The Bank of International Settlements (BIS) is testing ways to slash the time required to process cross-border transactions from five days to mere seconds — by using CBDCs.
Tests reveal the central bank digital currencies (CBDCs) — digital forms of fiat currencies — can circumvent complex requirements under which payments are passed through a network of banks with ease.
BIS adds that CBDCs can reduce the high costs of cross-border transactions by 50%.
Generally, international banks (without a network in a given country) remit payments through a local bank acting on its behalf.
But the process is tedious, complex, and long. Forcing banks to withdraw from some markets and severe ties with risky partners. Thanks to high costs and compliance issues.
CBDCs can foster positive trade and economic development
Benedict Nolens, head of Hong Kong-based BIS Innovation Hub, says CBDCs can foster cheaper and faster cross-border transactions especially to countries with poor banking systems. “They [CBDCs] would be positive for trade and economic developments”.
Currently, China is testing retail-focused CBDCs as a way to replicate cash in circulation. Other international central banks and governments are also testing “wholesale CBDCs” to enhance the internal workings of their financial systems.
The BIS testing of CBDCs, backed by the Central Banks of Thailand and Hong Kong, synchronized transactions data across customers in the payment chain.
By doing so, liquidity management, compliance, and foreign exchange operations slashed their cross-border payments costs by up to 50%.
The central banks of China and the United Arab Emirates are also embracing CBDCs in a project aptly known as “mBridge”.
Benefits of the mBridge Project
Joint research between the central banks of China, Thailand, and UAE on CBDCs shows potential in reducing transaction costs and enhancing speeds of cross-border payments.
In a recently published report, the mBridge Project can help central banks globally to better manage the liquidity of their CBDCs, monitor flows and balances of CBDCs, and improve privacy levels of transactions — even automate compliance concerns.
The Hong Kong Monetary Authority (HKMA) together with BIS and the central banks of China, UAE, and Thailand continue to broaden and deepen the research of CBDCs, which could continue to the global exploration of using the digital fiat currencies as a way to process cross border transactions with ease.
The next step for CBDCs is to develop the mBridge project prototype that will provide cross-border payment solutions all over the world.