The U.S. Federal Reserve has plenty on its plate. Over the next two days, the Board’s policy-making Federal Open Market Committee (FOMC) is meeting and is widely expected to announce another interest rate hike as it battles to tame the highest inflation rate the U.S. has seen for 40 years.
While stemming inflation is at the top of the Fed’s agenda, the U.S. central bank, like its counterparts overseas, faces other key decisions that will shape the money and banking landscape of the future. Chief concerns include how to respond to the highly volatile cryptocurrency markets and whether to implement central bank digital currencies (CBDCs).
Torsten Hoffmann, chief technology innovation officer for SAP Banking, notes that CBDCs are quickly gaining traction across the traditional finance landscape. Currently, he says more than 60 central banks are exploring the possibility of launching CBDCs. Among them, China is actively working on its plan to connect its central bank digital currency to Hong Kong’s Fast Payment system, and Israel is accelerating its study and preparations for the possibility of a digital shekel.
The move toward CBDCs was given additional impetus after Facebook (now Meta) announced its proposed Libra project — a project that Meta formally abandoned this month.
“This was not a surprise, as the project faced a lot of resistance from government entities since the beginning,” says Hoffmann. “Currencies are a key pillar of the government’s ability to stay in control, to influence the economy, or to manage crisis. There is a kind of competitive situation between government and private initiatives.”
While these innovative moves have the potential to completely alter the banking landscape, Hoffmann believes that to truly ready themselves for this new digital reality, CBDCs need to remain at the forefront of technology adoption.
“A CBDC would ideally be designed to facilitate transactions across borders, including cross-currency payments, and remittances,” Hoffmann said in a recent VentureBeat article. “By reducing dependency on physical currency [cash], lowering transaction costs, and reducing settlement risk, CBDCs would essentially be safeguarding monetary and financial stability for a nation.”
CBDCs can also provide an avenue for direct interaction with citizens of respective countries. In the case of a crisis, this could literally save lives at times when speed is crucial, bypassing the complex and indirect approach taken by the private bank sector, which often causes delayed payments.
The advent of Central Bank-issued digital currencies would have other repercussions for the private banking sector. Nearly half of financial institutions responding to a OneSpan study late last year said that regulatory compliance had slowed additional digital transformation. But despite the security and regulatory challenges that private banks face, 84% of banking leaders are still taking steps to prepare for CBDCs over the coming year and are turning to technology companies like SAP to help them prepare to compete.
Hoffmann said that SAP can support the players in multiple ways. For example, “by optimizing and bulletproofing processes; connecting banks and companies to the payment, lending, and procurement networks; and by providing accounting, risk, and compliance solutions for all relevant entities.”