Central Banks Urged to Unify on Digital Currencies
- Central banks around the world are growing increasingly interested in the concept of digital currencies.
The blockchain industry has captured the attention of several global organizations, such as the Bank for International Settlements, the International Monetary Fund, and the World Bank. These bodies recently called for central banks to take interoperability into account at an early stage of developing central bank digital currencies (CBDCs).
Central Bank Digital currencies are digital tokens that are issued by a central bank and mimic cryptocurrencies. They are often linked to the value of the fiat currency used in that nation.
CBDCs are being developed by numerous nations, and some have even put them into the financial system. Many nations are now looking into how to move to digital currency. The basic objective of CBDCs is to offer financial security, privacy, transferability, simplicity, and accessibility to businesses and consumers. CBDCs may also minimize the cost of cross-border transactions, lower the expense of maintaining a complicated financial system, and offer more affordable options to people who now transfer money via other ways.
In a recent report, the World Bank, the International Monetary Fund, the committee on Payments and Market Infrastructures of the Bank for International Settlements (BIS), and the BIS Innovation Hub, examined three options for cross-border interoperability that address issues such as lack of transparency, high costs, slow speeds, and restricted accessibility.
Cross-border payments have been a huge conversation amongst these organizations over the last few years. In 2020, a Committee on Payments and Market Infrastructures report listed 19 potential improvements to cross-border payments, which served as a basis for this new report.
The report further looked at three interoperability strategies, noting that it would be simpler for PSPs to function across platforms if there was compatibility or if uniform standards were adopted. Parties in the system could develop agreements, technical connections, norms, and operational components through interlinking to carry out transactions between systems. Several models could be used to achieve interlinking. And last, several CBDCs could be hosted by a single technological infrastructure.
With the global growth rate of CBDCs, there is a need for international collaboration, which would help solve the cross-border payment problems. CBDCs lack uniformity and there are many factors, such as design, that is still up for debate. The report recommended maximizing the chance for coordination while it still exists since research is progressing quickly. Coordination of design elements may aid CBDCs in avoiding unexpected hazards and enhancing standard Know Your Customer/Anti-Money Laundering initiatives.
Many central banks are conducting research and running pilot programs to see if a CBDC might work in their economy. Nine nations and territories had established CBDCs as of March 2022. The Bahamas, Antigua and Barbuda, Dominica, Saint Lucia, St. Kitts, and Nevis, Monserrat, Grenada, and Nigeria are part of the countries that have launched their own CBDC.