The role of commercial banks in CBDCs

While the potential of Central Bank Digital Currencies (CBDC) is substantial and more and more central banks explore their options in adopting a CBDC strategy, there are many challenges and considerations to cover. They range from cybersecurity and privacy concerns to the impact on financial markets, legislation and the role of commercial banks. The two-tier banking system, which has long provided the traditional setup for commercial banks, has typically supplied the fundamental support for the real economy in some of the largest nations worldwide.

To truly maintain the integrity of this working relationship between stated-owned central and private commercial banks, it’s important to consider both the banking system and how CBDCs are implemented and programmed. It is key in this relationship that central banks issue the value and grant its authenticity, while commercial banks as well as financial services providers issue the wallets that handle CBDC and are responsible for the application.

Maintaining the two-tier system

The cooperation between central banks and commercial banks has proven itself over many decades. The central banks take care of macroeconomic aspects, such as money supply management and currency stability, while the commercial banks are responsible for services such as customer advice, lending or corporate financing.

The balance between these two players can and should be maintained in the future era of a CBDC. While central banks will be in charge of the creation and destruction of digital money, commercial banks will be vital to its deployment. Commercial banks are the best players to take on a customer-facing role in the CBDC ecosystem and be responsible for the distribution – just as they are now with physical money. But more than that, since CBDC offers the opportunity to develop new financial products and services.

In the future scenario, they not only retain their previous role and function, they can even expand their position as service providers. The introduction of a general CBDC paves the way for new digital business models and additional revenue and growth opportunities. For example, automated functions in e-commerce can be used and further developed. Linked value chains and smart contracts ensure that the rules stored in electronic contracts trigger defined actions at certain trigger values and monitor their execution independently.

There is no need to fear competition from central banks; the proven division of roles and tasks between central banks, customer banks and financial service providers, in which consumers are supplied and serviced in a decentralised manner, remains intact. Commercial banks can also use the introduction of a digital central bank currency to bind customers even more closely to themselves with special apps for the use and custody of CBDC and to link them with new CBDC-based customer services.

Programming CBDCs to support commercial banks

 By programming CBDCs accordingly, commercial banks can not only remain relevant in a digital world, but even offer new and innovative services moving forward. The digitisation of currency has already taken place with commercial banking, making up much of the money created globally.

A CBDC for example can utilise programmable features that reside at the commercial bank level, giving them the authority to manage these features and helping to improve the overall performance and reduce the complexity of its ecosystem. Additionally, with the basic currency infrastructure provided by central banks, this provides a driver for digital innovation. Commercial banks are able to set additional conditions at the point of issuing secure smart digital wallets.

With smart digital wallets, consumers are able to create local rules within the policies and wallet conditions, such as setting up one for their family to use or creating spending limits for a child. Smart wallets are able to bring together traditional account-based infrastructure and the features of a token-based CBDC. This setup can help facilitate financial inclusion and be ideally suited for the digital world.

Why it’s key to keep commercial banks in the frame

Despite the jurisdiction that central banks will hold over CBDCs, commercial banks can continue to be a vital component in a world defined by digital currencies. In tandem with central banks, they have a responsibility to provide value when it comes to user adoption of CBDCs and trusting in a digital currency.