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A top official at the Monetary Authority of Singapore (MAS) has said that central bank digital currency (CBDC) could deliver low-cost and efficient cross-border payments, but it is not the only solution on the table.
Speaking at the International Symposium on Central Bank Independence this month, Ravi Menon, managing director at the MAS, said the current state of cross-border payments is “unacceptable”.
During a forum hosted by the Riksbank in Stockholm, Menon said that CBDC is among the leading candidates for solving long-standing pain points in cross-border payments, but it is by no means the guaranteed winner.
“Money today does not function as an efficient means of exchange in a cross-border setting, because the charges, the inefficiencies and the risks that go with a cross-border payment and settlement process are just not acceptable,” said Menon.
Citing an anecdote from Roberto Campos Neto, governor of the Central Bank of Brazil, Menon said that the fastest for Campos to send sterling to a counterpart in London is to convert reais into cash, put them in a suitcase and travel by plane.
“That is faster and more efficient than the correspondent banking network that we have today, for which I think central banks and commercial banks have to take responsibility,” he said.
In response, Menon proposed three possible solutions: linking up faster payment systems; linking up real-time gross settlement (RTGS) systems; or transacting using wholesale CBDC.
Using faster payments to send a transaction is generally free of charge and there is no charge to receive a transaction via faster payments.
If this could be replicated internationally, Menon says it would create a “seamless” experience for cross-border payments.
However, as banks generally charge a 3 to 4 percent commission to send a cross-border payment, any attempt to supplant the current system threatens a long-standing source of revenue for them.
“It will not happen naturally, because the banks earn economic rent from this inefficiency, and so central banks need to step in to link up their payment systems,” said Menon.
The second option, linking up RTGS systems, would enable instantaneous payments and settlements for cross-border transactions.
However, to create such linkages on an international scale, Menon said the world would need a “global central bank” to intermediate the flows — an unlikely feat of cooperation and technical infrastructure.
The third option, which appears to be Menon’s preference, would be multi-currency wholesale CBDC platforms.
Once again, this would allow payments to be made and settled instantly, as has been demonstrated by the Bank for International Settlements’ (BIS) Innovation Hubs in Hong Kong, Singapore and Switzerland.
Although cross-border payments is a “problem that needs to be solved”, and central banks “need to be at the heart of it”, Menon said central banks cannot do it alone, as ultimately funds must still flow from one commercial bank to another.
“We need banks, central banks and payment service providers (PSPs) — who may be non-banks — to be involved in this,” said Menon. “This is interdependence at its core.”
Programmability, or lack thereof
Continuing the theme of “inefficiencies”, Menon said the second use case where today’s money is not satisfying current demands or potential is in programmability.
“If you think about money as a set of instructions embedded in a software program or code that executes a function, then it changes the paradigm. And that's what programmability does,” said Menon.
According to Menon, asset tokenisation is one of the “key innovations” that is enabled by the combination of programmability and distributed ledger technology (DLT).
“You can tokenise anything and give it a digital identity, place it on the distributed ledger, and then you're able to transfer these assets seamlessly,” he said.
“In Singapore we call it ‘purpose-driven money’, where the money comes with an embedded code which executes the transfer of that money for a particular purpose.”
As an example, Menon suggested that in future money given to a charity could be programmed to be spent only on certain items or services, but not on others.
Similarly, if a government wanted to inject cash into the economy, or channel it to lower-income groups in times of high inflation, it could be programmed so that it can be spent on certain items, but not on others.
Although these ideas are typically associated with retail CBDC, as covered by VIXIO last week, Menon said that CBDC is not the only delivery mechanism for programmable money.
Once again, Menon said there are three options on the table: retail CBDC; private stablecoins; and tokenised deposits.
By far the most difficult one of these to regulate, according to Menon, would be private stablecoins, as they must be fully backed and fully secured at all times.
“The fact is, today most stablecoins are not that,” said Menon. “But it is conceivable that private stablecoins can be regulated in that manner.”
If this option were to be pursued, Menon said it would have to include rules against leveraging stablecoins for purposes other than spending, similar to rules that prohibit narrow banks from lending out deposits.
Tokenised deposits would be a more straightforward way of achieving programmable money, according to Menon, as bank customers could opt to program certain segments of their bank balance for particular purposes.
Menon said he believes there is “space” in the future financial and payments landscape for all three options to co-exist, but getting there will not happen naturally.
“I think the future of money and payments is one where there's going to be a lot more interdependence among central banks, banks and payment service providers,” he said.
“Central banks need to lean in because there is a larger social purpose of inclusion, increased economic efficiency, and the market will not provide this naturally, but the central bank can't operate independent of the market in arriving at these outcomes.”
