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BIS Report outlines CBDC benefits as joint initiative evolves to Phase 3

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Central Bank Digital Currencies or CBDCs have been gradually gaining traction. While some countries are at a later stage in terms of piloting, others seem to have lagged in the global race.

The US, for one, has been struggling with its e-dollar exploration. Nevertheless, entities such as BIS and IMF have continued to advocate for the CBDC rollout in response to the growing popularity of stablecoins and have also backed several collaborative initiatives of the same.

In the latest development, the Bank for International Settlements [BIS] outlined a prominent use case after reviewing a prototype being jointly developed by the central banks of China, the United Arab Emirates, Thailand, and the Hong Kong Monetary Authority.

CBDC Speed and Cost benefits

Titled ‘Inthanon-LionRock to mBridge,’ the report by the Switzerland-based financial institution stated that blockchain-powered CBDCs can potentially minimize cross-border payments’ transaction throughput from multiple days to just a few seconds. According to BIS, the aforementioned prototype shows a tangible improvement not just in terms of cross-border transfer speed but also substantially reduces numerous of the core cost components of correspondent banking. It further stated,

BIS stated that the prototype essentially displayed the potential of faster and lower-cost cross-border transfers for participating jurisdictions. It also went on to add that it can be beneficial for jurisdictions that do not necessarily have strong correspondent banking relationships.

BIS revealed the project evolving into Phase 3 which involves additional experimentation with respect to design choices, technology trade-offs, and defining a future direction from prototype to an open-source, production-ready system.

This isn’t the only joint initiative. As a matter of fact, the central banks of Australia, Singapore, Malaysia, and South Africa unveiled a joint initiative to trial international settlements with the help of CBDC earlier this month. Called ‘Project Dunbar,’ the initiative is expected to prototype shared platforms thus facilitating direct transfers between institutions using digital currencies issued by multiple central banks.

Dunbar is slated to be conducted in partnership with the Bank for International Settlements Innovation Hub from its Singapore Center. Similar to mBridge the initiative will also be based on a DLT-enabled infrastructure to “lay the foundation for global payments connectivity.”.

BIS’s latest project urges Australia, Malaysia, Singapore, and South Africa to test cross-border CBDCs

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The Bank of Internation Settlements’ aka BIS has been keeping an eye on the development of central bank digital currencies [CBDC] across the globe. In order to further spruce up the process, the bank hopes to initiate the whole cross-border system for CBDCs.

CBDCs have started to steer the world in a whole new direction. These central bank-issued assets seem to be the latest interest of governments across the globe. An array of countries have already developed the digital version of their fiat currency, however, a few others are still stuck in the research process. China has been at the top of the game as it has its asset already in use.

Now with an aim to get ahead in the race, BIS has urged the central banks of four regions namely, Australia, Malaysia, Singapore, and South Africa to join the bank’s latest initiative, Project Dunbar.

BIS’s Project Dunbar to focus on cross-border CBDCs

The aforementioned central banks have been working along with BIS to roll out a prototype that carries out cross-border CBDCs. The reason behind this is to uphold direct transactions and eliminating the requirement of intermediaries. With this prototype, the banks hope to diminish time as well as the cost of transactions.

Furthermore, the project would look into the “international dimension” of the design of the CBDC. Andrew McCormack, Head of the BIS Innovation Hub Centre in Singapore, would reportedly overlook the project.

Speaking about the same, McCormack said,

“Project Dunbar 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. With this group of capable and passionate partners, we are confident that our work on multi-CBDCs for international settlements will break new ground in this next stage of CBDC experimentation and lay the foundation for global payments connectivity.”

Several bank officials from across the globe believe that this project could be great for the CBDCs of different countries.

CBDCs Get Green Signal from Bank of International Settlements

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The topic of central bank digital currencies or CBDCs has been in discussion by regulators for a long time with many nations developing their own versions of it. Whatever remaining qualms the rest of the banking industry may have had about CBDCs seems to have changed after the latest approval by the Bank of International Settlements [BIS]. The document was the clearest signal yet from central banks that they are ready to fight any effort to undermine their key role in the global financial system.

Considered the central bank to all other banks, the BIS stated that if CBDC technology was not adopted by the banking world it would be left in the lurch by alternatives. The CBDC mentioned its latest directive in a list of recommendations released on June 23. According to the BIS, if banks remained stoic on their stance on the nascent technology, it would be overtaken by the Big Tech such as Amazon, Facebook, and Alphabet.

The release also included comments from BIS official Benoit Coeure who said:

“The train has left the station. It is not that we are getting carried away, we are just looking around. That [Big Tech overtake] is a place where you don’t want to be, where governments don’t want to be. The new trade wards are technology wars.”

Significance of BIS’s stance on CBDC

Coeure and the BIS’s statement comes at a time when global superpowers like China have CBDCs in the works. Although the digital renminbi had received a lot of traction during the initial announcement, it has since then dipped in terms of developmental progress. This lethargy shown by states is not something that would be seen by the mammoth technology giants swarming for dominance, said Coeure.

Coeure was not the only BIS official as he was also joined by his colleague Hyun Song Shin. Shin added that the onus was now on the authorities to decide whether citizens need digital IDs to use CBDCs. The other alternative would be a token-based cryptocurrency system that would keep transactions private. Both Coeure and Shin agreed that the BIS’s best pick out of the two would be going with the ID system.

Last year, the Bahamas became the first nation to launch a native CBDC, dubbed the Sand Dollar. Aside from China, other European nations such as France and Switzerland were also trying their hands at creating general purpose CBDCs.

BIS And Swiss National Bank To Roll Out CBDC By The End Of 2020

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Governments across the globe seem to be fond of the idea of a digital currency, however, they continue to despise crypto assets. Yet, the introduction of the Central Bank’s Digital Currency [CBDC] into the global financial arena is substantial proof that the world has moved ostensibly towards digitalization. The latest news from the Swiss National Bank reveals that the development of CBDC is heading in a positive direction.

Swiss National Bank Joins Forces With BIS

A recent report revealed that the Swiss National Bank [SNB] and the Bank for International Settlements [BIS] was prepping to test a CBDC by the end of 2020. The collaboration of these banks came to light at the Bund Summit held on Sunday in Shangai. The Head of Innovation Center at BIS, Benoit Coeure spearheaded the summit and revealed that both the banks were going to roll out a CBDC in the proof-of-concept stage.

With the intention of launching a CBDC by the end of this year, Coeure pointed out that the incorporation of proof-of-concept would allow the experimenting of retail CBDC. Researching central bank digital currencies has been overseen by Coeure at BIS. The platform purposes to draw connections between the existing payment systems along with several other elements.

The partnership between the SNB and BIS dates back to 2019. Both the banking giants collaborated to explore the prospects of blockchain-based tokens. For its latest venture, however, BIS aims to bolster its level of blockchain. During the early stages of their partnership, SNB had stated,

“This new form of digital central bank money would be aimed at facilitating the settlement of tokenized assets between financial institutions.”

BIS further announced its plans on joining forces with several other banks across the globe. Hoping to inspect its cross-border abilities, Coeure revealed that BIS would work closely with the Hong Kong Monetary Authority as well as the Bank of Thailand.

While China is well ahead in its CBDC game, other countries along with banks have been trying to catch up with the Asian country.

Coronavirus Pandemic to Trigger CBDC Development Globally

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The Bank of International Settlements (BIS) anticipates the effect of the coronavirus pandemic on retail payments to trigger positive development of CBDC globally. BIS is a Swiss-based international organization comprised of 60 central banks. The organization has released several reports centered on decentralization, cryptocurrencies, and central bank digital currencies (CBDC). CBDCs refer to state-issued cryptocurrencies, whose legal tender depends on the regulatory structure of a government.

Coronavirus impact on global payments

BIS ‘latest June 24 report suggests that the coronavirus pandemic has inflicted extreme changes in retail settlements. In addition, the report outlines the advantages and disadvantages of the current payment systems.

The report, for starters, highlights the rapid deterioration of fiat payments due to the risk of transmitting the virus between traders and consumers. And the economic uncertainty has caused “precautionary holdings” in fiat, leading to a decline in daily cash transactions.

Around the same time, restrictions levied by national governments, such as closing down tangible shops, have contributed to a steady decline in payment settlement on e-commerce. Besides, the fall in travel has led to a decrease in international visa transactions, and a substantial decline in remittances from migrants.

BIS says both of these changes show the benefits and limitations of the current payment system. Digital payment systems, on the other hand, have made it possible for many commercial operations to operate given the great disruption to daily activities.

“The crisis has amplified calls for greater access to digital payments by vulnerable groups and for more inclusive, lower-cost payment services going forward.”

Opportunity for CBDC development globally

In this regard, the BIS report outlines that CBDC development is globally at the frontier of policy opportunities “for central financial authorities;” could amount to a sea change. ” It notes that a successful CBDC could provide” a new, secure, trusted, and widely accessible digital payment method.

The BIS also noted that it would continue to offer its assistance to central banks worldwide in CBDC research and design. The organization has demanded global cooperation to ensure that post-COVID-19, future changes in international payments will be less split, more comprehensive, and more productive.