Challenges for IT infrastructure at Swiss banks when introducing wholesale central bank digital currencies (wCBDC)

The Swiss National Bank has been researching use cases in the context of central bank digital currency (CBDC)1 for several years. The focus is currently on application scenarios for commercial banks (wCBDC), namely trading tokenised assets against wCBDC. The aim of Project Helvetia is to gain insights from the integration of central bank digital currency for the settlement of tokenised assets within the infrastructure of the financial market2. In this context, banks are faced with the question of whether existing core banking systems (CBSs) and their own in-house IT infrastructure and processes are currently able to represent a wCBCD. We will explore this question in this article. The SNB’s envisioned solution under the 2022 Project Helvetia Phase II will be used as a basis.  

17.06.2024, Dominik Jocham (BEI St. Gallen), Clemens Eckert (Swisscom)         ​  5 min.

Core banking system

The Helvetia Phase II vision enables trading of tokenised assets (e.g. bonds) against wCBDC. The basic mechanisms of the current Swiss Interbank Clearing (SIC) setup with SIX will be retained, including trading hours, value date and settlement via a central marketplace. The cash flow is delivery vs payment (DvP)3, with wCBCD being used instead of demand deposits; the Swiss Digital Exchange (SDX) plays the role of the central marketplace. In CBSs, banks’ own deposits with other banks (e.g. the Swiss National Bank or correspondent banks) are managed by means of a mirror account. SIC works the same way: each participating bank maintains a current account with the SNB, from which the SIC clearing account cleared at the end of each value day4.

The envisioned Helvetia Phase II solution uses this established process and employ an additional technical account to map wCBDC. In addition to SIC, the SDX serves as a settlement platform for all wCBDC-related cash flows, e.g. the purchase of tokenised bonds against wCBDC and interbank payments with wCBDC. wCBDC is issued on the SDX at the bank’s initiation via the SNB, meaning that banks do not engage in on-chain activities such as the transaction of wCBDC on the blockchain between participants, on-chain reconciliation via nodes or the safekeeping of wCBDC in dedicated custody solutions.

Due to the broad use of established components (e.g. mirror accounts, SIC, DvP, etc.) in the envisioned solution, there is currently little to no need for change at the CBS: All the necessary technical foundations to cover the transactions are already in use today. The SNB, SIC and SDX will provide the banks with additional information compared to the status quo. This assessment is also shared by providers of CBSs:

‘From Finnova’s point of view, central bank digital currency (wCBDC) can already be represented by the existing CBS without any major adjustment. Prerequisites for this are that the information for reconciliation comes from trustworthy third parties (e.g. SDX or SNB) and that existing options (e.g. mirror accounts) are used.’ 
Finnova, 27 May 2024

‘We are implementing new payment systems in line with the requirements of stakeholders, i.e. our customers, Swiss Banking or SNB. Existing solutions from ecosystem partners for integrating cryptocurrencies will certainly make up an important component.’ 
ERI BANCAIRE S.A., 31 May 2024

Subsystems, interfaces & processes 

Based on the Helvetia Phase II target image, all on-chain activities are carried out by centralised players. This also includes the issue or redemption of wCBDC or the safekeeping of holdings in wCBDC.

Conversion systems (e.g. Finastra or Bottomline for payment transactions), which already enable the bank to participate in interbank business via SIC, should also be suitable for the operationalisation of a wCBDC. If necessary, a technical categorisation and selection option for wCBDCs should be created so that they can be distinguished from other currencies (e.g. CHF or EUR) in terms of system technology. Due to the role of the central players, it can be assumed that no further peripheral systems and interfaces will be required in the short term, e.g. for the safekeeping of wCBDC or for on-chain reconciliation. Swiss banks are already cooperating with other centralised providers such as crypto banks5 for the processing of on-chain activities such as custody or on-chain verification of the source of funds for a range of cryptocurrencies.

The ISO 20022 standard, which is already used today for interbank business, is used for the exchange of information. Due to the processing of all on-chain activities by centralised actors, the exchange of information between SIC, SDX & SNB takes place using established formats & on known channels.

The basic assumption of the target image is that the underlying business activities are subject to the same cornerstones as in SIC today. This includes, for example, trading hours, liquidity management on the part of the SNB and the banks or the value date for calculating interest. Among other things, blockchain-based solutions would be able to operate 24/7/365 and be completely transparent if they are technically designed accordingly. If the full potential of wCBDC were to be utilised, extensive adjustments would need to be made to these processes - and to the core banking systems. Selected examples are:   

Availability

Today, CBSs are available most of the day, but end-of-day (EOD) processing is mandatory for the calculation of interest rates and the reconciliation of transactions, among other things.

Liquidity management

24/7 operations require commercial banks to have adapted liquidity strategies, treasury activities or transaction opportunities, e.g. in the context of repo transactions6. In particular, the different systems and availabilities need to be brought into line with the overarching balance sheet management.

Processes

Changed operating hours of the CBS influence the processes at banks, e.g. in treasury and payment transactions. In contrast, with a transparent blockchain solution, selected processes can be designed much more efficiently, e.g. reconciliation work steps are eliminated or simplified due to the high level of transparency.

Automation

By using smart contracts, semi-automated process steps can now be fully automated, e.g. corporate actions in the context of tokenised assets. This results in a need to adapt processes or make changes in the banks’ securities back offices (e.g. dividend payments via smart contracts).

Depending on the key points selected for mapping wCBDC, the need for adaptation is low for peripheral systems, interfaces and processes in use today (as tested in the Helvetia II target design and piloted in Helvetia III7). However, if the chosen path is consistently pursued and the possibilities of wCBDC are fully exploited, changes in the parameters of the CBS, IT infrastructure, processes and the organisation will have to be adapted.

Clemens Eckert, Head of Core Banking at Swisscom 
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Part of efforts to achieve t+1 settlement

Since the end of May 2024, securities transactions in North America (US, Canada and Mexico) have been posted within one working day8. From a technical perspective, the use of blockchain technology makes it possible to settle securities transactions much faster, namely with atomic swaps. The purchase (and sale) of the security is carried out in exchange for digital money. This is linked to the immediate receipt (and delivery) of the security9.

However, an atomic swap conflicts with the current practice of central securities depositories (CSDs) whereby, if possible, securities transactions are carried out by means of netting. In this context, netting means that trading activities related to a security are offset against each other and only the delta is effectively settled. The advantage is lower complexity and significantly lower settlement costs, in particular for CSDs and/or marketplaces. In an atomic swap, each trading activity is accounted for on the basis of the 1:1 currency–security relationship10. However, switching to atomic swaps may be more efficient in the longer term, especially if other components of a decentralised financial market infrastructure (dFMI) are available, such as automated market makers or the widespread use of smart contracts11. 

Conclusion and outlook

From the current perspective, the need for change in IT infrastructure is low but requires the same key elements of the business, e.g. trading hours, value date, etc. The introduction of wCBDC will permanently change the current financial market infrastructure and influence interbank business. If key aspects of transactions, e.g. trading hours, value date, etc., remain the same, the need for change is low from the current perspective.

As soon as the potential of the blockchain-based wCBDC is fully exploited, e.g. intraday value times or trading hours, this will trigger a need for action in the CBS, the peripheral systems or the processes of a bank.

The next part of the series of articles deals with the challenges for IT infrastructure in the context of stablecoins for end customers and tokenised demand deposits (deposit tokens).

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