It was just 13 years ago in 2010 that Bitcoin notched up its first material transaction: two pizzas bought by a Florida based programmer Laszlo Hanyecz for 10,000 Bitcoin, the equivalent of £25 at the time.

Such early, real-world transactions helped fuel hopes among ardent digital currency enthusiasts that Bitcoin would rapidly evolve into a decentralised peer-to-peer (P2P) means of transferring value and compete against Visa and Mastercard and, more generally, give the banks a run for their money.

While that ambition remains largely unfulfilled, Lee McNabb, Head of Payment Strategy and Research, says that Bitcoin has been phenomenally successful in spawning thousands of imitators that now comprise the cryptocurrency space. At the same time, he observes, it has also become a highly volatile speculative store of value. By 2015 for example, Hanyecz’s two pizzas would have been valued at $2.4m. In 2021, when the Bitcoin price reached a high of $63,000, they would have been worth an astonishing $630m. Towards the end of June one Bitcoin was worth around $30,393, valuing the two pizzas at $303.9m – arguably enough to buy an entire pizza restaurant chain. While many have made considerable sums speculating on Bitcoin, its high volatility means many have also had their fingers badly burnt.

Meanwhile, the technology underlying Bitcoin – DLT – has had an altogether more positive reception. It has been leveraged to create new types of digital currencies such as stablecoins, for example. These aim to provide an alternative to the high volatility of cryptocurrencies like Bitcoin by having their value pegged to that of another currency, commodity, or financial instrument. At the same time, central banks are also focusing on leveraging DLT with many globally developing CBDCs off the back of it.

“Use cases must be at the heart of everything we do with CBDCs. That is because while CBDCs have enormous potential, they will demand significant investment by industry.”

With so much happening, it can be tough for busy treasurers to keep up with every digital currency development. But viewing the various incarnations as being on a spectrum ranging from private to public can be a useful way to make sense as to how they all relate to one another. McNabb explains: “Imagine Bitcoin and its immediate cousins as being at the private, highly volatile end of the spectrum. In the middle, we have stablecoins, which feature a certain amount of mediation via pegging to add stability to their value. “CBDCs, meanwhile, are at the public end of the spectrum. They are digital currencies that will be issued by central banks and their value will be equivalent to the country’s fiat currency. So, we can have the digital pound, the digital US dollar and so on. Most central banks are working on developing a CBDC and they are at varying stages with their efforts.”

According to US think tank Atlantic Council’s CBDC tracker, 130 countries, representing 98% of global GDP, are exploring a CBDC. That compares with just 35 countries in May 2020 – an accurate reflection of the powerful momentum behind their development. A new high of 64 countries are now in an advanced phase of CBDC exploration (development, pilot, or launch).

When watching these innovations, McNabb says a further consideration to have in mind is the two kinds of CBDC under development: retail and wholesale. The overwhelming focus of central banks currently is on the development of retail CBDCs – but wholesale use cases are growing and will be critical to ultimate adoption. “Our view, and that of many other institutions, is that use cases must be at the heart of everything we do with CBDCs. That is because while CBDCs have enormous potential, they will demand significant investment by industry.”

“Imagine Bitcoin and its immediate cousins as being at the private, highly volatile end of the spectrum.”

“Corporates, their treasury teams, and financial services providers all need to be comfortable with the ‘why’ and the ‘how’ informing their development and roll-out, and equally importantly be convinced by the use cases to justify the investment needed. This is an ongoing conversation between industry, central banks, and governments.”

Despite the positive momentum, Oliver Butcher, Head of Liquidity Portfolio Investment Management, says there is already some mixed evidence of how CBDCs fare in the real world. This includes results from live projects, one of which is in China where a CBDC pilot was launched over a year ago. Another is the Bahamian CBDC, called the Sand Dollar, which the island nation launched in 2020 and was a world first. Butcher says the take-up of these pioneering CBDCs so far is “microscopic”, pointing to a study by the London School of Economics (LSE) that shows that Sand Dollar balances increased by less than $300,000 between January 2021 and June 2022. In contrast, the value of physical notes increased by $42m over the same period, meaning, says the LSE, “that the Sand Dollar barely registers as a form of currency.”

In China meanwhile, the People’s Bank of China (PBoC) has been pushing the digital yuan hard for many years now. Yet in January the PBoC reported that so far, with its pilot, only $2bn worth of digital yuan was in circulation, accounting for just 0.13% of the total volume of yuan in circulation. The PBoC has also seen very low levels of adoption of the digital yuan to date in Hong Kong. Butcher points out: “It is, of course, early days but clearly there is a mountain to climb when it comes to the actual adoption of CBDCs in the real world. As it stands, we remain sceptical of the actual end demand. Having said that, it is precisely at such moments that reality hits home, the real challenges come to the fore and the real questions start to be asked. That can only be for the good. To stress again, it’s the use cases that will be the ultimate driver for both retail and wholesale CBDCs.”

While the live projects such as the digital yuan and Sand Dollar are – so far – offering little encouragement, McNabb believes Europe could fare better when its CBDC comes along. “I think the ECB, and others working closely with it on the digital euro, are quite progressive with their thinking from both innovation and competition perspectives.

When it comes to the development of CBDCs, there are many questions still unanswered about the infrastructure and processes that will be needed to support them. One of the thorniest issues, says McNabb, revolves around standardisation.

He explains: “What we’re at risk of doing here is creating a fragmented world of payments. For context think of SWIFT, which was set up 50-odd years ago to combat payment fragmentation and improve cross-border messaging. So SWIFT, quite rightly, is probably thinking and looking ahead to a very similar challenge, but in a digital world. With CBDCs, we are not all going to be singing from the same hymn sheet. That is never going to happen.”

“We’re going to have some countries with CBDC, some not. Some with retail CBDC only, some with wholesale, some with just traditional RTGS (real-time gross settlement). Interoperating payments across all of them just becomes very difficult and that is what the standardisation issue is all about. There are important discussions to be had and decisions to be made.”

When considering the impact CBDCs could have on treasurers, Butcher for one is clear that the challenges they represent will be felt by corporate as well as financial institution treasurers. For institutional treasurers, one potential concern could be that this new form of money will not sit on their balance sheet but rather end up on that of the BoE instead.

“It is, of course, early days but clearly there is a mountain to climb when it comes to the actual adoption of CBDCs in the real world.”

Butcher says the potential scale of such a transfer, especially in the UK, is sizeable and, as a consultation paper from HM Treasury and BoE points out, could well be a risk factor to address when assessing the financial stability of the CBDC regime.

He continues: “In the UK, the BoE and HM Treasury are talking about a range of between £5,000 and £20,000 for digital pound wallet sizes for individuals, which could amount up to 50% of all retail deposits. We have no sense yet of how businesses might fare with such limitations but financial institutions need to be aware that, as it stands, there is a significant risk on that front.”

For corporate treasurers, meanwhile, Butcher says the key element to be aware of is that, in all likelihood, a new form of money is coming soon: “Treasurers’ organisations will be accepting payments and managing those payments. They will be placing that type of money with a new payment interface provider (PIP), and NatWest will be among them. CBDCs are looking increasingly certain so it is important to be aware that this is very much on horizon.”

David Silver, Digital Asset Programme Manager, says all countries face a delicate task in configuring their CBDC regimes so that they balance the need between financial stability and the digital currency’s functionality. “It’s a tricky balancing act because the lower the holding limit for the CBDC wallet, the less functional it becomes, which in turn means less adoption by consumers and businesses. But the higher it is, the bigger the impact on banks’ funding which in turn impacts their lending capacity and prices and thus having a real-world impact on people and businesses.”

With so much activity across the digital currency space, McNabb believes the key challenge for corporates and their treasurers is to stay abreast of and educated about developments, particularly CBDCs.

“Treasurers need to have in mind that just because something is new it doesn’t mean it is necessarily better or will work for their business.”

He advises: “Digital fiat currencies, whether retail or wholesale, look highly likely to materialise over the next few years, so its vital treasurers learn about them and their potential impact on their operations, their pros and cons. “Of course, it’s easy for us in banking to say that because part of our role is to be actively engaged with CBDCs and the digital currency space generally. But it is incumbent upon everyone to understand how the future is being shaped now, where we might be in the matter of just a few years, and the potentially profound long-term consequences.”

For UK treasurers and those doing business with the country, McNabb suggests taking the time to have a thorough read of the BoE’s digital pound consultation paper and understand what it means. “It’s all about education and engagement. Actively participate as much as you can, as this can only be of help when CBDCs finally arrive. At the same it is important for all of us in banks and within corporates to recognise that the CBDC space is evolving quickly so any assumptions we make now may not continue to hold as developments continue and we get closer and closer to launches.” 

Silver echoes this, adding: “Treasurers need to be open to new ideas and approaches, of course, but it’s also vital for them to have in mind that just because something is new it doesn’t mean it is necessarily better or will work for their business. So, take a slightly sceptical approach when looking at all the various forms of money and payment regimes that are inevitably going to come down the line in the future.”

All six-parts of our “Essential Guide to Treasury Payments and Embedded Finance” will be published on our dedicated Hub, so do regularly check this for new instalments. They will also be published on the TMI website, with whom we have collaborated on this series.