Digital currencies and payment systems
Digital means of payment such as private stablecoins provide added customer value. They promise innovative and new business areas for the economy, increase efficiency and mitigate risks. Widespread use and acceptance of digital payment methods, however, pose important questions for banks and authorities.
The Swiss Bankers Association is looking into the potential implications of digital currencies and keeping a close eye on the rapid paradigm shift in the payments system. In March 2023, the SBA published a white paper on the idea of a deposit token.
Digital currencies and other electronic means of payment are set to become key components of the “Economy 4.0”. Given the social and economic benefits they bring, the question is not whether they will catch on but when and in what form. The requirements for payment services will evolve alongside the changing payment habits. Instant payment methods that are not tied to a specific channel and can be used across national borders will need to be offered.
A paradigm shift in payments is already happening
The sharp increase in cashless payments and the growing importance of digital currencies are influencing our payment system as a whole. Payment services which used to be seen purely as a cost factor, are now in the midst of a major technological, economic and regulatory upheaval. The system is robust, but it is also slow, inflexible and expensive. The expectations of today’s customers as well as evolving market infrastructure, competition and new technologies mean that secure, instant payment methods are needed that work across all channels.
In the near future, Instant payments (IP) will allow payments to be settled in seconds. All banks that offer customer payment services will sooner or later be required to be able to process instant payments: As early as August 2024, this will affect larger banks with more than 500,000 transactions, and as of November 2026, all banks in Switzerland will at least have to be able to receive instant payments. SIX provides helpful documents for the implementation, such as the basic principles, a SIC IP service manual and Implementation Guidelines.
Banks are facing various challenges
While IP in itself does not directly expand the functionality of traditional means of payment, it does yield improvements for digital business models in terms of speed and availability, which are also beneficial for digital currencies.
The Federal Council published a detailed report on Central Bank Digital Currencies (CBDC) in 2019. Together with the BIS Innovation Hub, the Swiss National Bank (SNB) is working on various applications for a digital central bank currency. At the same time, the Federal Council and the Swiss National Bank (SNB) stated that they see no need to introduce a retail CBDC at present, although they do acknowledge the potential for innovation in digital means of payment. The SBA shares this view and intends to contribute to Switzerland’s competitiveness and innovative power through its work on digital currencies. The impending surge in innovation presents the financial industry, and banks in particular, with numerous business-related, economic, technological and legal challenges that must now be overcome.
Fast growth in demand for digital money
Cryptocurrencies like Bitcoin have been attracting a lot of media and public attention for some years now. The announcement of Facebook's now-failed plans around a global digital currency (Diem, Libra) in 2019 has massively accelerated work of countless market participans on digital currencies and private electronic payments. Such currencies can be used in many different ways to generate significant economic benefits. They enable money flows to be programmed using smart contracts, allow payments to be processed among machines automatically with zero human intervention, enable applications in the contex of decentralized finance and simplify cross-border multi-currency payments.
Against this backdrop, the number of “wallets” used to store digital assets (including stablecoins) is growing fast globally. Turbulent developments among some stablecoins and crypto companies suggest that there is a need for a stable, trusted and secure digital currency.
The Deposit Token - New money for digital Switzerland
As the digital transformation sweeps through the economy and society at large, it requires support from efficient, generally accepted and secure means of payment. This raises the question of how banks can optimally support the Swiss economy in settling digital assets transactions and payments in a digitalized economy. Currently, the SBA is therefore prioritizing research on the possibilities and the optimal design of privately issued (i.e. by regulated and supervised commercial banks), publicly accessible and programmable forms of money as a public good.
Against this background, the Swiss Bankers Association (SBA) published a white paper on the concept of a digital currency in the form of tokenized deposits based on distributed ledger technology (DLT): the “Deposit Token” (DT). This kind of stablecoin, if carefully designed, would potentially allow for a wide range of new applications, reduce risks, increase efficiency, and open up whole new areas of business.
The white paper concludes that the DT can be a viable means of ensuring the financial centre’s competitiveness and strengthening the digital economy and its innovative power going forward, while also safeguarding Switzerland’s economic and technological sovereignty.
- The DT is "programmable money", i.e. a purely digital form of the Swiss Franc that can be extended with programmable functions. The DT sould be based on blockchain technology that is interoperable with other platforms and publicly accessible and allow for the use of smart contracts. This suggests an implementation on a "public blockchain".
- Commercial banks already provide their clients with deposits, a crucial and proven instrument for value creation. If this fundamental service is to be offered in the financial system of the future, a digital Swiss franc must resemble conventional deposits from an economic perspective as closely as possible.
- As is the case with deposits from different banks, the DT must be backed by secure and highly liquid assets on the issuer's balance sheet, to guarantee the DT’s ability to preserve value, creating a basis for converting the DT into conventional deposits at par value at any time (convertibility) and for exchanging it for DTs issued by other institutions (fungibility). Our analysis suggests that the DT should be issued by a jointly controlled intermediary equipped with the necessary licenses and controls.
- To take advantage of the legal certainty created by the DLT Act in relation to the transfer of claims and the use of the DT in smart contracts, it would be issued as a liability of the issuer in the form of a ledger-based security. However, questions surrounding the DTs qualification as a security according to financial market law need further analysis and clarification.
- In addition to the efficiency gains and innovative potential within the various areas of application that can be realized through programmability, there are further advantages for private households and companies which stem from the availability, usability, reliability and security of payments.
- As a means of payment, the DT can be integrated seamlessly into a DLT-based transfer of ownership. This allows for delivery-versus-payment (DvP) functionality, i.e., the simultaneous settlement of “asset leg” and “cash leg”.
- The DT will provide the general public with access to this stable form of money for the first time, and render the usage of less stable and secure tokens or stablecoins obsolete.
From today’s perspective, the DT could be widely used in the following areas of application:
- As cash leg for digital asset transactions: A DT would allow for fully automated, simultaneous settlement of digital asset transactions on the same platform and thereby reduce settlement and counterparty risks. The automated settlement of corporate actions promises to yield particularly large efficiency gains.
- As vehicle for “payments of the future”: Firstly, it could serve to settle wallet-based retail payments in combination with smart contracts and thus be a catalyst for further innovation, be it in e-commerce, at the client interface or in peer-to-peer transactions. Secondly, the DT could help reducing costs and frictions in payments involving large or very small amounts.
- As catalyst for a CHF DLT-based financial ecosystem: In a DLT-based financial ecosystem (a form of decentralised finance), both traditional and new types of financial products can be replicated and settled using smart contracts via the blockchain. The DT can enhance the maturity of this ecosystem, tap into new applications and make it more attractive for Swiss users by reducing entry barriers and supporting financial transactions in their reference currency.
The DT must meet legal and regulatory requirements while also fulfilling clients’ need for confidentiality and privacy. Various open questions must be answered to permit the successful further development of the DT concept. Furthermore, aspects like (i) the precise impact of the DT on the balance sheet, financial and risk indicators of banks, (ii) The interfaces between the public blockchain and existing financial market infrastructure systems and (iii) the suitability of the DT for cross-border applications.
Feasibility studies are now needed to drive the DT concept forward. To this end, a dialogue must take place with the relevant authorities to bindingly resolve legal and regulatory issues. The SBA and its members are committed to obtain this needed clarification and to continuing their joint work on the DT.