The ‘holy grail’ of cross-border payments is within reach in 10 years, according to a paper published by the European Central Bank (ECB).
Visions of how to achieve this holy grail – defined as a solution allowing cross-border payments to be immediate, cheap, universal and settled ‘in a secure settlement medium’ – are examined in the paper, which concludes that two routes could have highest potential for larger cross-border payment corridors.
The interlinking of domestic instant payment systems and future central bank digital currencies (CBDCs), both with a ‘competitive’ FX (foreign exchange) conversion layer, are identified as the most promising avenues.
‘Towards the Holy Grail of Cross-Border Payments’ is the title of the working paper, which is co-authored by Ulrich Bindseil, who has worked for the ECB for more than two decades and is currently director-general of the Frankfurt-based authority’s Directorate General Market Infrastructure and Payments; and George Pantelopoulos, an economics lecturer at Newcastle Business School in Australia.
For the holy grail to be reached, however, the duo write that ‘strong progress’ is required on anti-money laundering/combatting the finance of terrorism (AML/CFT) compliance to ensure ‘straight-through-processing’ (STP – automated processing without manual involvement) ‘for the large majority of cross-border payments’.
En route to the holy grail
The importance of trends helping the achievement of the holy grail are outlined in the paper, including the ‘rapid’ fall in the costs of global electronic data transmission and computer processing; new payment systems technology (allowing for instant payments); innovative concepts such as the interlinking of payment systems including a currency conversion layer and CBDC; and what it describes as ‘unprecedented’ political will and global collaboration such as through the G20.
It states that the interlinking of domestic instant payment systems and CBDCs may have the highest potential to deliver the holy grail as they combine technical feasibility; ‘relative simplicity’ in their architecture; and ‘maintain a competitive and open architecture by avoiding the dominance of a small number of market participants who would eventually exploit their market power’. Moreover, monetary sovereignty is preserved and the ‘crowding out of local currencies is avoided due to a FX conversion layer at the border (which does not hold for Bitcoin and global stablecoins)’.
But Bindseil and Pantelopoulos caution that challenges must be tackled to set up these solutions, including: the organisation of an ‘efficient competitive FX conversion layer conducive to narrow bid-ask spreads applying to the FX conversion’; the global addressability of accounts; and achieving the same degree of legal certainty for interlinked cross-currency payments as for domestic payments.
In terms of AML/CFT compliance, the authors acknowledge the G20’s pre-existing focus, as well as referencing ‘Project Nexus’, the Bank for International Settlements (BIS)/Monetary Authority of Singapore project launched last year to explore how nations could fully integrate their retail payment systems into a single cross-border network with ‘minimal adaptations’.
Bitcoin ‘least credible’ route
The potential of modernised correspondent banking, emerging cross-border fintech solutions, Bitcoin and global stablecoins are also covered in different sections of the 59-page paper. For each, settlement mechanics are explained and an assessment is provided on its potential to be the holy grail.
The authors rate Bitcoin as ‘least credible’. Traditional correspondent banking, cross-border fintechs and global stablecoins take an intermediary place, but may all ‘contribute to improvement’ over the coming years, the authors concluded. From a public policy perspective, stablecoins ‘appear somewhat more problematic than the other two options as they aim at deep closed-loop solutions, market power and fragmentation’, the paper notes.
Cross-border fintech solutions have already delivered in terms of offering cheaper-than-ever cross-border payments for certain currencies and use cases, the authors acknowledge, pointing out that they have ‘added competition and as a consequence have contributed to an overall decline in cross-border payment fees in the segments they serve’.
But the authors assert that some fintech companies’ ‘very attractive offers might be unsustainable in the long run, as if it were to be part of their aggressive strategy to increase their customer base, future fee increases would be more or less unavoidable if they were to maintain profitability.’
But the CBDC route, too, is hardly a fait accompli. Most major economies, for example the US, Eurozone and UK, are all yet to commit to launching CBDCs. ‘Even if there are no reasons to doubt the commitment of central banks to prepare for CBDC issuance, there is still considerable work ahead,’ the authors acknowledge.
*** The BIS-housed Committee on Payments and Market Infrastructures (CPMI) on 29 July invited comments from commercial banks, fintech companies and other interested parties on a consultative report, ‘Facilitating increased adoption of payment versus payment (PvP)’ – issued as part of the G20 cross-border payments programme. Deadline for responses on the 35-page report is 30 September 2022.
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