A joint research report conducted by three central banks has concluded that Central Bank Digital Currencies (CBDC) have the capacity to upgrade cross-border payments and settlements.
Titled ‘Cross-Border Interbank Payments and Settlements: Emerging Opportunities for Digital transformation‘, the paper was collaboratively authored by the Bank of Canada (BOC), Bank of England (BoE) and the Monetary Authority of Singapore (MAS). With them, a number of experts from commercial banks “led by HSBC”.
Specifically, the research project makes a hypothetical proposal for three possible models that address particular issues, allowing for the achievement of what the paper calls “future-state capabilities”; these are the desired outcomes which have been gathered from research into “challenges and root causes of issues associated with cross-border interbank payments and settlements”.
Appraising the limitations of technological innovations within this space, the report acknowledges present initiatives that are taking place that “go some way” to address obstacles. However, it describes these as “incremental changes” and in order for a long-term solution to be established, there “may need to be a more fundamental paradigm shift” which are “enabled by new technology platforms”.
A study from IBM and the Official Monetary and Financial Institutions Forum (OMFIF) recently revealed that central banks have been exploring and trialing CBDCs with “mixed results”.
There are two types of CBDCs; firstly the “retail CBDC” which is designed for public use, and secondly “wholesale CBDCs”, which are limited to financial institutions and markets.
The report offers two approaches based on legacy models with one referring to the collection of initiatives currently underway or in the making and a second which is based on the expansion of real-time gross settlement (RTGS) operators roles for cross-border settlements, eliminating intermediary banks.
A third model comes with three nuanced variations and focuses on the utilization of wholesale central bank digital currencies (W-CBDCs) for this process.
The first of the W-CBDC models is one that can only be “transmitted and exchanged only within their home jurisdictions”. This would require commercial banks to open wallets across multiple central banks should they desire to hold a number of currencies. The second broadens the scope a little further by suggesting for a W-CBDC that can operate “beyond their home jurisdictions”. For commercial banks, this would entail adopting multiple wallets within their respective central banks, and would require “each central bank to support multiple CBDC tokens”.
Finally, the third variation is ideal yet ambitious, and suggests a universal W-CBDC, “backed by a basket of currencies and accepted by all participating jurisdictions”. Conclusively, the report found the first jurisdiction-specific model offered few benefits as they are simply tokenized versions of existing models.
The other models that do not limit the scale of the system are, however, solid options to reduce counterparty credit, settlement and payment risks; also broadening access to RTGS systems. That said, the report identifies all of the W-CBDCs models as having particular drawbacks including not performing to present standards and that they “degrade” existing governance frameworks.
The concept of CBDC’s has been around for some time, however, now it appears as though there is significant potential on the horizon, as a few nations around the world such as Thailand begin to embark on the CBDC journey.
This is also not the first time that the BoE or BOC have spoken publicly about CBDCs. Furthermore, Managing Director of the International Monetary Fund (IMF) Christine Lagarde recently gave a speech in Singapore on the matter, highlighting the several positives that can be drawn from this new fintech frontier.
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