According to the most recent Citibank Securities Services Evolution whitepaper, an overwhelming 87% of survey respondents, including 12 financial markets infrastructures (FMIs), think central bank digital currencies (CBDCs) are a workable solution to transition to shorter settlement cycles by 2026. This is in an effort to revolutionize financial settlement cycles and meet the demands of a rapidly evolving market.
Source: Citibank
The report sheds light on India’s recent success in implementing T+1 settlements, ensuring all trade-related transactions conclude within a mere 24 hours, sparking interest among securities firms worldwide.
As the United States and Canada, alongside other major economies, strive to adopt T+1 settlement cycles, the Citibank survey probes the role of distributed ledger technology (DLT), CBDCs, and stablecoins in expediting this transition. Astonishingly, the support for CBDCs witnessed an impressive 21% surge from securities firms compared to the previous year.
Source: Citibank
This shift is complemented by both domestic pilots and cross-border initiatives, as cross-border multi-bank experiments now offer detailed insights into the practicality of operationalizing central bank funding within digital frameworks. The report underscores the potential of these experiments in fostering a digital context for central bank funding, both within internal systems and across entire markets.
However, despite the mounting enthusiasm for digital cash, the road to universal digital asset adoption is not without hurdles. Regulatory uncertainties, limited knowledge, compatibility with traditional financial systems, and blockchain interoperability are among the prominent roadblocks identified in the report.
While the financial landscape is undergoing significant changes, institutional investors, banks, and asset managers stand as pivotal players with the ability to scale and implement market-wide solutions. This scalability is crucial for the successful and widespread adoption of CBDCs, stablecoins, and other centrally governed financial instruments.
Predicting the trajectory of financial aspirations, the Citibank report envisions a transformation beyond T+1 settlement cycles by 2028. Anticipated changes encompass the mainstream integration of DLTs, abbreviated settlement cycles, funding mechanisms centered on digital cash, and the eventual replacement of core banking systems.
In an era marked by global cooperation, the Reserve Bank of Australia recently conducted its own CBDC pilot shortly after India’s proposal for cross-border payments using its CBDC to 18 central banks. The global sentiment towards CBDCs is not unique to the Citibank report; the Bank for International Settlements (BIS) projects that around 15 retail CBDCs are set to circulate globally, with nine central banks expressing their intent to issue wholesale CBDCs for financial market use within the next six years.
Yet, amid these progressive strides, privacy concerns persist as a critical point of contention. Representatives such as Republican Congressman Tom Emmer have raised alarm over CBDCs’ potential impact on individual privacy, autonomy, and free markets. Meanwhile, Democrat lawmaker Robert Kennedy has voiced his opposition about the intentions behind CBDCs, asserting that they could be instruments for societal monitoring and control.
In an age of transformative change, the financial landscape is poised for a revolution powered by CBDCs and innovative technologies. As markets evolve and governments seek to navigate this new terrain, the journey towards digital financial sovereignty is marked by both potential and challenges.