Money Transfers

DMI finds CBDCs not targeting cross-border payments, huge potential in metaverse

The Digital Money Institute’s third annual payments report looks at central bank digital currencies for the first time, as well as other payment methods, through the lens of cross-border payment utility.

Central bank digital currency (CBDC) development aims squarely at inclusion, both for the central bank in the national economy and for the people it serves. Meanwhile, the technology for cross-border payments is being developed elsewhere for the most part, according to a new report on the payments industry.

The Digital Money Institute (DMI), part of the Official Monetary and Financial Institutions Forum think tank, released its third annual Future of Payments report on Dec. 8. The report was sponsored by several payments companies and the crypto exchange Binance, and those companies penned sections that supplemented DMI’s findings. This was the first time it included a survey of central banks.

The DMI staff found in its survey that CBDC development was “gaining momentum,” with two-thirds of central banks expecting to have CBDCs within a decade. Another 12% of central bank respondents said they did not expect to issue a CBDC at all. When asked about their objectives, more than a quarter of central banks mentioned preserving their roles in money provision and more than 10% mentioned financial inclusion. “Other” was indicated more often.

None of the banks chose “aid cross-border payments” as one of their objectives. Nonetheless, almost 35% of the banks saw interlinking CBDCs as the most promising way to improve those payments. When asked about stablecoins, nearly 90% of banks identified them as “an opportunity to make cross-border payments more efficient.”

Fiat-based cross-border payment systems are developing rapidly. However, there are significant hurdles to achieving global reach, especially data exchange, as only around 70 countries have adopted the financial messaging standard known as ISO20022. The DMI report assures that “regionally integrated payment networks offer an exciting prospect.” Still, 80% of African cross-border transactions are processed off the continent. In general, payments are “unlikely to be a ‘winner-takes-all’ kind of fight,” the report said. “The variety of payments systems will grow, creating competition and diversity in the marketplace.”

#Live: Sonja Davidovic, @BIS_org: It’s truly very difficult to determine what the impact of a #CBDC on #financial stability might be. It’s not an easy task to design these #technologies properly to avoid adverse impacts. https://t.co/V0bbfnZZ3a

— OMFIF (@OMFIF) December 8, 2022

Cryptocurrency and stablecoins are making their greatest strides in emerging economies, as they offer the advantages of disintermediation (which enables faster settlement across time zones), cost savings and accessibility, but have the potential downsides of volatility and unreliability. In the authors’ opinion:

“Vulnerable nations should invest in bringing down the cost of remittances and broadening access to financial services to reduce the exposure of vulnerable economic groups to volatile and unsafe cryptocurrency products.”

Finally, the report looks at the metaverse from a payments perspective, calling it “first and foremost, a model for a digital economy.” In the metaverse, cross-platform interoperability is key and will likely require “major changes to business models.” In turn:

“Developing the infrastructure to make metaverse payments stable, secure, interoperable and free from financial crime will have a huge impact on the broader payments landscape.”

The report cites a Citi estimate that the metaverse addressable market could reach $13 trillion.

Crypto’s adaptability, openness key to ideal monetary system, say BIS execs

Some of the biggest flaws preventing present-day cryptocurrencies from mainstream adoption, pointed out by the BIS execs, are bottleneck congestion in DeFi and the reliance on volatile assets.

Governments across the globe see central bank digital currencies (CBDC) as a means to improve the existing fiat ecosystem. Cryptocurrency’s technical prowess supported by the central bank’s underlying trust is key to enabling a rich monetary ecosystem, suggests an International Monetary Fund (IMF) publication.

“Digital technologies promise a bright future for the monetary system,” reads the publication attributed to IMF deputy managing director Agustín Carstens and BIS executives Jon Frost and Hyun Song Shin.

A BIS study from June revealed that cryptocurrencies outdo fiat ecosystems when it comes to achieving the high-level goals of a future monetary system.

Some of the most significant flaws preventing present-day cryptocurrencies from mainstream adoption, pointed out by the BIS execs, are bottleneck congestion in decentralized finance (DeFi) and the reliance on volatile assets.

Both wholesale and retail CBDCs can potentially inherit abilities from the crypto ecosystem that benefit end users, the post highlighted:

“By embracing the core of trust provided by central bank money, the private sector can adopt the best new technologies to foster a rich and diverse monetary ecosystem.”

It further recommended central banks utilize innovations such as tokenization to allow purchases using multiple fiat currencies — further benefiting merchants and customers.

The IMF’s gloomy forecast predicting a global economic slowdown raised concerns about an incoming recession in the crypto markets. Cointelegraph previously reported that Bitcoin (BTC) markets were likely to recover when the uncertainty about the current state of the economy and geopolitical tensions are resolved.

However, the IMF pointed out that the various liquidations, bankruptcies and losses at major firms like Celsius, Three Arrows Capital and Voyager Digital Holdings had only a minor impact on traditional financial systems.