Cash & Liquidity ManagementPaymentsECB: CBDCs are the “holy grail” for cross-border payments 

ECB: CBDCs are the “holy grail” for cross-border payments 

Momentum across central banks globally in the development of CBDCs is building, with two major reports pointing to their potential benefits for corporates

The European Central Bank (ECB) has hailed central bank digital currencies (CBDCs) as the “holy grail” of cross-border payments, with the potential to deliver cheap, universal, secure and instant payment solutions far better than anything else on the market, including bitcoin and stablecoins.

According to a recent ECB report, “it is time for forceful measures” to improve cross-border payments as volumes have continued to increase and forecast to grow further. It also pointed out that while digitalisation has made instant cross-border communication quasi-cost-free, this advance has not spilled over into cross-border payments where costs associated with execution remain stubbornly high.

The ECB report identified two main reasons for the failure of digitalisation to impact cross-border payments. The first is that intermediaries “continue to struggle to ensure compliance with AML/CFT regulations and fear the legal and reputation risks of non-compliance”.

Second, although payment service providers have improved the “front-end” of completing cross-border payments in the form of enhanced user convenience, the “back-end” of facilitating payments, through payment and market infrastructures, continue to face many challenges.

Bitcoin a non-starter

While CBDCs are seen as the cure to cross-border payment pain, the ECB is far less enamoured of bitcoin, which it says is the “least credible,” solution and “inherently expensive and wasteful”. Stablecoins were labelled an even “more problematic” alternative to bitcoin due to their “closed loop” systems and fragmentation by the ECB.

The report by the ECB follows a landmark report on CBDCs and cross-border payments by the Bank of International Settlements (BIS), IMF and World Bank for the G20. In that report the three organisations are upbeat about the potential of CBDCs but warns that central banks face major decisions with regards to interoperability and cross-border usage if they are to fulfil their potential.

Over 90 countries have active CBDC projects ranging from the research stage through to the 10 projects which have officially launched, according to the Atlantic Council’s CBDC tracker. The BIS report, however, warns that lack of early-stage coordination and cooperation between central banks working on CBDCs could stymie their development. For CBDCs to succeed in improving cross-border payments, central banks must make fundamental decisions on foreign access and how CBDCs connect across jurisdictions.

“CBDC design must consider cross-border functionality at an early stage and international cooperation and coordination are prerequisites,” according to the BIS report.

“Central banks must also make critical choices on the access of non-residents and foreign financial institutions to central bank digital currencies (CBDCs), as well as ensuring multinational interoperability, to fully harness the potential for CBDCs to enhance cross-border payments.”

Cutting out the middleman

Welcoming the BIS report, Mark Sutton, senior manager at treasury and risk consultant Zanders, says: “It really starts to outline the various key points which will help polarise the future ongoing discussions around CBDCs.

“Corporate treasury will be all too familiar with the long-standing challenges around cross-border payments. As the BIS report correctly states, the current model, which is based on a series of correspondent banking arrangements includes high costs, low speed, limited access, and insufficient transparency. So, you can instantly see the benefits of moving away from this current SWIFT network model to simplified architecture based on distributed ledger technology underpinned by CBDCs.”

Sutton says that the first and probably most significant benefit to corporate treasury of CBDCs is the immediate removal of correspondent banks, with their associated and often significant lifting fees for the onward processing of cross-border payment transactions.

“That will be made possible because each bank will now be a node within the new cross-border CBDC infrastructure – so we move directly to a point-to-point model,” he says.

“A direct consequence of this is the associated acceleration of processing and clearing cycles as well as a reduction in the cost of processing as there is no longer an intermediate agent in the chain. We now have the opportunity to move not only to true real-time, but also the potential to go 24/7 for the full 365 days in a year.”

Sutton anticipates CBDCs will generate considerable cost savings for treasurers, pointing to US management consultant Oliver Wyman’s ‘Digital Currency Battleground’ report that estimates that if CBDCs were used between China and Singapore the potential costs savings could range between SG$16bn to SG$24bn ($12bn – $17bn) – equivalent to 3.5% of Singapore’s GDP. The savings would arise from a combination of fee savings from lower transaction costs and improved liquidity management from a real-time treasury operation.

“As more and more financial data modelling is progressed around the true value of a new cross border CBDC payment rail, it is providing support for the view that these flows can bypass the SWIFT network with its associated and possibly outdated correspondent banking network,” says Sutton.

Benefits for billions of unbanked

Peter Woeste Christensen, director at capital markets technology and advisory firm LPA, is also very upbeat about the potential of CBDCs and believes they “revolutionise the world of payments”.

While the BIS report highlights the benefits of CBDCs for corporates, it also highlights the major impact they could have on the world’s estimated 1.7bn unbanked citizens currently without access to banking and financial services generally – a major additional benefit for Christensen.

“The BIS has realised CBDCs have the potential of really unlocking financial services for the many unbanked. It’s one of the most important things to look at here,” he says.

On the corporate side, as well reducing cross-border costs and friction, Christensen sees CBDCs having the potential for companies to more securely engage with smaller suppliers and develop new business models.

“Companies are currently stuck in the way they think about processes, how they pay and organise their supply chains. CBDCs will usher in an age when they can finally think out of the box. They have the potential to set off a new wave of innovation.”

The ECB, which is currently developing a digital euro, has tentatively pencilled in 2025 for its formal launch. Christensen believes the launch will go ahead, though admits there may be slippage in the timetable by a year or two.

“I think it is likely that we will start seeing CBDCs going live within the next 5-7 years. The momentum and determination across the G20 are such that we can be optimistic it will happen.”

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