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Standard Chartered Bank – Network management and the CBDC revolution

Initiatives focused on central bank digital currencies (CBDCs) are becoming increasingly ubiquitous.

Network management and the CBDC revolution

Initiatives focused on central bank digital currencies (CBDCs) are becoming increasingly ubiquitous. Interest in CBDCs, an electronic form of central bank money that can be used by both businesses and consumers to make payments, is gathering momentum and has the potential to fundamentally transform financial services.

In fact, the COVID-19 crisis has accelerated a number of CBDC initiatives amid mounting public health concerns about the handling of physical cash, according to the Bank for International Settlements.1 In addition to expediting cross-border payments; reducing cash management costs; enhancing transparency and facilitating wider financial inclusion among un-banked communities, CBDCs could significantly reshape the securities services model. Standard Chartered assesses how custodian banks will need to evolve in order to meet the increasing institutional client demand for digital assets, including CBDCs.

The market for CBDCs

According to John Ho, Head of Legal, Financial Markets, at Standard Chartered, a number of countries have launched their own CBDC trials or proof of concepts.  These include China, the UK, Canada, Singapore, France and most recently the US, a shift that has happened largely in response to investors’ attitudes towards digital assets. A recent study by Fidelity Digital Assets, for example, found 36% of institutional investors have exposures to digital assets, while 60% agreed that these instruments should have a place in investment portfolios.2 Many clients increasingly believe that digital assets, such as CBDCs, could be quite attractive in these current market conditions as they are uncorrelated to other asset classes and maintain demand for central bank money.

Jyi-Chen Chueh, Head of Group Custody Services Product at Standard Chartered, said some investors believe CBDCs carry a reduced counterparty risk relative to stablecoins as the former are issued by central banks and the latter by commercially-run institutions. As a result, investors transacting in CBDCs will be taking on central bank risk whereas those using stablecoins have to consider their exposures to private issuers, which might be more decentralised, less regulated and whose value and liquidity may be affected by market forces. Trading CBDCs is therefore seen as being less risky among investors.

However, Fidelity pointed out that some investors still have reservations about digital assets, citing their volatility; a lack of fundamentals and concerns about market manipulation.3

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