Challenges for IT infrastructure at banks in Switzerland when introducing a digital Swiss franc for end customers
In our first article we looked at the challenges that digital Swiss francs (DCHF) would face in interbank business. Now we want to go a step further and highlight its importance for the end-customer business.
15.08.2024 Dominik Jocham (BEI St. Gallen), Clemens Eckert (Swisscom) 7 Min.
The last article outlined the need to adapt IT infrastructure at commercial banks when introducing central bank digital currency3 for interbank business4. A DCHF based on central bank digital currency for end customers was explicitly excluded from the analysis, as there are currently no apparent intentions to open one up to end customers. It can therefore be assumed that – if at all – a DCHF could currently only be launched via a private or public-private partnership, e.g. deposit tokens, orchestrated by Swiss Banking5 or the CHFD stablecoin from Swiss Stablecoin Ltd6. These DCHFs must be distinguished from existing solutions in closed ecosystems, e.g. Sygnum’s Digital Swiss Franc for settlement within its own secondary market platform, Sygnex7. Based on these concepts, we outline below the need to adapt IT infrastructure at banks. Other areas of action for introducing a DCHF, such as displaying deposit tokens or CHFD on a bank balance sheet or the technical design of the underlying blockchain, are not further discussed in this article.
Common understanding of stablecoins & deposit tokens
As in the case of CBDC, the question arises as to whether a bank’s IT infrastructure would need to be adapted if a DCHF for end customers (natural persons and legal entities) were introduced. The assumption is that the DCHF will be introduced in the form of a stablecoin or as a deposit token to supplement the existing payment system and that the two-tier banking system (level 1: central bank to commercial banks, level 2: commercial banks to end customers) will continue in its present form. Building on the previous article, the following sections outline the need to adapt banks’ IT infrastructure in connection with the introduction of a DCHF. We distinguish between two scenarios:
- Benchmarks remain the same (baseline scenario): The DCHF is introduced with the aim of optimising existing processes, activities or financial interactions of end customers with commercial banks or between end customers. Examples include lower-cost transactions and increased transparency through the use of blockchain technology. In this scenario, existing, established mechanisms are maintained (e.g. transaction time frames, end-of-day processing in the CBS, etc.) and the potential of blockchain technology is not exploited.
- Benchmarks are adjusted: The DCHF is introduced to provide comprehensive support as part of the digital economy in Switzerland. In doing so, existing benchmarks (e.g. trading times, payment models, etc.) are deliberately changed and the potential of blockchain technology is tapped into. This includes designing new business models or using smart contracts.
Benchmarks remain the same
Focus on efficiency of existing services
Benchmarks are changed
Unlocking the potential of blockchain technology
Operationalising one or more of the above application scenarios will trigger a need for technical and functional adjustments in the CBS, the peripheral systems and/or interfaces and processes. One example is the portfolio reconciliation between CBS and DCHF balances held by third parties (e.g. central actor, wallet provider, etc.) in order to prevent double bookings. In all probability, the DCHF will no longer be held centrally, but by different providers. On-chain data (on end-customer holdings in DCHF) must therefore be compared with end-customer balances in CBS to prevent double bookings.
Existing peripheral systems must be supplemented or adapted depending on the application scenario. In particular, information will not only be exchanged with third parties via established formats, but the bank will also have to access data blockchains directly (e.g. to check an end customer’s DCHF balance). Due to the need to adapt peripheral systems and the skills to be built up in the context of blockchain, processes need to be adapted more extensively (e.g. in the context of reconciliation) or can even be automated (e.g. by using smart contracts in conjunction with corporate actions).
Depending on the intended application scenario, introducing the DCHF will require either very little or a great deal of change to banks’ IT infrastructure. The decisive factor here is whether and to what extent the potential of blockchain technology should be exploited. After all, once instant payment is introduced, very high-speed financial transactions 24 hours a day will no longer be blockchain technology’s unique selling point.
Instant payment in the context of a DCHF
The largest Swiss banks are expected to offer instant payment in late summer 202412. Instant payment means that it will be possible to transfer funds with final settlement within 10 seconds 24 hours a day, from or with banks in Switzerland. As a result, beneficiaries will not only have their money available more quickly, but the counterparty risk will also be drastically reduced. The next generation of the Swiss Interbank Clearings System, SIC513, will serve as the infrastructure.
Technically, payments can be processed 24/7 within 10 seconds by a DCHF, e.g. through the use of scalable blockchains14 or the use of layer-2 solutions15. Unlike instant payment, a DCHF can be integrated into other application scenarios without changing the technology, e.g. via smart contracts in machine-to-machine payments or escrow. The introduction of a DCHF could therefore be a further development of the idea behind instant payment.
Conclusion and outlook
The need to adapt IT infrastructure depends on the use cases for the DCHF and the selected scenario: the more benchmarks are changed, the greater the need for changes to the CBS, peripheral systems, interfaces and processes. Based on the services provided by central actors, the need for change in IT infrastructure may shift further, e.g. if the bank wants to provide its own custody solution for DCHF end customers.
The introduction of instant payment represents a significant added value for end customers compared to the current SIC. A DCHF even promises additional added value (e.g. a high degree of automation through the use of smart contracts or scalable escrow functionality), which cannot yet be achieved with instant payment alone.