In the domain of payments, there is always a serious debate regarding promoting innovation in the tech space. Hence, the discussion boils down to the innovation fostered through the private sector's efforts or publicly led initiatives from regulators and legislators.

Belonging from the bitcoin era, we've witnessed hundreds of digital coins being launched for the past several years as Diem looms (as part of Facebook's efforts, of course). BIS disclosed that central banks have a bit of catching up to do. The invasions created by the private sector might inspire central banks, especially the U.S. The approach is to bring the digital offerings to commercial and cross-border use cases or risk being out of the loop.

According to the sources of Reuters, Benoit Coeure, a former European Central Bank official, passed a warning on Friday (Sept. 10) that central banks are at risk of falling behind gambits like the ones undertaken by Facebook and its stable coin.

Cost Reductions

BIS reported costs associated with wholesale payments are challenging to measure and vary per bank and region. In addition, the average retail payment cost ranges from below 2% in Europe to over 7% in Latin America. In contrast, the average global cost of sending remittances is 6.4% of the amount sent.

The BIS examined the report regarding the series of tests conducted for cross-border transactions. It involved four central banks and leveraged blockchain in settling the payments in seconds rather than days (representing an 80% reduction), then cut half of the expenses.

Collaboration and/or Competition

According to the remarks, Central banks can ensure that well-designed CBDCs will be safe and neutral payment methodologies. In simple words, it serves as a common interoperable platform around which new payment ecosystems can organise. Accordingly, the digital fiat blueprint focuses on consumer use cases, public policy objectives, and technology. As stated earlier, Europe has positioned itself as a 'face of the future', and stakeholders contribute towards building fast payment systems and the privacy and security afforded by GDPR.

Apart from Europe, India is developing its digital currency framework, with a viable digital rupee on its way by the end of the year. Furthermore, Sweden ranks as the second country in the world to launch a CBDC, on the heels of the Bahamas last year.

Establishing a multi CBDC platform for international payments

A report published by BIS, 'Ithanon-LionRock to mBridge: Building a multi CBDC platform for international payments,' was contributed by the BIS Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People's Bank of China, and the Central Bank of the United Arab Emirates. Hence this project marks the first standard platform for multiple CBDC settlements.

Thereby, BIS observed three layers of technology tied to the platform after delving a bit into the technology deployed. Therefore, Layer 1 is acknowledged as the core layer, comprised of the blockchain ledger. Here the data persists, and the smart contract logic that implements functionality is programmed. The second layer is the application layer to provide access, routing and identity functions. At last, the third layer is the front-end layer, which interfaces with the core systems. The objective of the platforms is to enable the participants of each network to conduct fund transfers and foreign exchange transactions on a peer-to-peer basis. It dwindles settlement layers and numerous core cost components of corresponding banking.

Act fast or miss the digital payments boat

According to BIS, major central banks should now press ahead with digital currency projects to avoid falling behind the private-sector payment initiatives that are already taking root. Thus, corporate headway into digital payments like Facebook's Diem stable coin accelerated since the pandemic. In contrast, central banks are falling behind Big Tech when questioned regarding the future of cash in some countries. BIS advised the significant banks to roll up their sleeves and accelerate work on the nitty-gritty of CBDC [central bank digital currency] design. However, CBDCs will take years to be rolled out, while stable coins and crypto assets have already entered the market, which addresses the urgency to adopt digital currency.

EU sets its position in the CBDC race. Furthermore, the European Central Bank is looking into the design and potential launch of a digital euro. The desired goal of CBDC's intent is to preserve the best elements of the current systems while still allowing a safe space for upcoming innovation. It is high time for central banks to act now while the current system is still in place.

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Irene Asha Tirkey

Irene has completed her post-graduation in Integrated Marketing Communication from Calcutta Media Institute, Kolkata, India. Her key areas are blogging and content writing. She is in this industry for three years. Her interest areas include travelling listening to music, and painting.