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Public and private sectors must work together to improve cross-border payments: BoE’s Cunliffe

BoE's Sir Jon Cunliffe (right): highlighted the potential for 'atomic payments' and smart contracts during the BIS Innovation Summit panel session, which was moderated by the IMF's Tobias Adrian (left)

Public and private sectors need to work in tandem to enhance cross-border payments, the Bank of England (BoE) deputy governor has said.

Sir Jon Cunliffe was speaking at a Bank for International Settlements (BIS) Innovation Summit 2021 panel discussion focused on the extent to which the development of wholesale central bank digital currency (CBDC) – central bank digital money issued directly to commercial banks – has the potential to improve cross-border payments.

The session – entitled ‘Fast, cheaper cross-border payments: is wholesale CBDC the answer?’ – sought to pick up on themes from the Financial Stability Board’s ‘Enhancing Cross-Border Payments’ roadmap presented to the G20 last October. The past six months have seen the progression of numerous international CBDC research collaborations in the cross-border space, for example, the central banks of China and the United Arab Emirates (UAE) recently teamed up with the equivalent authorities in Hong Kong and Thailand.

“Newer, tokenised forms of wholesale CBDC are starting to emerge at least in experimental form, and they may offer a great deal in terms of improving the speed, reliability and functionality of payments,” said Cunliffe, who prefaced his remarks by saying that “strictly speaking, wholesale CBDC exists at present because wholesale settlement in central bank money is digital just about everywhere”.

So-called ‘atomic payments’ – when the transfer of two assets is linked in such a way as to ensure that the transfer of one asset occurs if (and only if) the transfer of the second asset also occurs – and smart contracts were referenced by Cunliffe as two particularly interesting areas.

‘If we don’t work together, we won’t get there’

Many central banks, including the BoE, are renewing their existing digital wholesale payment systems by upgrading their real-time gross settlement (RTGS) and other infrastructure while researching the possibilities of emerging areas such as CBDC, Cunliffe said.

But wholesale CBDCs have the potential, he said, to “make a big difference, potentially, depending how they are designed, to full 24-7 operation and seamless transaction, to enabling broader access to settlement and to creating interoperability between different wholesale payment systems”.

Upgrading current systems will drive progress towards the same goals but, Cunliffe said, wholesale CBDCs “may offer a much more effective way of doing that with the prospect of greater functionality – things like atomic payments and smart contracts”.  

“We [the BoE] are engaging with wholesale CBDC ideas and proponents, and we hope that by bringing the two together [improving existing systems while taking up new technologies] we can ensure that we can move forward with what we have but actually take advantage of the future,” Cunliffe told the online audience.  

“It may be that one form [of payment system] comes to dominate,” he later said, looking ahead. “But it’s much more likely that for the foreseeable future there will be different payment systems and different rails, and getting a payment from ‘A’ to ‘B’ may involve switching between payment rails at some point, out of the wholesale system into the retail system or between rails that don’t currently exist.”

Cunliffe concluded by saying that progress must be driven by public and private sectors together, adding that “if we don’t work together on these changes, we won’t get there.”

Facebook’s Diem is ‘wake-up call’

Sveriges Riksbank first deputy governor Cecilia Skingsley described wholesale CBDC as “a possible solution or one of the solutions but not the solution” to the discussion’s question, adding that it was “not the objective to get to at any price”.

More broadly, Skingsley described the current reality of making international payments as “not up to scratch”, particularly for people making payments from developed countries to developing countries. “If I would like to send €100 from Sweden to someone in Uganda who doesn’t have a bank account I’d have to pay as much as €50 [in charges],” she said.

Skingsley said public authorities worldwide should “appreciate” private-sector digital currency initiatives such as Facebook’s Diem (formerly Libra) as a “wake-up call for rethinking how we facilitate competition and efficiency”.

“In my view, [if] choosing between cost and speed [of international payments], I think cost is the most important thing to address,” Skingsley added. “But if we, on the public-sector side, manage to provide the private-sector side with enough competition I think it will solve both things.”

Advocating for the public sector to seize the initiative – “sometimes the public sector has to take the torch and run with it” – she said that she could ultimately see CDBCs playing “very different roles in their respective economies”.

“There are countries with financial inclusion challenges where a CBDC, rightly designed, could actually be of great importance,” she said. “In other countries where financial inclusion is not such a problem today, or may not be a problem going forward, their CBDC (should they decide to launch one) would be more of a sort of sideshow, more of a default option that you use for resilient purposes, perhaps for government-to-people transactions.”

Programmatic possibilities

The discussion, which was moderated by the International Monetary Fund (IMF)’s Tobias Adrian, featured two further panellists: Umar Farooq, chief executive of JP Morgan’s recently created Onyx business unit, which oversees the global bank’s digital currency work; and Javier Perez-Tasso, chief executive of interbank payments network SWIFT.

Farooq described CBDC as “one very exciting way” that payment operating systems, which have not previously seen a “tremendous amount” of innovation, could evolve. But he added: “There are also other ways – fundamentally changing RTGS systems to make them real-time.”

Saying that “real power” could be found in “the programmability of the platform” itself, he continued: “We can make potentially money smart – so, it protects itself from money laundering, versus ourselves [banks] having to do [check] identity. When you start combining those factors you can create something very powerful and very futuristic. I believe we’ve only scratched the surface.”

Perez-Tasso described CBDCs’ big attraction as combining the exchange of value and settlement into one digital process, which he called “very promising”. But he added that CBDCs do not, per se, resolve “all friction points” in payments chains, for example, know-your-customer (KYC) controls.

“But I do see an exciting time, as private- and public sector build out on infrastructure for CBDCs and beyond,” Perez-Tasso said. “At SWIFT we are asking ourselves how we might facilitate interoperability between digital fiat and token-based currencies and, as well, the underlying technologies that support them, whether they are DLT [distributed ledger technology], APIs [application programming interfaces] or others. For us, getting the foundations right of the bigger picture is fundamental.”

REGISTER NOW ‘Delivering Central Bank Digital Currencies (CBDCs): Exploring the Technology Challenge’ upcoming Global Government Fintech webinar, supported by our knowledge partner Amazon Web Services, on 22 April 2021

FURTHER READING Check out our news report from the BIS Innovation Summit’s opening session, ‘How can central banks innovate in the digital age?’, which featured US Federal Reserve chairman Jerome Powell, Deutsche Bundesbank president Jens Weidmann and BIS’s own general manager, Agustín Carstens