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CBDCs potential to catalyze banking innovation
Programmability can improve access to working capital, enhance supply-chain resilience
The Asset 1 Jun 2023

For both individuals and corporates in banking and other industries, commercial applications of central bank digital currencies (CBDCs) can deliver innovative new service propositions and be the catalyst for a new era of programmable banking, according to a recently published whitepaper.

In particular, via their programmability feature, CBDCs can be leveraged to transform retail, trade and supply-chain finance, finds the Co-creating the Future Ecosystem of Banking with CBDCs whitepaper, published by Standard Chartered and PwC China.

The feasibility of using wholesale CBDCs for cross-border payments between central banks, the paper notes, has already been tested through pilots, such as mBridge – a joint project between the Bank for International Settlements Innovation Hub and four central banks.

Studies and pilots around retail CBDCs are also underway in mainland China, Hong Kong and a number of other jurisdictions. Most recently, the Hong Kong Monetary Authority commenced its e-HKD Pilot programme with Standard Chartered as one of the participants selected based on its proposed use case of e-HKD in offline payment scenarios.

Against this background, the paper looks into the next steps for CBDC development and the value that they could bring to digital payments. And, in particular, it studied the application of smart contracts to CBDCs, with an eye to enabling innovation and transforming business models.    

Currently, many loyalty schemes are restricted in their geographical scope, the paper points out, and complexities around technical, regulatory and tax issues across jurisdictions can hinder cross-border efficient schemes.

Smaller businesses, the paper finds, often struggle to create cost-efficient loyalty schemes or join established loyalty alliances. Programmed CBDCs can enable small firms or networks of niche brands to form alliances and offer compelling digital loyalty schemes, thus greatly enriching the retail space.

Similar benefits can apply when programmed CBDCs are used to improve accessibility to trade and supply-chain finance. While widely available to buyers and suppliers with sound credit ratings, many small and medium-sized enterprises still face barriers when seeking to access these financing solutions due to their lack of scale, collateral or credit history.

“CBDCs have the potential to alleviate these pain points, provide better access to working capital for small suppliers and enhance the resilience of the overall supply chain,” says Ricky Kaura, head of transaction banking for Asia-Pacific, Africa and the Middle East at Standard Chartered.

Overall, an appropriate governance model for smart contracts and data sharing can support the wider adoption of CBDCs in commercial contexts, the paper emphasizes.

James Lee, partner, advisory digital, at PwC China, adds: “Greater collaboration between industry bodies and regulators across jurisdictions will be critical to validating CBDC use cases and creating a programmable banking ecosystem that fulfils the potential of CBDCs.”

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