Bank of International Settlements announced it is working with four central banks for a multi-currency digital-fiat study it calls Project Dunbar.
“We’re trying to bring central banks together around wholesale settlement,” said Andrew McCormack, center head at BIS Innovation Hub Singapore.
But although those central banks say they’re keen to collaborate, saying this represents a once-in-a-generation chance to remake the global payments system, most aren’t prepared to issue digital currency, even at the wholesale level.
“We’re convinced [of use cases] but we won’t pull the trigger yet,” said Fraziali Ismail, assistant governor at Bank Negara Malaysia, one of four central banks working with BIS Innovation Hub, speaking at a forum affiliated with the upcoming Singapore Fintech Festival to announce the project.
Central banks from Australia, Singapore, and South Africa are the other participants.
Multi FX, multi uses
Project Dunbar will develop prototypes for shared platforms that will enable international settlements with digital currencies issued by multiple central banks.
Monetary Authority of Singapore sounded most ready to move ahead with its own central-bank digital currency (CBDC). Sopnendu Mohanty, chief fintech officer at MAS, said central banks are embracing digital fiat because private market players forced their hand. But now that they’re having to respond, authorities are finding meaningful benefits.
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“The use case exists,” Mohanty said. “We’re not like a tech company looking for a problem to solve. Making cross-border payments efficient is a real need.”
For countries reliant on trade, CBDCs could help businesses make better use of working capital that is currently tied up in the existing correspondent-banking system. The status quo requires capital for pre-funding trades or as collateral. As a result, settlement can involve multiple banks or intermediaries, which adds to complexity, errors, and cost.
Using CBDCs could reduce or eliminate these barriers. CBDCs are digital-native expressions of central-bank money.
Issuing these, at least at the wholesale level (that is, among designated commercial banks as well as corporations such as telecom operators – and not directly to individuals), would allow them to use central-bank money as a settlement asset, says Chris Thompson, deputy head of payments policy at Reserve Bank of Australia.
“CBDCs could provide wider benefits, letting more people settle in central-bank money,” he said.
One of the purposes of Project Dunbar is to determine whether this also reduces settlement risk and the implications of atomic delivery-versus-payment. (“Atomic” means two legs of a transaction settle simultaneously, unlike the phased processes in correspondent banking.)
We won’t pull the trigger yetFraziali Ismail, Bank Negara Malaysia
Other aspects of CBDCs the authorities are researching is programmability via smart contracts. This could let them automate certain functions, or place conditions on the transfer of money. This could erase a lot of the cost and risk in complex multi-party transactions. Such powers would also make CBDCs ideal units of settlement for assets that are tokenized on blockchains.
A true regional payments solution?
Central bankers are therefore keen to make cross-border payments, from remittances to large-volume corporate transactions, as cheap and efficient as payments in their domestic markets.
This is not a new idea. Either globally or regionally, as in Southeast Asia, central banks have discussed ways to link their domestic payment systems. The advent of faster payment systems, using API connectivity to make domestic settlements in near real time, revived the discussion.
CBDCs could let more people settle in central-bank moneyChris Thompson, Reserve Bank of Australia
However, regional groupings such as ASEAN have failed to make it happen, because no one could agree on how to govern a shared platform. Singapore and Thailand went ahead with a bilateral project, but there’s no sign that this can extend regionally.
CBDCs might be the sword of Alexander that cuts this Gordian knot, because of the decentralized nature of the distributed-ledger rails they would use. Authorities have been reluctant to give up control by letting payments settle on a foreign domestic infrastructure, but something like Project Dunbar could evolve into a shared platform in which central banks own a stake – akin to the way commercial banks jointly own SWIFT for payments messaging.
I see CBDCs competing with stablecoinsSopnendu Mohanty, Monetary Authority of Singapore
But how central banks can reach such an accord, and what this means for the payments industry, has yet to be worked out. It’s one of the drivers of Project Dunbar.
“We’d like to see different jurisdictions be able to issue CBDCs on shared platforms that financial institutions can access directly to settle transactions, either among themselves or for their customers,” said RBA’s Thompson.
Each to their own
However, central bankers agree that if there’s one thing they’ve learned so far, it’s that Project Dunbar is not going to result in a global standard for issuing digital fiat. On the contrary, they view CBDCs as a tool to assert their sovereign powers.
“I see CBDCs competing with stablecoins,” said Mohanty at MAS.
Herco Steyn, acting divisional head of the fintech unit at South African Reserve Bank, said, “CBDCs have the potential to strengthen our monetary sovereignty in the digital age.” Programmability means CBDCs can be designed to meet specific challenges in domestic policy. “The one-size-fits-all solution won’t work…harmonizing CBDCs cross-border will be difficult.”
But CBDCs will be very limited if they’re too diverse. For example, they are not likely to be suited to integrate with incumbent payment systems: digital fiat operates best with blockchain-based tokens or other digital currencies. Nor has anyone yet figured out how to handle foreign-exchange trades in a CBDC context.
These are just some of the technical challenges. But the real hurdles are political.
CBDCs can strengthen our monetary sovereignty in the digital ageHerco Steyn, South African Reserve Bank
“The issues aren’t technological,” said Ismail at Bank Negara. “They’re about governance, process, and education.”
Interoperability is more important than trying to forge global standards, the central bankers agree, especially as they look to a future of more decentralized finance (DeFi) and embedded finance. To make these trends go mainstream will require a major renewal in digital identity and infrastructure, so that CBDCs and privately issued smart contracts are compliant and enable know-your-customer and anti-money laundering checks.
Mohanty, citing MAS’s string of DLT experiments in payments, said, “Dunbar gives us the optimism that we can do these little experiments, but so what? It won’t matter unless central banks agree on interoperability for cross-border settlements. Dunbar is the last mile on this big experiment.”