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Telehouse: Are Commercial Banks Ready for Central Bank Digital Currencies?

Digital currencies are often misconstrued as a threat to banks and currency as we know it. The rapid digitisation that has taken place over the last few years has propelled the conversation on CBDCs (central bank digital currency) to a new height but with so many unsure of what a CBDC actually entails, would they benefit and or cripple commercial banks?

80% of the world’s central banks are considering central bank digital currencies (CBDCs), representing a major upheaval for commercial banks, and a potential threat to their market dominance. They will need infrastructure capable of supporting crucial components in the rollout of CBDCs, with legacy systems proving a major obstacle as Tech Fins make a land grab for parts of that ecosystem. Mark White, the manager of Financial Markets and Fintech at Telehouse explores how using a combination of cloud and colocation to deliver the flexibility needed to adapt minimises costs. 

Mark White, manager - Financial Markets and Fintech, Telehouse
Mark White, manager – Financial Markets and Fintech, Telehouse

CDBCs, which are essentially a digital version of the cash we keep in our pockets, are becoming increasingly popular. Usage levels are being boosted by the rise of cryptocurrencies and progress in China, which is on course to be one of the first global economies to introduce a government-backed digital currency as early as Spring 2022.

According to a 2021 BIS Survey of central banks, 86% are actively researching the potential for CBDCs, 60% are already experimenting with the technology and 14% are deploying pilot projects. And the benefits are clear; CBDCs offer a universal means of payment that also reaches the unbanked population while allowing central banks to retain control of their currencies in an increasingly digital world.

For commercial banks, however, they represent a major upheaval and potentially a significant threat to their market dominance.  And with many still reliant on inflexible, legacy on-premises infrastructure, banks need to transform, and do so quickly, or find themselves left behind.

Gauging the risks

The risk for commercial banks is twofold: they could lose out as bank deposits shift to CBDCs and they could be threatened by newer fintechs entering the market. The Bank of England’s decision to introduce a digital currency has led to difficult conversations with the commercial banks as it will almost inevitably result in them incurring some loss of trade. However, the threat from fintechs is arguably even greater, given the potential these businesses offer in terms of shifting payments and deposits away from banking sector and onto their own networks.

Fintechs will undoubtedly be making a land grab for parts of the banks’ ecosystem, as they look to shake up the market with their vast analytics and data management capabilities. We may also see some of the technology platforms and providers jump fully into financial services and get properly regulated. If commercial banks can’t compete effectively, they could end up being relegated to a simple back-office support and compliance function. There is the potential for the banks to lose a significant share of the market here if they don’t move fast enough to ready themselves.

Finding a way forward

Commercial banks have a vital role to play in offering CBDC services, however, they need to be proactive. To capitalise on the CBDC opportunity and remain competitive against the new breed of fintechs, banks cannot afford to be complacent. They need to simplify their business operating models to enhance customer service and reduce cost, and more importantly, they need to become more agile. This will require them to embrace change, move away from legacy infrastructure and kick-start the move to digitalisation.

The answer for many will lie in the cloud, enabling banks to work more flexibly; scale easily and affordably, and drive greater agility. The digitalisation of traditional banking services, often requires additional resource and this is far more cost effective in the cloud than it would be to upgrade or expand traditional on-premise infrastructure.

However, maximising security in the cloud will be key, especially if, as could happen, digital currencies become an attack vector in a cyber war with other governments. The success of CBDCs will rely on the use of personal data and banks have a responsibility to safeguard this data. As a result, many are turning to colocation as an attractive solution; providing the flexibility and scalability required, while also enabling fast, secure and direct connections to cloud service providers (CSPs).

Creating business-critical interconnections

The ability to access connected ecosystems will be critical in helping banks to extend network reach, reduce latency and costs and digitally transform, as infrastructure demands continue to grow.

Carrier-neutral data centres offer the ability to connect privately to a rich marketplace of CSPs, such as AWS and Microsoft Azure, with fast, low-latency connectivity and predictable and scalable bandwidth.

This gives banks the flexibility to scale up or down as required to innovate and grow, while still retaining security and therefore removing the risk inherent in this growth.

Being able to quickly ingest and process data will also help give banks an edge on their competition, so choosing a data centre partner with close proximity to London’s financial district will be particularly important, providing faster data processing and delivering quicker results from real-time data analysis. Not only will this enable them to quickly deliver the analytics needed to support the new currencies, it will also allow them to be nimble enough to stay ahead of their fintech rivals.

Seizing the opportunity

The advent of CBDCs can be an opportunity rather than a threat for banks, but only if they take steps to transform now. Legacy systems will continue to prove a major obstacle and so banks urgently need to rethink their infrastructure strategy before it’s too late.

By embracing a combination of cloud and colocation, banks can benefit from the flexibility and scalability they need to adapt and remain competitive, while maximising security and minimising costs. And having the right infrastructure partner, one that can provide the security, resilience, and low-latency connectivity required to enable transformation will be critical to success.

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