Mushtak Parker
CAPE TOWN - Is the world taking that great leap forward into a digitisation future towards official digital currencies? The Innovation Hub of the Basel-based Bank for International Settlements (BIS), the gatekeeper of the global banking system often dubbed the “Central Banks’ Bank”, recently took a major step in that direction “to test the use of central bank digital currencies (CBDCs) for international settlements”.
Codenamed Project Dunbar, the initiative is led by the Innovation Hub’s Singapore Centre and four of the world’s most stable central banks – Reserve Bank of Australia, Bank Negara Malaysia, Monetary Authority of Singapore, and South African Reserve Bank (SARB).
The fact that SARB has been invited to participate is a recognition that despite South Africa’s entrenched economic fundamentals, SARB’s reputation and integrity as a financial services regulator is widely respected by the IMF and Basel Committee for Banking Regulation, and its peers, albeit some concerns remain over governor Lesetja Kganyago’s future operational independence as extreme left radicals agitate for its nationalisation.
“Project Dunbar,” says Andrew McCormack, head of the centre, “brings together central banks with years of experience and unique perspectives in CBDC projects and ecosystem partners at advanced stages of technical development on digital currencies.
“We are confident that our work on multi-CBDCs for international settlements will break new ground in this next stage of experimentation and lay the foundation for global payments connectivity.”
It aims to develop prototype shared platforms for cross-border transactions using multiple CBDC platforms, which “will allow financial institutions to transact directly with each other in digital currencies issued by participating central banks, eliminating the need for intermediaries and cutting the time and cost of transactions”.
Given the instant and global reach of digitisation, accelerated by the impact of the Covid-19 pandemic, Project Dunbar is confined to CBDCs in their role in global payment solutions.
The wider market of digital currencies, including the cornucopia of cryptocurrencies, digital assets, exchanges and banks, are in a fragmented state of a digital Wild West bereft of necessary oversights, with central banks scurrying to learn on the job and how to rein in the exuberance and excesses with some semblance of regulatory order.
According to BIS, 60% of central banks are experimenting with CBDCs.
Cross-border payments are essential for settlement of global trade, workers remittances, e-commerce, tourism receipts and even sovereign debt obligations. Multi-currency and cross-border payments are more complex, adding to risks and costs.
Most are settled through correspondent banking arrangements, traditionally through banks in New York for dollar transactions, in London for sterling transactions and Frankfurt for euro transactions.
But this was a highly neo-colonial process, given that most major correspondent banks are western-owned, effectively dictating price and terms.
In an era of the “Financial War on Terror”, sanctions and the US Patriot Acts which gives US authorities transnational jurisdictional sway over foreign nationals especially when transactions involve the US dollar, this process is exacerbated. This despite the emergence of banking majors from China, Japan, GCC (Gulf Co-operation Council) states and Singapore.
When then Malaysian PM Dr Mahathir Mohamed signed bilateral payment arrangements (BPA) with Chile and Iran where respective central banks would settle accounts between their economies on an annual basis, the IMF barely tolerated it, given the threat to loss of business of the correspondent banks.
The spectre of Mahathir’s envoy Nor Mohamed Yakcop negotiating BPAs with Iranian central bank officials in a bunker in the middle of the internecine 1980-88 Iran-Iraq War is poignant.
One can argue the semantics of the difference between payment systems and arrangements, but when Mahathir tried to emulate this on a multilateral basis with the Group of 77 countries, the IMF threatened Malaysia with expulsion on the grounds that it broke Fund membership rules.
Will CBDCs be the great equaliser of cross-border payment solutions and democratise the whole process? Moody's VP Stephen Tu maintains that “incentives to develop CBDCs have gained in strength since the outbreak of the pandemic, and if carefully implemented could produce large economic gains by increasing financial inclusion and reducing financial friction within the system”.
To him, it could level the playing field for public money and provide citizens direct access to a faster, lower-cost digital form of money.
To Fitch, CBDCs could be the damascene road to “authority-backed cashless payments with innovations in step with the wider digitalisation of society”, but Fitch warns that the “widespread adoption of CBDCs may be disruptive for financial systems if associated risks are not managed, including the potential for funds to move quickly into CBDC accounts from bank deposits, causing financial disintermediation, and for heightened cybersecurity”.
CBDCs would also give traditional banks a run for their money by dislodging them from their role as intermediaries in the financial system. As digital money becomes cheaper, faster and more inclusive and digital migration accelerates, banks and their historic credit risk skills and privileged access to customer data will likely wane as technology firms access new kinds of credit-relevant alternative data not previously available to banks.
The ability to offer digital financial services is becoming more a necessity, and consumer expectations for the seamless user experiences provided by tech firms has never been higher. Globally, tech firms have delved deeper into banking, with payments, small business lending and insurance and providing “banking-as-a-service“.
The danger is replacing one oligopoly with another. Digital money has the potential to transform the financial sector, with emerging markets standing to gain most. The World Bank estimates a $16 billion (R227bn) a year boost to remittances to low-income countries simply on lower fees.
Today, there are a billion registered mobile money accounts across 95 countries, with close to $2bn transacted every day. Sub-Saharan Africa is a leader in mobile money, accounting for almost half of mobile money accounts worldwide.
Parker is an economist and writer based in London
Cape Times