork
The work to achieve the interoperability between the different traditional and DLT systems, including the underlying coding, was executed in such a way that only hours, not days, of testing were required to complete the HSBC/IBM transaction. “Witnessing the tokens and payments moving across the system and surfacing in different user interfaces was hugely impressive,” comments Williamson.
One of the reasons for the project’s success was the collaborative approach adopted by the teams, says Søren. “When you’re innovating and challenging – and we were challenged to the extreme at times – I was struck just how well the teams from IBM, HSBC and Banque de France worked together.”
One of the most effective mitigants of project disruptions was clearly setting out the use cases upfront and sharing those with the entire team, explains Søren. “We were pushing the teams and the technologies as far as they could go, but the clarity of vision and the transparency of communication between teams was essential because when we came up against a challenge , it was resolved by a well-briefed team with a clear end goal in mind.”
Of course, the pioneering nature of the project generated some hurdles, many of which had never been encountered before, and this was difficult at times. As Williamson quips: “It wasn’t all cartwheels and laughter.” Indeed, he recalls: “Working out how to move tokens between two different blockchains was a real test, even if it was hugely rewarding once we had achieved it”.
There were logistical challenges too. Not only were there three different organisations that needed to pull together, but there were separate development teams located in various geographies which, with teams spread across India and Europe, meant operation across different time zones. Success prevailed, leading Williamson to conclude that “the key to good collaboration is maintaining an honest, open and transparent feedback loop”.
Commercial bank role
The success of the HSBC/IBM project adds momentum to the likely involvement of commercial banks in CBDC distribution. About 80% of money in circulation is private, notes Williamson. This is derived largely from commercial bank credit creation, which it then drives into the retail world. He believes that by enhancing the visibility and transparency of central bank money flows between central and commercial banks, CBDCs only strengthen that connection.
“The work undertaken between Banque de France, HSBC and IBM proves that if you have the right technology, workflow transparency, and an audit trail of where central bank money is at any time, it can support intraday liquidity, and how that is managed between central and commercial banks, and corporate clients.”
With this in mind, the view that CBDCs will disintermediate commercial banks is incorrect, says Søren. “I’m involved in several CBDC projects with commercial banks and I’m not seeing that message from them at all,” he reports. “On the contrary, for the retail CBDC projects that I’m involved with, the central banks all see commercial banks as the key to distributing CBDCs.”
In the wholesale space, while Søren notes some risk of process disintermediation for commercial banks, he confirms that as far as he is concerned central banks are working to overcome any such risk. “I don’t see a threat to either retail or wholesale CBDC. I do see central banks reinforcing the wider agreement that CBDCs should do no harm to existing mechanisms. Commercial banks are therefore critical for the success of the roll-out of CBDCs.”
Treasury and CBDCs
None of this matters to the treasury community if corporates can’t directly benefit. To this end, Williamson says the fact that CBDCs can deliver improved transparency, workflow, and audit trails for corporate money should support a range of enhanced intraday liquidity decisions.
In the use case of primary bond issuance, with the bond ‘on chain’ (i.e. connected to a public DLT), he suggests that there are a number of opportunities for corporate treasurers to have visibility over bonds that have been issued. With digital representation of those bonds, as opposed to paper copies, “it could lead to different investment decisions around Delivery versus Payment and how this is accelerated, or even fractionalisation of those bonds”.
The interoperability explored by the HSBC/IBM project also looked at outcomes in supply chain networks, says Søren. “Where there is interoperability between payment providers such as HSBC, and the global supply chain networks, it creates the possibility of instantaneous exchanges around financing and payments, for example. So, while our project explores CBDCs, we can see that it proves the case for endless other opportunities.”
The treasury conversation around CBDCs will, of course, turn to the different stores and values of payments possible on distributed ledgers. Williamson comments that while CBDCs are only part of that ecosystem, “corporate treasurers do need to be aware of those changing elements, because one day they may need to be able to accept and process them within their organisational systems”.
Keep your eye on the ball
This suggests treasurers should be doing their homework now. With a host of research material and news reports on CBDCs freely available, treasurers can indeed begin their preparations. Williamson cautions that the space is evolving rapidly in terms of concept development, even if the emergence of practical solutions is moving at a slower pace.
“Treasurers should be aware, keeping an eye on progress at a technical and governmental level, and considering how these developments could impact their organisations, especially if they operate globally because each jurisdiction may take a slightly different approach,” he advises.
For Søren, the progress made by CBDC projects such as the one undertaken by HSBC/IBM means “technology is no longer the issue”. Having deployed a solution using a hybrid cloud structure, and proven interoperability between any type of network, in any time zone, on any type of technology, he suggests that “the only remaining issue is how we roll this out”.
With many potential use cases propelling interest in and beyond the central and commercial banking spaces, he feels real-world solutions will be in production, possibly within five years. “CBDC is real now, and corporate treasurers should be thinking about it. They should be engaging with innovative banks such as HSBC so they really understand the implications for their business.”
It’s important because, to use Williamson’s favourite analogy, anyone who remembers what happened to Blockbuster Video at the hands of streaming services such as Netflix will know what comes next for those who fail to keep up.