The Rise of Central Bank Digital Currencies: Implications for Corporate Treasury
We undoubtedly live in an increasingly digital era, and treasury is not an area that can ignore or escape digitalisation. The recent rise of the Central Bank Digital Currencies (CBDCs) is set to become a transformative development for corporate treasury departments with the announcement from the Bank of England and other major central banks. With all that in mind, treasury professionals around the world need to be equipped with knowledge about CBDCs to help them prepare for this pivotal shift.
The Evolution of Corporate Money Management
The treasury landscape has undergone significant shifts in the past decades: think old-fashioned manual ledger systems versus modern real-time digital platforms. This is a true testament to treasurers' ability to embrace change and navigate innovation. The advent of CBDCs is yet another significant frontier, bound to shake up the finance and treasury world by converging monetary policy considerations with digital technology and imposing new challenges on financial strategy that require a forward-thinking, holistic approach.
Traditionally, the pillars of the treasury ecosystem consisted of the well-known triad: physical cash, the money of commercial banks and central bank reserves. The introduction of another financial instrument - CBDCs challenges the pre-existing frameworks because it doesn't just digitise currencies but forces the financial industry to rethink how financial transactions and liquidity are being managed.
CBDCs in the Corporate Treasury Context
Contrary to some fear-mongering and misinformation, CBDCs are not like complex and volatile cryptocurrencies or stablecoins. They are a direct digital extension of a sovereign currency and a liability of respective central banks, therefore carrying the same level of security as physical banknotes, just in digital form.
For treasurers and businesses operating cross-border, this hits the spot. Commercial bank deposits are still subject to counterparty risk, while CBDC holdings will be effectively risk-free from a credit perspective. This can be transformative in how treasurers structure their approach to liquidity optimisation, cross-border transactions and financial risk.
Slow Decision-Making
Siloed financial operations hinder the ability to be agile in a dynamic global financial landscape, and react to market trends in a timely manner. Because the data is spread across multiple systems and entities, access to a real-time view is basically impossible—by the time all information is aggregated and consolidated, it may already be outdated; therefore, the business may miss out on some key opportunities. A study conducted by Gartner reported that 35% of CFOs cite data quality as the main issue hindering the adoption of automation in finance. The lack of rich, accurate, and consolidated financial data delays reporting and decision-making in both the short and long term.
Key Differentiators for Treasury Operations
Nowadays, businesses access the financial system through commercial banks. CBDCs can offer a dramatic change to this setup, offering direct access to central banks' monetary infrastructure. As such, CBDCs are more than a technology innovation - they are bound to restructure how businesses engage with the financial system.
For example, a multi-subsidiary corporation, operating cross-border, needs to manage cash pools, execute payments and maintain liquidity using multiple banking relationships through a rather manual and time-consuming process. CBDCs will offer a significant upgrade with:
Global CBDC Landscape
The Global CBDC landscape is still in its growth phase, reliant on each country's innovation and technological capabilities. The biggest ones to watch at the moment, that provide some insight into how CBDC might work in practice, are China's digital yuan and European Central Bank's digital euro project. The summary below provides treasury departments with a valuable overview of the regional developments to factor them into the considerations for future operations:
United Kingdom
Digital pound is still very much in development and it will focus on retail and wholesale applications. It will be integrated with the existing payment infrastructure and bring enhanced liquidity management with programmable features.
European Union
In 2023 the Digital Euro has moved from investigation to the preparation phase and it's predicted to launch between 2026 and 2027. It will emphasise privacy and offline capabilities as well as cross-border payments within the eurozone.
Asia-Pacific
China's digital yuan is currently the most advanced CBDC. Piloted first in 2020, it has been since tested in over 26 cities and provinces with over 300 million individual users. In late 2023 the digital yuan hit 160 billion yuan (approximately $22 billion) in transaction volume. The launch date has not yet been announced; however, testing continues, alongside cross-border transactions with Hong Kong, Thailand, and the UAE through the Multiple CBDC Bridge project.
Operational Transformation for Treasury Departments
The introduction of CBDCs will require finance teams and treasury departments to think differently about their core operations and make significant changes to areas such as liquidity and risk management as well as technology they rely on.
Reimagining Liquidity Management
With CBDCs liquidity management shifts to real-time, predictive, truly strategic endeavour. Programmable money allows for additional automation that minimises idle cash through intelligent routing, intelligently redistributes cash based on rules and thanks to near-instantaneous cross-subsidiary transfers. CBDCs transform cash management into something akin to strategic financial engineering that is aligned with wider corporate strategies.
Transformation to Risk Management
Even without CBDCs, the risk and compliance landscape undergoes frequent changes. The nature of near-to-instant transfers happening through central bank infrastructure will mean that the risk will diminish dramatically, and the focus will shift to technological integration and cybersecurity.
With the advent of CBDCs, a few key areas that treasurers should look at are:
Technology Infrastructure for CBDC Readiness
Undoubtedly, the technological transformation will come hand in hand with the launch of CBDCs and force finance departments to reassess and upgrade their tech infrastructure. In practice, this will mean creating systems capable of handling digital currencies while maintaining robust security and compliance standards and keeping up with pre-existing workflows.
Key technological considerations may include:
Systems Integration
Control Framework
Preparing for the CBDC Future
While CBDCs are not happening now and will not fully replace other financial instruments, their arrival is imminent and therefore should not be overlooked. Preparation for the launch is crucial and it's all about strategy and viewing it as an opportunity rather than a disruption or a threat.
By continuously developing CBDC literacy among the finance and treasury teams and keeping up with recent advancements you can act proactively rather than reactively and conduct readiness assessments with plenty of time. It is wise as well, to engage with appropriate banking partners who will be able to advise on adaptable tech infrastructure, capable of handling various financial instruments, including CBDCs. With plenty of time ahead, you can develop appropriate frameworks and strategies to prepare you for when digital currencies finally arrive.
Fyorin, your global financial partner
Interested in transforming your treasury management function? Get in touch with us at [email protected]
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