Speech
Embargo
30 March 2023, 6.00 pm
Swiss Payments Vision - an ecosystem for future-proof
payments
Money Market Event
Andréa M. Maechler and Thomas Moser∗
Member of the Governing Board / Alternate Member of the Governing Board
Swiss National Bank
Zurich, 30 March 2023
© Swiss National Bank
∗
The speakers would like to thank Dirk Faltin, Basil Guggenheim, Matthias Jüttner, Mico Loretan, Benjamin Müller, Andreas Wehrli und
Michael Zimmert for their support in the preparation of this speech. They also thank Sébastien Kraenzlin, Raphael Reinke and Tanja
Zehnder for their valuable comments, as well as SNB Language Services for their translation of the text.
Ladies and gentlemen
Welcome to the Swiss National Bank's Money Market Event. My colleague Thomas Moser
and I are delighted that we are able to hold this event in Zurich in person for the first time
since 2019.
In recent weeks, the SNB has been active to the full extent of its statutory mandate. At our
monetary policy assessment last week, we raised our policy rate by 50 basis points to 1.5%. In
doing so, we are countering the renewed increase in inflationary pressure. To provide
appropriate monetary conditions, we also remain willing to be active in the foreign exchange
market as necessary - for some quarters now, the focus has been on selling foreign currency.
At the same time, there has been a loss of confidence in Credit Suisse over recent weeks. In
order to avert damage to Switzerland, on the Sunday before last the authorities decided on
extensive measures to safeguard financial stability. Within the framework of its mandate, the
SNB contributed to this solution, acting as lender of last resort to ensure the stability of the
Swiss and global financial system. Today we are talking about another element of our
mandate: ensuring a well-functioning system of payment transactions in Switzerland. All
three elements - price stability, financial stability and a well-functioning payment system -
are important for public confidence in money.
This evening, we will be looking at the future of cashless payments. The payments system is
currently undergoing extensive change, both in Switzerland and around the world. The main
drivers of this change are the ongoing digitalisation and the increasing use of new
technologies such as distributed ledger technology (DLT). These are enabling new forms of
money and are fundamentally changing the way we make payments.
The key question we are addressing in our talk today is: How can we harness the potential of
digitalisation and new technologies in payments while maintaining confidence in the
payments system and in money itself? In other words: How can we innovate while
safeguarding the tried and tested?
To achieve this, we first need an effective division of labour between the public and the
private sector. The public sector lays the foundation for public confidence in money. This
includes a stability-oriented monetary and fiscal policy, a clear regulatory policy framework
with sound institutions, financial stability, and a secure and efficient payments system.
The private financial sector plays a key role in developing innovation and employing new
technologies to create innovative solutions for its customers. It knows best what companies
and end users need and is able to develop effective solutions for them.
The private financial sector and the SNB must work together to take the right steps to ensure
that innovation can thrive on a sound basis. This requires a shared vision for the Swiss
financial centre - a Swiss Payments Vision, as already set out at one of our Money Market
Events two years ago. This vision conceives the future of cashless payments in Switzerland as
an efficient, reliable and secure ecosystem. In addition, this ecosystem must be fast and
interoperable in terms of new payment solutions, new technologies, and across national
borders.
Before we continue looking into the future, let me focus on three principles that are
fundamental to confidence in the current payment system, and which will serve as keystones
for the further development of Swiss payments.
Foundations of confidence in the current payment system
The first principle is the close interrelationship between private money and central bank
money (cf. slide 1). This interrelationship allows for an efficient division of labour between
commercial banks and the central bank, and manifests itself in the two-tier financial system.
Central banks issue money in the form of cash and book money. Everyone can hold cash.
Central bank book money, on the other hand, can only be held by regulated commercial
banks1 in the form of sight deposits at the central bank. The diagram shows the central bank,
in dark blue, as the bank of commercial banks. It manages the accounts of commercial banks,
implements monetary policy, and performs its role as lender of last resort by providing
liquidity to commercial banks in the form of sight deposits.2
Commercial banks create private money in the form of book money that customers deposit
with them. They compete with each other and are therefore interested in offering their
customers the banking services, such as credit and payment solutions, that best meet their
needs. They are also responsible for complying with anti-money-laundering and
know-yourcustomer rules.
Commercial banks are thus the link between the financial system, shown in light blue with the
central bank at its centre, and the rest of the economy (in green). Sound and appropriate
regulation plays a key role here. Banks are authorised to create private money and can obtain
liquidity from the central bank, but must at the same time comply with strict capital and
liquidity requirements.
This brings me to the second principle: All payments that are important for the system as a
whole are to be settled in risk-free central bank money (cf. slide 2).3 These payments are
represented by the dark blue lines.
Besides its use as a means of payment that promotes confidence, central bank money also
requires a reliable settlement of payments. A settlement mechanism is required that replicates
the delivery of cash in digital form for commercial banks, i.e. a real-time transfer that is final
and irrevocable. One such payment system was introduced around the world in the 1980s -
the real-time gross settlement (RTGS) system. Switzerland was a pioneer in its development
of the Swiss Interbank Clearing (SIC) system in 1987.4
In an RTGS system, each payment is settled individually in central bank money and in real
time. A payment is executed precisely if - and only if - the paying commercial bank has
sufficient sight deposits. The receiving commercial bank can therefore be assured that it is
receiving risk-free money. Payments in the SIC system are thus final and irrevocable and
contribute to confidence in the payment system. Settlement in central bank money creates a
stable core in the payments system, around which innovative customer solutions and new
technologies can flourish.
The third principle is that payment systems, payment solutions and forms of money should be
integrated as seamlessly as possible (cf. slide 3). This means there needs to be a high degree
of interoperability: It must be possible to exchange Swiss francs seamlessly and one-to-one
across different forms of money and payment systems. A lack of interoperability leads to
frictions which result in higher costs and time delays and thus limit the usability of money.
The three principles - a two-tier system, settlement of payments in central bank money, and
seamless integration within the ecosystem - are well-established and, at the same time,
necessary requirements for a well-functioning payment system.
Payments are currently undergoing extensive change, both in Switzerland and around the
world. What are the main challenges posed by this transformation?
Challenges arising from innovation and change
The first challenge is the increased speed demanded for payments (cf. slide 4). Fintech and
bigtech companies are responding to widespread customer demand for ever faster and more
convenient payment solutions. These companies have developed innovative solutions using
technologies such as artificial intelligence, machine learning, and high-speed data processing.
In a fast-moving world, the ability to analyse data in real time is of paramount importance.
This has led to a data revolution in the financial industry, which is also reflected in payment
services.
The second challenge is to enable interoperability between old and new technologies, such as
distributed ledger technology - DLT for short. DLT makes it possible to represent and
manage assets such as money and securities on a shared system of ledgers. In principle at
least, this means that traditional financial institutions are no longer required for making
payments.
It is too early to speculate where all this is going. What is clear, however, is that innovation
should ideally thrive in a way that does not jeopardise the security and efficiency of
payments. This requires a common vision for the Swiss financial centre - a Swiss Payments
Vision. To make this vision a reality, we must find ways to enable cashless value transfers
directly from the payer to the recipient in a fast and secure way and to seamlessly integrate
new payment instruments, forms of money and technologies. We need to improve the speed
and interoperability of payments while upholding our three principles.
End-to-end value transfers - instant payments in Switzerland
The success of payment apps like Twint clearly demonstrates that there is strong customer
demand for fast payment solutions (cf. slide 5). It is not without reason that the verb 'to twint'
has entered everyday usage here in Switzerland. When you twint money it is credited to the
recipient's account in real time.
However, contrary to what the end-user experience may suggest, twinting does not result in
an immediate final transfer of value between the participating commercial banks. In fact, there
is a time lag before the individual payments are settled between the commercial banks.
Although the end user immediately has the money at their disposal, there is initially only a
promise of payment between the commercial banks involved - resulting in credit risk.
Only an immediate and final transfer of value avoids this credit risk. Instant payments enable
just that: the complete processing of retail payments in real time, around the clock, and from
customer to customer ('end-to-end'). By settling all payment steps in real time, instant
payments bring important benefits for end users, commercial banks, and the economy.
Instant payments allow for shorter settlement chains. The shorter the chain, the lower the
risks. This should reduce costs, because the assumption of risk is not free and can be reflected
in higher payment fees.
Another important benefit of instant payments is the ability to automate processes and link
them to other services within a company. Take, for example, the business model of an online
retailer that wants to keep its inventory as small as possible. The company receives numerous
orders and payments from customers every day and must dispatch the goods ordered. At the
same time, new goods have to be reordered, as well as paid for. If the retailer's customers pay
for their online purchases using instant payments, the retailer will receive the purchase
amount during the order process. It can then use this money immediately to dispatch the
goods without any credit risk, and to reorder them if necessary.
Instant payments can also add value in the case of cross-border payments. Addressing
inefficiencies in cross-border payments is a priority of the G20. Together with the BIS
Innovation Hub, central banks around the world are experimenting with how to connect
instant payment systems across borders. Examples include Project Nexus and the linking of
payment systems between India and Singapore.
As a result of these benefits, we at the SNB are convinced that an immediate and final transfer
of value in cashless payment systems between end users will become the new standard. Until
now, cash was the only way this was possible for end users.
When will instant payments be launched in the Swiss market?
Before instant payments can be launched, the payment system infrastructure needs to be
upgraded (cf. slide 6). This has been under way for some time. During the course of this year,
the SIC system itself will become instant payment-capable. And from August 2024, the
largest commercial banks active in retail payment transactions will be offering their customers
the possibility of receiving instant payments. However, for instant payments actually to be
available to commercial banks' end customers, private sector solutions are still needed.
According to surveys, many commercial banks are also planning to offer the possibility of
sending instant payments from August 2024 onward. Competition among commercial banks
should ensure that efficient payment solutions are offered to end customers, for example in
ebanking.
What do instant payments mean for the two-tier financial system?
Instant payments settled in central bank money are an example of how our first principle - the
division of labour between the central bank and the private sector in the two-tier financial
system - enables successful implementation of innovations.
With the introduction of instant payments, the end customers of SIC participants will also be
able to settle their payments securely, quickly and in central bank money. In Switzerland, the
irrevocable and secure transfer of value in central bank money in real time has to date only
been possible for participants directly connected to the SIC system. This expansion of the
group of participants brought about by instant payments corresponds to our second principle:
the secure settlement of payments in central bank money.
What about our third principle, the seamless integration of payment methods and forms of
money?
It is precisely here that we find the most significant innovation prompted by instant payments.
Private money that end customers hold at commercial banks is seamlessly linked to the
central bank money held by commercial banks via instant payments. This integration enables
retail payments to be settled in real time and in central bank money.
The SNB is aware that the implementation of instant payments at commercial banks presents
not only opportunities, but also challenges and costs. Perhaps the biggest challenge is the need
to adapt today's core banking systems so that they can handle the increased speed. Such
adaptation will benefit retail payment transactions and provide an important basis for
integrating further digital innovations into our payments in a secure way.
Let me now focus on a second area of innovation that is also benefiting from the increase in
speed and could require major adjustments to the financial system. This is distributed ledger
technology (DLT) and tokenisation.
DLT and tokenisation
DLT is a peer-to-peer computer network that enables its members to access transaction data
simultaneously and to update it (cf. slide 7). It provides the basis for a clear allocation of
ownership in a computer network without the need for a central party.
DLT offers interesting potential applications for the financial sector, and is therefore regarded
as one of the biggest innovations in the fintech area. It is no surprise, then, that the private
sector is investing considerable resources in this technology. The public sector also recognises
its potential. In 2021, Switzerland became one of the first countries to adopt a comprehensive
legal framework for the application of DLT. Besides various adjustments to securities law, a
new licence category for DLT trading facilities has been created under the Financial Market
Infrastructure Act. This has created the basis in Switzerland for a regulated token ecosystem.
Where do you find interesting applications of DLT in today's financial system?
The short answer is in the area of financial market infrastructure, which includes trading
platforms, securities settlement systems, and payment systems such as the SIC system, via
which transactions are settled.
DLT promises efficiency gains in post-trading, i.e. in the clearing, settlement and custody of
assets. A shared ledger increases transparency and simplifies the booking of transactions. In
addition, it eliminates the need for costly and error-prone reconciliation processes between
different databases on different systems.
Moreover, DLT also allows assets such as securities, works of art or money to be securitised
in the form of digital tokens, represented in a decentralised and fraud-proof network, and
managed. Standardisation allows assets of different types to be represented as tokens on a
shared infrastructure. Transfers of tokens can be programmed in the form of 'smart contracts'.
DLT enables the efficient and low-risk settlement of transactions. For example, the transfer of
tokenised assets versus tokenised money can be effected conditionally according to
preprogrammed logic.5 It replicates the payment process with cash, where the exchange of
money and goods can take place simultaneously on a delivery-versus-payment basis. In DLT,
the term 'atomic settlement' is used in this context.
Settlement in DLT systems raises issues similar to those for settlement in an RTGS system,
just the other way round. Central bank money existed as a secure means of payment before
the introduction of the first RTGS systems; what was lacking for a long time was an
appropriate settlement mechanism. This was provided by RTGS systems introduced from the
1980s. With DLT, the situation is reversed: A secure settlement model in the form of atomic
settlement is designed to be in place from the outset. The unresolved question with DLT
systems is which means of payment are the most appropriate.
The SNB is open to DLT and the token ecosystem and its potential for efficiency gains and
risk reduction. At the same time, however, DLT can introduce new risks into the system. It
could fundamentally change the role of financial intermediaries, and thus the architecture of
today's financial system. If we are guided by the three principles, it should help limit the
risks.
Token transactions require stable-value, generally accepted means of payment. We will now
show you which private and government-issued forms of money qualify under principle 1
within the two-tier financial system. In addition, we will consider the question of how
settlement should be structured in central bank money in accordance with our second
principle, and take a look at the SNB's planned projects in this area. Finally, we stress that the
seamless integration of tokenised money with existing and new payment and settlement
systems is particularly important, especially if DLT and tokenisation become mainstream.
This would satisfy the third principle.
Forms of money
Turning to the first question, in what form should central bank money be used for the
settlement of token transactions?
The table on slide 8 gives an overview of possible forms of money that could potentially be
used as a means of payment in token transactions. On the top level, we differentiate between
privately issued money and government-issued money, i.e. central bank money. On the
second level, we differentiate between book money and token money.
Token money is a new, DLT-based form of money. Like book money, it can be issued by
both private issuers and the central bank. In the latter case, it is referred to as a central bank
digital currency - CBDC for short. Depending on the user, a distinction can be made between
retail CBDC and wholesale CBDC. Wholesale CBDC would correspond to a tokenised form
of sight deposits held by commercial banks at the central bank. Retail CBDC, on the other
hand, would be available to the general public; it would essentially be tokenised cash.
Examples of private token money are tokenised account balances at commercial banks, and
stablecoins. Tokenised account balances at commercial banks correspond to account balances
in the form of book money, except that these account balances are made available in the form
of tokens on a distributed ledger. Tokenised account balances allow end users to exploit the
potential of DLT.
Private token money promises parity with book money by allowing tokenised money to be
converted into book money at par value at any time. Like today's account balances at
commercial banks, tokenised account balances at commercial banks do not necessarily have
to be backed one-to-one with high-quality liquid assets at all times. Stablecoins, as a rule, are
collateralised.6
Payment settlement of token transactions
Another important question is how exactly should transactions be settled. There are two
options (cf. slide 9).
The first is integrated settlement, where both money and other assets exist in tokenised form
on the same DLT infrastructure. This integration allows for the secure and efficient atomic
settlement we talked about earlier. Technically, such integrated settlement would be possible
with both private token money and CBDC.
The second is synchronised settlement, where the cash leg of the transaction is not represented
on the ledger but is synchronised with it. Both private book money and central bank book
money can be used as the means of payment here. For transaction settlement, the transfer of
tokenised assets on a DLT infrastructure is synchronised with the transfer of money in
conventional payment systems. Here, too, money and goods can be exchanged simultaneously
on a DvP basis, but the challenge lies in coordinating processes across different
infrastructures, each with a different underlying technology.
Traditional financial market infrastructures use the synchronised settlement model for settling
securities transactions, for example by coordinating the RTGS system with the securities
settlement system.7
The SNB is examining three models for token settlement
Let me now turn to the question of how token transactions could be settled in central bank
money. Given the potential of DLT and tokenisation, the SNB sees the need to take a close
look at secure and efficient payment settlement in a token ecosystem. We are therefore
launching a project in which we are testing three models in productive payment and
settlement infrastructures (cf. slide 10). To this end, we are working with regulated financial
market infrastructures and other market participants.
The first model involves synchronised settlement (cf. slide 11). A link to the SIC system
synchronises the settlement of tokenised securities with the settlement of payments. This
'RTGS link' was tested, together with SIX and the BIS Innovation Hub, in Phase I of Project
Helvetia. Such synchronisation was shown to be technically feasible. Nevertheless, this model
has significant disadvantages compared to integrated settlement, as DLT functionalities were
limited. As part of the project, we are currently examining whether these disadvantages can be
minimised by adjusting the SIC system or the link itself.
The second model involves integrated settlement, using a Swiss franc wholesale CBDC
(cf. slide 12). In Phases I and II of Project Helvetia, tests of the issuance of a Swiss franc
wholesale CBDC were conducted on the test environment of SIX Digital Exchange (SDX).
Building on the insights gained, we intend in particular to further explore the operational basis
that would enable the SNB to issue wholesale CBDC for settlement purposes if necessary in
the future. As part of the project, we will issue real wholesale CBDC on SDX for a limited
time and test selected transactions with market participants.
The third model involves integrated settlement using private Swiss franc token money that is
protected under bankruptcy law (cf. slide 13). As part of the project we aim to examine ways
in which private token money that is backed one-to-one by sight deposits at the SNB, can be
legally structured in such a way that, in the event of the bankruptcy of the token issuer, it
would have a risk profile comparable to that of central bank money.
We will be reporting on the projects and the lessons learnt in due course. At this point, let us
make it clear that this work is not intended as a declaration of the SNB's intent to issue
wholesale CBDC, or indeed to offer another settlement model. Rather, the point is to act
prudently and proactively so that we can continue to fulfil our mandate in the future.
Integration of token money and book money
Let me now turn to the integration of token money and book money. We do not yet know
what role DLT and tokenisation will play in the financial system of the future (cf. slide 14).
There are three possible scenarios. In the first scenario, both remain niche products. A second,
hybrid scenario, in which assets can be transferred and paid for in both tokenised and
traditional form, is also conceivable. In the third scenario, infrastructures would be based
primarily on DLT, and assets would only be available in tokenised form.
For the second and third scenarios, a seamless integration of different forms of money as well
as a high degree of interoperability between existing and new payment and settlement systems
are essential. A lack of interoperability may lead to segmentation of the financial market
infrastructure. A lack of integration may lead to fragmentation of the monetary system and
threaten the singleness of the Swiss franc. The SNB will pay particular attention to this issue.
Conclusion
This evening we have looked at how we can harness the potential of digitalisation and new
technologies while at the same time maintaining security and confidence in the payment
system.
No matter where the future takes us, a common vision - a Swiss Payments Vision - is needed
in order to ensure that the financial sector and the SNB take the right steps together. This
vision conceives the future of cashless payments in Switzerland as an efficient, reliable and
secure ecosystem that is also fast and interoperable in terms of new payment solutions and
new technologies, and across national borders.
The SNB projects mentioned earlier have precisely this goal. In the area of instant payments,
we are laying the foundations for retail payments to be settled immediately and around the
clock in central bank money in the tried and tested framework. As for token settlement, we
are examining how central bank money could also be made available in a regulated token
ecosystem, should the need for it arise.
The Swiss financial centre can face the ongoing digital transformation with unflinching
resolve. The SNB will make the necessary contributions to the further development of the
payment infrastructure in Switzerland. Together we will overcome the challenges and ensure
that we continue to have secure, efficient, fast and interoperable payments in the future.
Thank you for your attention.
Swiss Payments Vision - an ecosystem for
future-proof payments
Andréa M. Maechler, Member of the Governing Board
Thomas Moser, Alternate Member of the Governing Board
Money Market Event, Zurich
30 March 2023
Principle 1: Close interrelationship between private money and central bank money
SNB
Regulated institutions
End users
Principle 1: Close interrelationship between private money and central bank money
Principle 2: Settlement of payments in central bank money
Principle 1: Close interrelationship between private money and central bank money
Principle 2: Settlement of payments in central bank money
Principle 3: Seamless integration of payment systems, payment solutions and forms of money
Speed and interoperability as areas of development for future-proof
payments: Swiss Payments Vision
High speed
Interoperability
1 2
Immediate value transfer with
Seamless between technologies
settlement in central bank
(e.g. DLT) and across borders
money
RTGS
24/7
Payments
DLT
4 30.3.2023 Swiss Payments Vision - an ecosystem for future-proof payments | Money Market Event | Andréa M. Maechler / Thomas Moser | © Swiss National Bank
Instant payments offer many benefits for the economy
Lower costs and risks
through shorter settlement chains
In real time, final and
Seamless connection with new services
around the clock
as part of automated value chains
like cash, but in electronic
form
Cross-border payments
thanks to links with other
IP systems
Settlement in central bank money Account-based at commercial
banks
Instant payments - an innovation based on proven principles for
futureproof payments
24/7
max. 10 s
SIC system
/ SNB
Regulated institutions
End users
6 30.3.2023 Swiss Payments Vision - an ecosystem for future-proof payments | Money Market Event | Andréa M. Maechler / Thomas Moser | © Swiss National Bank
Distributed ledger technology (DLT) has potential to make financial market
infrastructure more efficient
DLT
DLT
DLT
SIC system
/ SNB
Regulated institutions
End users
Token transactions require a stable-value, generally accepted means of payment ...
Issuer Private Central bank
Form of money
Book money Token money Book money
Account balances at Wholesale Account balances at central
Private token money Retail CBDC
bank
commercial banks CBDC
User End users Commercial banks
... and a secure and efficient settlement model
Issuer Private Central bank
Form of money
Book money Token money Book money
Account balances at Wholesale Account balances at central
Private token money Retail CBDC
bank
commercial banks CBDC
User End users Commercial banks
Synchronised (token versus
Settlement model Synchronised (token versus
Integrated (token versus token money)
book money)
book money)
SNB is examining three models for secure and efficient token settlement
Issuer Private Central bank
Form of money
Book money Token money Book money
Account balances at Wholesale Account balances at central
Private token money Retail CBDC
bank
commercial banks CBDC
User End users Commercial banks
Synchronised (token versus
Settlement model Synchronised (token versus
Integrated (token versus token money)
book money)
book money)
Model 3: Backed private Model 2:
RTGS link (model 1): expanding existing RTGS functionalities to support token
settlement
DLT
SNB / SIC
system
11 30.3.2023 Swiss Payments Vision - an ecosystem for future-proof payments | Money Market Event | Andréa M. Maechler / Thomas Moser | © Swiss National Bank
Wholesale CBDC (model 2): testing wholesale CBDC in a pilot project
W
SNB
DLT
12 30.3.2023 Swiss Payments Vision - an ecosystem for future-proof payments | Money Market Event | Andréa M. Maechler / Thomas Moser | © Swiss National Bank
Backed private token money (model 3): examining options to increase value
stability and acceptance of private token money
P
DLT
SNB
13 30.3.2023 Swiss Payments Vision - an ecosystem for future-proof payments | Money Market Event | Andréa M. Maechler / Thomas Moser | © Swiss National Bank
Three scenarios for future payments landscape
Hybrid
DLT remains a niche
DLT as standard
technology
?
DLT
14 30.3.2023 Swiss Payments Vision - an ecosystem for future-proof payments | Money Market Event | Andréa M. Maechler / Thomas Moser | © Swiss National Bank
Thank you for your attention.
© Swiss National Bank