Report suggests bright future for central bank digital currencies
Plus, fintech’s easy money runs out and an interview with open banking fintech Yapily
Central bank digital currency pilots gather speed
Nine out of ten of the world’s central banks are working to create a digital version of their currency. Some have already completed the task. The Bahamas has the Sand Dollar, Nigeria launched the eNaira last October and China is close to launching the digital renminbi, or e-CNY, after trialling it at February’s winter Olympics.
Alongside this innovation, some large central banks have also been working together to examine whether they can make cross-border payments using these new digital currencies faster, cheaper and more efficiently.
The cost and time involved in moving money around the world is staggering. The process often requires money to pass through a chain of correspondent banks, with each carrying out its own checks and charging its own fees before it reaches its final destination.
There were $23.5tn of cross-border corporate transactions in 2020, costing $120bn in fees and taking an average of two to three days to complete, according to a recent report by Oliver Wyman and JPMorgan.
The situation is equally frustrating for individuals sending money across borders. The cost of sending $200 to low- and middle-income countries added up to $12 on average in the fourth quarter of last year, according to the World Bank.
The G20 and Financial Stability Board have both made it a priority to tackle inefficiencies in cross-border payments.
The Bank for International Settlements, the central bank for central banks, thinks it has a solution. It published a report last week detailing the results from a number of experiments to transfer central bank digital currencies (CBDCs) across borders.
“The projects show that platforms with two or more CBDCs are technically feasible and offer a range of benefits that can lead to faster, cheaper and more transparent payments across borders,” the BIS said.
In one project, known as mBridge, the central banks of China, the United Arab Emirates, Hong Kong and Thailand created a system for turning their digital currencies into tokens that could be exchanged between commercial banks of the various countries.
The French and Swiss central banks teamed up with a private sector consortium in a similar project called Jura to swap euros and Swiss francs in the form of digital tokens between commercial banks.
In the Dunbar project, the Australian, Malaysian, Singaporean and South African central banks allowed commercial banks to have direct access to the digital currencies of each country and to transact with each other.
“These experiments worked,” said Hyun Song Shin, head of research at the BIS. “Now we need to make sure we can build it to scale and it can stand the test of real world use.”
Not everyone is convinced, however. Zennon Kapron, who runs an Asian fintech research company, said privacy concerns could be a big barrier — at least for consumers. “Would you use a CBDC wallet from a different country? It is meant to be private, but is it really?”
Besides, Kapron thinks the private sector is already making swift progress on improving the efficiency of cross-border payments, giving the example of Thai consumers using QR codes to make cheap, instant payments in Singapore.
On top of these concerns, the BIS said there are still a number of “policy, legal, governance and economic questions” over multi-CBDC systems.
The biggest is whether they could expose a “vulnerability of the broader financial system”, it said, adding: “For example, participants’ access to liquidity and credit in one currency (or lack of it) could spill over to other currencies or markets at significant speed.”