Digital currencies: global payments could bypass legacy banks
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Central bank digital currencies generate a lot of noise for an innovation that is still largely theoretical. The Bank for International Settlements is adding to the buzz with an experiment to use multiple CBDCs for international payments. It hopes transactions using blockchain-based currencies can cut out intermediaries and leapfrog legacy systems.
Commercial banks can be forgiven for feeling alarmed. Sprawling correspondent banking networks allow them to take a small cut at every stage of many cross-border payments. The total cost for some small transactions can exceed 10 per cent, according to the World Bank.
Fintechs are already colonising busy payment corridors. Fast, low-cost dealings using blockchain-based CBDCs would represent an even deeper disruption.
Under the BIS scheme, central banks in Australia, Malaysia, Singapore and South Africa will jointly design platforms for cross-border payments in CBDCs. The BIS expects to publish results next year and demonstrate prototypes that November.
The paradox is that most central bankers fear digital currencies as much as traditional private sector financiers do. They are brainstorming about CBDCs because they fear cryptocurrencies more. These threaten to sidestep regulation protecting retail customers and financial stability.
Most central banks are working on some variant of the idea. China’s e-Rmb trial had 21m personal and 3.5m corporate wallets as of July.
Ideally, central banks would prefer old-fashioned private sector banks to keep their role distributing and managing money flows. This is a fiddly, expensive business.
The problem for central banks and private institutions alike is that the emerging technology may impose an infrastructure of its own. Glomming CBDCs on to the existing financial system may be awkward and lack credibility.
That tension is apparent in EU plans for central banks to hold retail deposits of CBDCs. This would reduce their current account provider to a funnel for funds. A proposed cap on the amount deposited reflects fears that money would avalanche into central bank deposit accounts at times of stress.
There will be no overnight revolution. It is notable that bitcoin, the crypto which alarms central bankers most, is used primarily for speculation. Despite the hype, it is an awkward and insecure medium for payments. Chief executives of large universal banks would meanwhile be making more fuss about their own trials of blockchain currencies if these were going brilliantly.
Even so, once a technological genie gets out of the bottle, it stays out. This one is beginning to push harder on the cork.
The Lex team is interested in hearing more from readers. Please tell us what you think of plans for CBDCs in the comments section below
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