Digital currency has been cited as a solution by the reserve banks of Canada, Singapore and the United Kingdom that can be implemented to help with the challenges that are usually encountered when making international payments.
The Convenience of Using CBDCs for Cross-Border Payments
The report by the Bank of England, Monetary Authority of Singapore and Bank of Canada states that Central Bank Digital Currencies (CBDCs), which can either be retail CBDCs or Wholesale-CBDCs (W-CBDCs), has several benefits. These benefits include its all-rounder availability, anonymity, and its eradication of counterparty credit risk for participants.
Commercial banks such as United Overseas Bank, HSBC, Toronto-Dominion Bank, and Oversea-Chinese Banking Corporation made inputs on the report which outlines three models of W-CBDCs that can be implemented with geographical reach or acceptability categorizations.
The first W-CBDC model is specific to a particular currency and can be transmitted and exchanged within the nation, and not to other countries. Basically, this would mean that the Central Banks would offer the wallets for the W-CBDC in the country’s currency. Wallets would be opened with the central banks by commercial banks while the reserve banks would issue the currencies they wish to hold.
The second W-CBDC model will be a currency-specific one, and would be transmittable and exchangeable beyond the domestic jurisdictions. Each central bank would be required to offer support to multiple W-CBDC tokens if this model is adopted. Also, multiple wallets would be opened by commercial banks with their local central banks.
The third model involves a singular W-CBDC which would be backed by different currencies and would be transmittable and exchanged in all the participating nations. The problem with the last model, however, was noted in the report below;
“…because it requires backing by a basket of currencies, the W-CBDC in this model is subject to volatility, potential manipulation and investment activity. Additionally, our analysis indicates that the pace of adoption could be hampered by the complexity of adding new currencies into the basket backing the W-CBDC.”
Intentions Behind the CBDCs Suggestion
The report finally concludes that problems plaguing international payments such as poor availability, fragmented standards and having to go through multiple intermediaries will be solved by changing from the use of current corresponding banking channels in making these international payments.
Currently, the report states that the global value of both retail and international corporate payments is projected to grow by 5.5% each year to reach figures of about $30 trillion in 2022, from a value of $22 trillion in 2016.
The mutual report was titled, ‘Cross-border interbank payments and settlements: Emerging opportunities for digital transformation,’ and it was drawn from CBDC initiatives that the Bank of Canada and the Monetary Authority of Singapore have previously carried out with Project Jasper and Project Ubin respectively.