Digital currencies and the future of commercial banking

Commercial banks have compelling reasons to adopt digital currencies. Retail CBDCs can create new revenue streams through the provision of additional services, such as programmable digital wallets or smartcards for offline digital payments for example. Furthermore, commercial banks distributing retail CBDCs can provide access to banking services for individuals who are currently underserved or excluded from traditional banking systems. This can help commercial banks address new target groups and expand their reach and customer base.

Digital currencies can significantly reduce settlement times and transaction costs for banks using innovative use cases. For example, wholesale CBDCs are particularly useful for interbank payments, enabling atomic settlements and processes like delivery versus payment (DvP) – an important form of settlement in securities and trade finance. In contrast, tokenised deposits could address corporate-specific needs like supplier payment automation for a given term of delivery, supply chain financing, and cash pooling in treasury management, providing more automated and compliant payment solutions. 

Competition is another key driver for digital currency adoption. With big tech and fintech companies rapidly expanding their digital payment offerings, commercial banks risk losing market relevance if they fail to act. Stablecoins offer corporates an alternative to B2B and cross-border transactions, threatening banks’ dominance in this space. 

According to Dr. Roman Hartinger, Senior Business Analyst for CBDC at G+D, banks have historically been at the forefront of innovations, adopting pioneering products such as payment cards or online banking. “Leveraging the advantages of digital currencies and introducing new use cases to customers would strongly establish banks in the tokenised economy,” he says.

Retail CBDCs: An opportunity for innovation

For commercial banks, retail CBDCs are an opportunity to enhance digital services and attract customers. Integrating retail CBDCs into existing banking apps and platforms could allow banks to streamline customer access to digital cash, creating new channels for onboarding clients in underbanked areas, for example. 

Retail CBCDs also allow for more advanced innovations. For consumers, they offer faster, more secure payments at point-of-sale terminals, online checkouts, and within apps. Banks themselves can unlock more advanced digital commercial capabilities, enabling automated and programmable payments and settlements for machine-to-machine and IoT-related transactions, for instance. 

Adoption of retail CBDC will depend on a combination of factors that influence each player in the ecosystem – commercial banks, merchants, and users. Having commercial banks at the forefront of retail CBDC distribution, alongside their existing banking services, requires a delicate balance with their core business model. 

The digital euro, for example, would essentially function as an online wallet managed by companies like banks, but guaranteed by the European Central Bank (ECB). ECB board member Piero Cipollone recently weighed the potential benefits of CBDCs against the risks that the global stablecoin development could pose to eurozone banks, including the loss of fee revenues and shrinking client bases.¹

Dr. Abbas Albasha, Senior Strategy Consultant for Digital Currencies at G+D, believes that for commercial banks to actively promote retail CBDCs, there needs to be a fair compensation model that not only incentivises banks but also encourages adoption by merchants and, ultimately, by end users. In other words, the compensation model would need to protect commercial banks’ traditional revenue streams. “Retail CBDC, as a public payment option, must align with commercial banks’ business objectives to ensure a ‘do-no-harm’ approach, allowing for safe and scalable adoption that simultaneously benefits all stakeholders in the CBDC ecosystem,” he says.

Wholesale CBDCs and deposits tokens (CBMTs)

While retail CBDCs cater to individuals and small businesses, wholesale CBDCs and deposit tokens address bank-to-bank transactions and corporate needs, respectively. Wholesale CBDCs can offer significant efficiency gains by streamlining interbank settlements, cross-border payments, and securities transactions, for example. Meanwhile, tokenised deposits provide a secure alternative to stablecoins, alleviating corporate concerns around compliance, tax treatment, and risk. 

Tokenised deposits are showing significant potential in advanced use cases like machine-to-machine and IoT payments, and supply chain finance. As an example, DG Nexolution, DZ BANK, Festo, and Giesecke+Devrient have experimented with offline token machine-to-machine payments in secure environments, demonstrating the potential of deposit tokens within Industry 4.0 use cases. 

Stablecoins: A double-edged sword

Stablecoins present both opportunities and challenges for commercial banks. Regulated stablecoins, including those issued under MiCAR in Europe, are gaining popularity in B2B payments. However, their adoption depends on high retention rates and stability, which in turn requires significant investment from issuers. 

Banks have a clear advantage in this space. Unlike stablecoin issuers, they can provide deposit tokens without needing one-to-one reserves, leveraging their existing infrastructure to offer tokenised deposits with fewer regulatory responsibilities. As a result, deposit tokens are often seen as a more secure and compliant digital currency solution for corporates.

That said, banks can also act as stablecoin issuers, as demonstrated by initiatives like JP Morgan’s Kinexys and Société Générale’s Forge coin. The key difference, aside from the reserve requirements, is that stablecoins are bearer instruments, while deposit tokens are liabilities that require settlement when exchanged with corporates or individuals who are not clients of the same issuer. Nonetheless, regulated stablecoins will continue to play an important role in cross-border transactions and as a stable cryptocurrency for investing in ‘on-chain’ instruments.

Strategic choices for banks

With the sector experimenting with multiple forms of tokenised money simultaneously, banks face strategic choices. Retail and wholesale CBDCs, deposit tokens, and stablecoins each have different liabilities and perform different functions, ranging from consumer payments to more advanced B2B use cases. The more that banks can embrace this diversity and offer more options, the more customers they can hope to attract and retain. 

However, inaction poses significant risks and high opportunity costs. If banks fail to adopt digital currencies, they stand to lose substantial market share in payments to non-bank competitors, including big tech and fintech companies. Taking proactive steps can help banks maintain their competitive edge. Banks are uniquely positioned to lead the digital currency revolution, leveraging their well-established foundations, and combining innovation with their existing infrastructure and compliance frameworks.

Digital currencies are set to reshape the banking industry. For commercial banks, they present opportunities to innovate, boost financial inclusion, and take a leading role in the growing world of tokenised money solutions. To stay relevant and address the evolving needs of diverse markets, banks must prioritise embracing tokenised money solutions. This requires making strategic decisions tailored to the unique needs and expectations of their customers.