Mohsen Al Zahrani, head of innovation at Saudi Arabian Monetary Authority (SAMA), says the central bank’s cross-border blockchain project with the United Arab Emirates is on track to go live in the first quarter of 2019.
Speaking with DigFinlast week on the sidelines of a conference organized by blockchain-payments company Ripple, Al Zahrani says SAMA and its Emirati counterpart have just begun the technical implementation.
The project involves launching a crypto-currency backed by the Saudi central bank that will enable cross-border payments. A handful of commercial banks from both Saudi Arabia and the UAE are also participating. Ripple was brought in by SAMA to provide the technology.
Al Zahrani leads the innovation center for SAMA’s payments division, which was set up in 2016. Speaking to Ripple’s audience, he says central banks have been wary of crypto. “Tokens on distributed ledgers are not an easy thing for central banks to swallow,” he said, so the innovation center began exploring them. “First we had to understand what it is.”
Cross-border use case
In Saudi Arabia, payments are centralized at SAMA, which oversees a single national network of ATMs and points of sale. The central bank has taken the lead to prod banks to innovate, Al Zahrani says. This includes a regulatory sandbox, as well as inviting banks to participate in its Ripple pilot for digital currencies.
Dilip Rao, global head of infrastructure innovation at Ripple, says central banks by definition don’t have a role in cross-border payments. But they are interested in supporting faster payments for high-volume, low-value payments; the current SWIFT infrastructure for real-time gross settlements operates in batches, better suited for large, infrequent transactions.
It's not an experiment; it's real
This project puts SAMA and the Central Bank of the UAE among the pioneers of central-bank digital currencies (CBDCs), along with Singapore’s Project Ubin and Canada’s Jasper. Other central banks are exploring the idea.
But their motives vary. Al Zahrani says, for example, that Sweden is weighing CBDCs as a solution for the lack of cash in its bank branches, as the population has developed a strong preference for credit cards or mobile payments. Ecuador, on the other hand, sees CBDCs as a means of promoting financial inclusion among the unbanked.
“For us, it’s more about efficiency,” he said. Given the centralized nature of Saudi national payments, there was no use case at home, but cross-border transactions presented a different opportunity, as they currently involve a lot of friction. The project involves using a token to settle transactions between Saudi riyal and Emerati dirham.
“We’re not anti-digital,” Al Zahrani, “which is why we’re experimenting with issuing our own digital currency. But there are questions about how issues these and how, who controls it, who guarantees it.”
He says the initial project is for corporate transactions. “But it’s not an experiment,” he told DigFin. “It’s real. If it doesn’t work, we’ll shut it down. But our goal is to scale this.” That would mean to other regional central banks, and to more commercial banks. Retail payments are theoretically possible but not likely any time soon, he says.
Central banks: beyond the tech
Most other central banks have not sought to deploy a digital currency or endorse other blockchain projects, but they are studying it and exchanging information, said Marcelo Yarid, chief information officer at Banco do Brasil, speaking at the Ripple event.
Andrew McCormack, vice president for payments and technology at Payments Canada (the body carrying out the Bank of Canada’s Project Jasper), says the technology itself is not the major question market anymore.
“It’s about monetary policy, regulatory frameworks, and the potential disruption of financial market intermediaries in the domestic payment system,” McCormack said. Bank of Canada officials see potential in blockchain, “But we still have more questions than answers.”
Payments Canada will release a white paper this month detailing its recent phases in Jasper, which include post-trade settlements of fiat and digital currencies.
“It’s been 10 years since the Bitcoin white paper was published, which inspired central banks to invest more in fintech in general,” McCormack said. He says the legacy infrastructure has done a good job of reducing risk, but at the expense of customer experience. “Now tech is front and center for regulators and central banks,” he said, noting the proliferation of faster payment systems, open banking and sandboxes. “It’s a renaissance, letting us explore the art of the possible.”
That said, he thinks a Canadian digital loonie is a ways off. “We’re not planning to issue one,” he said, noting the volatility in crypto undermines its use as a medium of exchange; other risks include draining deposits of fiat, and the environmental costs of proof-of-work consensus mechanisms. But Bank of Canada is interested in the emergence of stable coins. “Central banks have centuries of experience ensuring that stability, and we can inform that discussion.”