Are banks ready for digital money?

Banks worldwide are testing systems to handle digital money as central banks and private firms run pilots for central bank digital currencies (CBDCs) and tokenized assets. Activity has risen since the late 2010s: China began broad trials of the digital yuan in 2020, the European Central Bank opened a digital euro investigation in 2021, and other central banks have published research or run pilots.

Large commercial banks, central banks and payments firms are assessing technical and legal changes needed to settle, custody and move value in digital form. Many legacy core-banking systems were built for batch processing and account records, not for real-time token transfers or on-ledger settlement. Banks must choose whether to connect directly to distributed ledgers, use intermediary platforms, or adapt existing payment rails to support tokenized balances.

Operational changes include new custody models for digital tokens, real-time liquidity management and integration of APIs for instant settlement. Regulators are defining rules on customer identification, anti-money-laundering controls, privacy and the legal status of digital balances. Banks need clarity on how CBDC would interact with deposit insurance, reserve requirements and capital treatment.

Retail CBDCs that let the public hold central bank money directly could affect bank deposits. Some central banks and banks have proposed two-tier models in which commercial banks distribute CBDC and continue onboarding and lending functions. Wholesale CBDCs aimed at settlement between financial institutions focus on atomic settlement of tokenized securities and delivery-versus-payment processes.

Security and resilience are priorities. Banks are investing in stronger authentication, key-management systems for digital wallets and disaster-recovery plans that cover new ledger technologies and traditional infrastructure. Regulators expect firms to demonstrate operational resilience before wider deployment.

Banks are taking various approaches: pilots that tokenize internal assets, tests of cross-border token transfers with correspondent banks, partnerships with fintechs to build ledger connectors and wallet services, and upgrades to real-time gross settlement or instant payment systems. Where central bank pilots exist, some banks participate in limited trials to test settlement finality, offline payments and privacy options.

Multiple CBDC designs and private tokens could create fragmentation without common standards and messaging formats. Cross-border use will require coordination among central banks, standards bodies and private operators to support foreign-exchange and compliance processes.

Tokenization of securities and receivables can shorten settlement times and reduce reconciliation. Banks expect demand for custody of tokenized assets, merchant settlement in digital currencies and advisory services on integrating digital assets. The 2009 launch of cryptocurrencies and later stablecoins accelerated regulatory and industry work on CBDCs.

Progress differs by country and by bank. Many institutions are running pilots and modernizing systems while regulators continue to define the legal and operational rules for digital money.