RBA, BIS and other central banks move forward on digital currencies for ‘cheaper, faster’ global payments

The RBA, alongside the BIS and other central banks, has examined the use of digital currencies to make cross-border payments cheaper, faster and safer.

The RBA has taken part in an international project examining the use of central bank digital currencies to make cross-border payments cheaper, faster and safer.

An international project examining the use of central bank digital currencies to make cross-border payments cheaper, faster and safer has shown a viable path forward, according to the Bank for International Settlements.

The initial phase of the research project, undertaken in late 2021 by the BIS and the Reserve Bank of Australia, alongside central banks in Malaysia, Singapore and South Africa, developed prototypes to allow central bank digital currencies (CBDCs), essentially digital banknotes, to be exchanged on an international platform.

Titled “Project Dunbar”, it demonstrated a means of modernising cross-border transfers, proving that the concept of multi-CBDCs was technically viable, even as it raised more questions than answers, the BIS said on Tuesday.

“A common platform is the most efficient model for payments connectivity but is also the most challenging to achieve,” said Andrew McCormack, head of the BIS Innovation Hub Centre in Singapore.

“Project Dunbar demonstrated that key concerns of trust and shared control can be addressed through governance mechanisms enforced by robust technological means, laying the foundation for the development of future global and regional platforms.”

Unlike domestic payments, there is currently no single international platform for cross-border payments and settlements leveraging these digital banknotes. Instead, the correspondent banking model is used, with banks holding foreign currency accounts with each other, meaning multiple correspondent banks are involved in a single transaction, driving up costs and slowing down settlement.

On a multi-CBDC common platform, each participating central bank would issue its own CBDC in its own domestic currency.

“Participating commercial banks would then hold these CBDCs directly, gaining access to foreign currencies without the need for accounts with correspondent banks.

“As all participating banks could potentially hold the different CBDCs directly, they would be able to transact directly with each other in the participating currencies,” the BIS said in a 63-page report.

Through the use of multiple CBDCs, the cost of transferring money around the globe could be slashed as intermediaries are cut out and settlement processes are simplified.

Project Dunbar provided valuable insights into the opportunities and challenges associated with developing a shared platform to enhance cross-border payments, Reserve Bank assistant governor for the financial system, Michele Bullock, said.

“Allowing entities to directly hold and transact in CBDCs from different jurisdictions could reduce the need for intermediaries in cross-border payments, but it would need to be done in a way that preserves the security and resilience of these payments.

“While there is clearly more work to be done in thinking about the feasibility and design of multi-CBDC platforms, the findings from Project Dunbar provide a good platform for future work in this area.”

The BIS also noted the potential for cross-border payment processes to be automated through smart contracts.

Access to multiple CBDCs, jurisdictional boundaries and governance were among the challenges identified through the research.

“A shared platform implies a level of universality – with features and capabilities that are common and available to all participants,” the BIS report noted.

“At the same time, an adequate level of autonomy and control over each jurisdiction’s domain areas is required to build greater confidence among the equal participants of a shared platform.”

The complexities around multiple central banks sharing critical financial infrastructure and the differing requirements across jurisdictions may mean a series of regional platforms would be more likely than a global platform, the group added.

“This naturally leads to considerations around how it may be possible to connect these individual regional platforms to realise synergies such that participants transact directly across jurisdictions, including via the lower-volume corridors.”

The report comes as the Federal Government assesses the feasibility of a retail central bank digital currency in Australia, and a day after Commonwealth Bank said CBDCs would be a major focus for the bank this year.

Treasurer Josh Frydenberg on Monday released a new consultation paper on the cryptocurrency industry, seeking feedback on digital asset regulation, including input on a licensing and custody regimen, and the classification of digital tokens, to provide more certainty to crypto providers, consumers and regulators.

Originally published as RBA, BIS and other central banks move forward on digital currencies for ‘cheaper, faster’ global payments