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.

A blockchain-based, DCHF for end customers (e.g. private individuals, companies or institutions) could have a lasting impact on financial transactions1.  

The DCHF is not only seen as an enabler for the digital economy, but also as an efficiency driver for existing financial transactions (e.g. -transaction processing, etc.)2.

The use of a DCHF also makes it possible to tap into new application scenarios for private individuals (e.g. lower costs for money transfers), banks (e.g. custody of the DCHF) and private-sector companies (e.g. combining cash flows and services in the context of Industry 4.0).  

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

Stablecoins are characterised by the fact that they represent a value on a blockchain 1:1, making that value tradable in the form of a digital token.  

  • The value represented can be in the form of legal tender (e.g. CHF or EUR), physical securities (e.g. gold) or blockchain-based securities (e.g. Bitcoin). What all stablecoins have in common is that they maintain the 1:1 bond to the underlying value even when trading volumes are high. The collateral to underpin the stablecoin is deposited in full with a custodian, e.g. a bank in the case of CHF.  
  • The 1:1 deposit of the stablecoin at the underlying value prevents the effect of monetary policy measures such as expanding the money supply. The first providers, e.g. Swiss Stablecoin Ltd, Sygnum and Bitcoin Suisse, have either launched a DCHF in the form of a stablecoin or are working on doing so.  

As the name suggests, a deposit token depicts demand deposits8 in the form of a token on a blockchain. The value of the token generally corresponds to one unit of the bank’s demand deposits.  

  • Unlike a stable coin, deposit tokens cannot be deposited 1:1 with assets and can therefore be influenced by monetary policy measures.  
  • Interest may also be paid or charged on it – similar to existing demand deposits held by banks. In Switzerland, Swiss Banking is coordinating the efforts of various banks to gain initial practical experience in dealing with deposit tokens9. 

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

In the baseline scenario, the introduction of the DCHF is to be seen as a technical upgrade of existing services and products for end customers (e.g. peer-to-peer transactions or collective bookings for companies). Similar to the vision of the Helvetia Phase II project, in this scenario, central actors10 assume all on-chain activities (e.g. custody, on-chain due diligence, etc.)11, while commercial banks provide the interface to end customers and ensure compliance with relevant regulations (e.g. AML & KYC checks, etc.). End customers purchase the DCHF via a commercial bank, which in turn instruct central players to issue it. In the CBS, end customers are allocated a corresponding balance in DCHF, e.g. in the form of segregated accounts in the CBS, and the bank’s balance with central actors is mapped using mirror accounts (similar to the nostro–vostro setup in interbank business). The commercial bank’s reconciliation consists in supplementing the additional mirror accounts and mapping their processes. With regard to peripheral systems, it can be assumed that they can continue to be used in their existing form (e.g. use of SIC for CHF transactions between central actor and commercial bank in the case of stablecoins). However, if a deposit token is used, the existing payment system must be supplemented, as the deposit token is issued natively on a blockchain and ideally transferred to it. The transfer of information between banks and central actors may need to be adapted; common and established formats can form a stable basis here (e.g. ISO-certified messaging standards).   End of accordion.

In this baseline scenario, blockchain technology is used to make existing use cases more efficient (expected lower costs) and more effective (shorter transaction times). It can be assumed that regardless of the DCHF chosen (stablecoin or deposit token), the need for adjustment to the CBS, peripheral systems, interfaces or processes at banks will remain manageable.  

Benchmarks are changed

Unlocking the potential of blockchain technology

The use of blockchain technology offers various possibilities, e.g. with regard to the availability of payment periods, the management of liquidity for companies and a high level of automation through smart contracts. Starting with the baseline scenario, the DCHF can be used to implement new application scenarios in which basic benchmarks such as availability and transaction times are changed. Selected application scenarios are roughly outlined below:  

  • Micro payments: The DCHF makes transactions in very small amounts technically and economically possible. Switzerland’s digital ecosystem and Industry 4.0 are particularly suitable areas of application. 
  • Digital escrow: Using smart contracts and DCHF, payments can be made subject to certain conditions, e.g. the purchased goods must have been shipped before the money is transferred in full. In this case, the fulfilment of the condition is not verified by a neutral third party (escrow), but carried out technically by means of a smart contract and an atomic swap. This allows the cost-efficient and scalable mapping of escrow activities for different areas of application, e.g. online shopping and supplier–producer relationships.  
  • Wallet: In order to use the DCHF in Switzerland’s digital ecosystem, a wallet is needed in both the baseline scenario and in the event that benchmarks are changed in order to store the private key for accessing the DCHF. The user-friendliness of the solution and trust in the provider are essential for a high adoption rate among end customers. Banks in Switzerland enjoy the advantage of trust and have the interface to end customers. This will allow them to position themselves as wallet providers for end customers and launch additional products, such as smart contracts and blockchain-based financial products. End of accordion.

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.  

Sources

1 Neue Zürcher Zeitung(opens in new tab)
2 SwissBanking(opens in new tab)
3 Wholesale Central Bank Digital Currency (wCBDC)
4 Stablecoins Core Banking Radar Artikel(opens in new tab)
5 SwissBanking(opens in new tab)
6 Swiss Stablecoin(opens in new tab)
7 Sygnum(opens in new tab)
8 In this case, deposits by end customers with commercial banks are referred to as demand deposits
9 SwissBanking(opens in new tab)
10 For example, the issuer of the DCHF or a digital stock exchange such as the SDX
11 At present, it has not been conclusively clarified who the central player is or what tasks it has to fulfill.
12 SIX(opens in new tab)
13 SNB(opens in new tab)
14 Algorand Technologies(opens in new tab)
15 Digital currency initiative(opens in new tab)

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