As interest in central bank digital currencies (CBDCs) continues to grow around the world, central bankers are increasingly shifting their focus from domestic applications to cross-border use of CBDCs.
A survey of 50 central banks conducted in the first quarter of this year by the Bank for International Settlements (BIS) found that 28% of the central banks were considering options to make CBDCs interoperable at a wholesale level by forming multi-CBDC arrangements, including integrating multiple CBDCs into a single payments system. Almost 14% of the central banks said they were considering an active role in foreign exchange conversion.
The G20 has made enhancing cross-border payments a priority and CBDCs present an opportunity for central banks to improve existing international payment arrangements.
“Central bank digital currencies (CBDCs) could ease current frictions in cross-border payments — and particularly so if central banks factor an international dimension into CBDC design from the outset,” according to the BIS in a paper titled “CBDCs beyond borders: results from a survey of central banks” published this month.
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Rethinking cross-border payments and settlements in Singapore
“With the wholesale CBDC construct, with the DLT [distributed ledger technology] construct, there is a possible opportunity to redesign the whole ledger system, especially when you are settling cross-border,” said Sopnendu Mohanty, chief fintech officer at the Monetary Authority of Singapore (MAS). He was speaking at a panel discussion on “Asia Pacific CBDC Innovation, Collaboration and the Drive to Interoperability” at the recent Hyperledger Global Forum 2021, an enterprise blockchain event.
Mohanty said that Singapore and Thailand, which linked their national real-time retail payment systems — PayNow in Singapore and PromptPay in Thailand — earlier this year after three years of work, brought down the cost of cross-border transfers between the two countries significantly by an average of 10 to 15% before, to 3% now. The remaining cost was primarily due to foreign exchange and settlement fees, and a wholesale CBDC with DLT could “make a big difference” in further reducing the cost.
A “multi-currency multi-ledger construct definitely is the way forward”, Mohanty said.
With BIS support through its regional Innovation Hub, Singapore embarked on Project Dunbar for cross-border payments involving wholesale CBDCs. The project builds on the country’s earlier multi-year multi-phase work on Project Ubin, which explored the use of DLT and blockchain for domestic clearing and settlement of payments and securities.
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Project Ubin, which concluded last year, saw the development of a blockchain-based multi-currency payments network prototype. The project has since moved from experimentation to commercialization with U.S. investment bank J.P. Morgan partnering with Singapore’s DBS Bank and state-owned investment company Temasek to form Partior, a technology company, to develop a blockchain-based multi-currency payments network for real-time commercial cross-border clearing and settlements globally using commercial banks digital currency.
Mohanty says he’s seen “massive growth” in the blockchain space in Singapore, with close to 200 blockchain companies in the country now solving issues around trade finance, settlement processes, bond issuance, among others, using this technology. “There are a whole set of commercial enterprises coming through not only by fintechs, also by mainstream banks, DBS and et cetera, which clearly shows that blockchain has become mainstream.”
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“For many emerging markets, many countries who can’t afford traditional faster payment systems, traditional payment infrastructure…, they may find retail CBDC with [DLT] infrastructure a compelling argument for a switch,” Mohanty said.
“In Singapore, I may not have a compelling argument because I can move money between two bank accounts at zero cost in three clicks,” Mohanty added. “But there are countries which still need a lot of infrastructure investment, and they can leapfrog like Cambodia.”
Digital payments in Cambodia
Serey Chea, assistant governor at the National Bank of Cambodia, also spoke at the panel discussion on Cambodia’s Project Bakong, which was built on the Hyperledger Iroha platform.
Chea clarified that Project Bakong, while widely regarded as a CBDC due to some of its features such as its underlying technology, was intended to be a backbone payment system. “From a legal perspective it is not [a CBDC],” said Chea, adding that the Cambodian central bank did not have any direct liability to the public.
Project Bakong is a digital payment system that allows for payments, deposits and cash transfers in a tokenized version of the Cambodian riel or U.S. dollar. According to Chea, there have been about 100,000 downloads of the Bakong wallet, with about five million users.
Chea said that one of the motivations for Cambodia’s Project Bakong was to make mobile payments cheaper by reducing regulatory compliance costs in Cambodia’s fragmented payments landscape.
“The payment service provider doesn’t have to be a member of central clearing house as long as they have their Bakong credit, as long as their user has Bakong credit they can transfer to anyone they want because it is peer to peer,” Chea said. Chea has previously said that it could be difficult for payment service providers as technology companies to participate in the national clearing house and reach the same standard of liquidity management as banks. “It would be counterproductive as regulatory compliance cost would be passed on to end-users,” she said.
Chea sees a digital currency that can be sent across borders as “probably one of the most useful case of digitalizing of currency.” But issues around interoperability and digital identity will need to be addressed.
According to Chea, Cambodia is currently working to connect the DLT-based Bakong platform with a conventional platform from Maybank, a commercial bank in Malaysia. “There’s a lot of challenges, particularly in the digital identity, but we hope we can overcome it and launch it within this year.”