FIS argues that now is the time for banks to get involved in the development of central bank digital currencies.
“There will be a role for banks and other firms that provide financial services,” said Julia Demidova, head of CBDC and digital currency strategy for FIS. “Central banks and public sector institutions are looking to see what it will take to support the new payments ecosystem.”
FIS this week launched RealNet Central, a service designed to help central banks deploy the first real-time digital payment networks. The banking technology company also added a CBDC Virtual Lab to help governments build CBDCs, or a digital form of a country’s existing currency. Other large private sector firms are seeking a position in CBDC development, with Visa and Mastercard both of which publicly confront central banks.
“We are working on building the functionality, determining what the use cases are and how they fit into existing payment systems,” said Demidova.
FIS is working with M10, a technology firm that tokenizes traditional currency, a process that creates a digital representation of an underlying obligation held by a regulated financial institution. This allows banks to exchange cash for a tokenized digital currency.
Governments have become more active in payment technology in recent years. Real-time payments projects include FedNow, which is expected to launch in the US in 2023, joining the private sector-led RTP pipeline. Other real-time payment networks include Faster Payments in the UK and the Single European Payments Area in the European Union. Canada’s Real Time Rail, a coalition of government stakeholders and banks, is expected to debut in 2023.
Real-time settlement is a key part of CBDCs, which aim to support online transactions for consumers, governments and businesses. There are dozens of them CBDC projects is being developed globally, although the statuses of these projects vary, as do the structures of each CBDC. And in some cases, like in the US, there still is it is not a strong commitment for issuing a government-backed digital currency.
The pace and uncertainty over the structure has created concerns over interoperability between CBDCs and worries from banks that government-backed digital currencies could dilute existing account balances.
What about banks?
Writing for American bankerRob Blackwell, chief content officer of the InfraFit Network and former editor-in-chief of American Banker, said the Fed could, through a digital dollar, create an alternative to federally insured deposits, draining funds from community banks and affecting the availability of credit.
While FIS, Visa and Mastercard are producing technology designed for central banks, all three firms serve networks that have thousands of card-issuing banks, giving these banks a potential role in supporting digital currencies.
“Banks are worried about disintermediation,” Demidova said. “They’re asking us what CBDCs will look like.”
Visa has partnered with Consensys, a blockchain technology company, to develop infrastructure that issuers can use to build services on top of CBDC systems. Visa is in discussions with central banks about how its network and missing banks fit into different CBDC models and how the card brand can work with commercial and central banks to process cross-border transactions involving conversions between CBDCs.
Mastercard has also partnered with Consensys to co-develop blockchains, which could include CBDC payment processing. Mastercard has also partnered with a CBDC project in the Bahamas.
In a comment letter to the Federal Reserve, which has been accumulation of public contribution in a CBDC, Mastercard advocated a tiered system involving the US government working with private companies to support a digital dollar.
These collaborations suggest that private banks will play a role in the CBDC, most likely by offering products and services that allow consumers and businesses to transact in digital currencies. Demidova also envisions a role for banks as service providers and competing technology developers that will support the use of digital currency.
“Part of the central bank’s mandate is to provide safe, accessible money,” she said. “Central banks are the guardians of financial stability”.
FIS serves approximately 20,000 customers, including banks and merchants, in more than 130 countries. FIS won Worldpay in 2019, a $35 billion deal that was part of several major mergers that year that combined banking technology providers with payment processors, closely linking the development of payment technology with banking services.
The CBDC Lab “is an effort by FIS to tap into new markets,” said Tim Sloane, vice president of payments innovation at Mercator Advisory Service. “These platforms are important for nation-states that have yet to develop their fastest payment network or are interested in developing a CBDC.”