The reserve banks of Canada, Singapore and the United Kingdom have singled out central bank digital currencies as being one of the solutions that can be implemented in order to solve the challenges encountered when making cross-border payments.

The report by the Monetary Authority of Singapore, Bank of England and Bank of Canada notes that CBDCs, which can either be retail CBDCs or Wholesale-CBDCs (W-CBDCs), offer various advantages including 24-hour availability, anonymity and eliminating counterparty credit risk for participants.

The report, which also received input from commercial banks such as United Overseas Bank, HSBC, Toronto-Dominion Bank and Oversea-Chinese Banking Corporation, outlines three models of W-CBDCs that can be implemented with the categorization being based on the geographical reach or acceptability.

Three Models

The first W-CBDC model is currency-specific and can thus only be transmitted and exchanged within the home country but not to other jurisdictions. Consequently, this model would see central banks offering wallets for the W-CBDC in the local currency. Commercial banks would thus be required to open wallets with the various central banks issuing the currencies they wish to hold.

In the second model, the three central banks propose a currency-specific W-CBDC which would be transmittable and exchangeable beyond the domestic jurisdictions. Under this model, each central bank would be required to offer support to multiple W-CBDC tokens. Commercial banks would thus be in a position of holding with their local central bank multiple W-CBDC wallets

The third model involves one universal W-CBDC which is backed by multiple currencies and can thus be transmitted and exchanged in all the participating jurisdictions. The report, however, says this model has drawbacks:

“… 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.”

Efficiency and Convenience

Overall, the report notes that switching from the use of the current correspondent banking channels in making cross-border payments into new rails will assist in overcoming problems such as poor availability, fragmented standards and having to go through multiple intermediaries.

This comes at a time when the global value of both retail and corporate cross-border payments is projected to grow by 5.5% annually to reach a figure of US$30 trillion in 2022 up from US$22 trillion in 2016, as noted by the report.

The joint report titled “Cross-border interbank payments and settlements: Emerging opportunities for digital transformation”, drew heavily from the CBDC initiatives that the Bank of Canada and the Monetary Authority of Singapore have carried out with Project Jasper and Project Ubin respectively.

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