Central Banks of UK, Singapore, and Canada Are Positive for Having CBDCs for Cross-Border Settlements

18. Nov 2018 Posted by Akolkar B on News

In a jointly published report, the central banks of U.K, Canada, and Singapore that having CBDCs can help these institution to counter the challenges of making instant and cheaper cross-border payments. Furthermore, the three banks say that CBDCs will also help to reduce counterparty credit risk for participants in cross-border interbank payments and settlements.

The report suggests that the central banks can issue either a retail CBDC or a wholesale CBDC (W-CBDC). The W-CBDC is furthermore classified into other three models with its implementation depending on its acceptability and geographical reach.

  • The first model of W-CBDC talks about its transfer and exchange within the local market and under the specific country’s jurisdictions. Central Banks can then offer wallets to hold the W-CBDC in the local fiat currency. In such case, commercial banks would require to open wallet with different central banks issuing those currencies they wish to hold.
  • The second model involves issuing a currency-specific W-CBDC which can be exchange and transferred beyond the local jurisdictions. This model requires central banks to offer multiple W-CBDCs. Herein, the commercial banks can hold several W-CBDC wallets with their domestic central bank.
  • The third model involves having a universal W-CBDC. This CBDC shall be backed with multiple fiat currencies which can be exchanges and transferred within all the participating jurisdictions. However, the report notes some downside to these models. The report notes: “… because it requires backing by a basket of currencies, the W-CBDC in this model is subject to volatility, potential manipulation and investment activity. Additionally, our analysis indicates that the pace of adoption could be hampered by the complexity of adding new currencies into the basket backing the W-CBDC.”

Overall the crux of this report is to bring new and innovative solutions to replace the existing payment and settlement systems which are turning out to be laggard due to multiple intermediaries, fragmented standards, and poor availability.

Earlier this week while speaking at the Singapore FinTech conference, IMF Chief Christine Lagarde asked central banking institutions to explore the concept of having central bank digital currencies (CBDC). Lagarde said that CBDCs can help to curb the anonymity of other decentralized crypto assets. While at one end it can foster innovation, it will also help to create a safer and clean environment for people to make low-cost and instant global payments.