Central bank digital currencies (CBDCs) are game-changers and can transform finance and banking as we know them today, the Bank for International Settlements (BIS) said in its latest report. The report focused on a CBDC project between China, Thailand, the United Arab Emirates and Hong Kong.
Known as the Inthanon-LionRock Project, it began in 2019 with the signing of an agreement between the Hong Kong Monetary Authority and the Bank of Thailand. They will later integrate the Digital Currency Institute of the People’s Bank of China and the Central Bank of the UAE in the third phase of the project, known as the mCBDC Bridge project or, in short, mBridge.
According to the BIS, the prototype the four worked on has shown great effectiveness, especially in cross-border remittances. The bank said it was able to improve the speed of cross-border transfers from days to seconds. It was also able to significantly reduce the associated costs, according to the report.
“This thus demonstrates the potential for faster and cheaper cross-border transfers for participating jurisdictions,” the report says.
He added: “The overall goal of the project throughout these three phases remains unchanged: to design and iterate a new efficient cross-border payment infrastructure that improves key pain points including high costs, low speed and operational complexities. . “
The report notes that the costs of cross-border remittances range from 2% in Europe to 7% in Latin America, with a global average of over 6%. Taking into account data obtained from the project and McKinsey’s existing market data, PricewaterhouseCoopers estimates that a CBDC solution could reduce transfer costs by up to 50%.
Speed is another big challenge a CBDC could solve, according to the BRI. Currently, cross-border remittances take up to five days to process. The mCBDC Bridge project was able to reduce this time to seconds.
In the near future, the BIS and participating central banks will work on developing the prototype into a production-ready solution. Legal, business, governance and political concerns are listed and analyzed as participants seek to focus on the use of production.
However, it’s not just the cross-border remittance industry that a CBDC can have an impact. A recent article from nChain described a new tool that can be activated by a retail CBDC, allowing central banks to better target inflation rates.
With an ever-changing global economy in which shocks like the COVID-19 pandemic devastates nearly every other sector, central banks can no longer rely on generalized monetary and fiscal policy toolkits. The use of electronic cashback rates, enabled by the CBDC, can allow these banks to stimulate the economy through consumer spending. These rates can be particularly critical when the interest rate hits the lower limit of zero, which in the current setup leaves little for central banks.
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