Moody’s: Central bank digital currencies will cut remittance costs

Central bank digital currencies (CBDCs) are likely to lower costs for people sending remittances and cut settlement and counterparty risks for banks in cross-border transactions, a report by Moody’s Investors Service has said.

The unravelling of the cryptocurrency market and the tumbling value of cryptocurrencies has strengthened arguments in favour of more stable digital assets, such as CBDCs, the rating agency said.

CBDCs are the digital form of a country’s money issued by its central bank.

They are similar to cryptocurrencies, except that their value is fixed by the monetary authority and equal to the country’s fiat currency. CBDCs are expected to provide some middle ground for the highly volatile cryptocurrency market.

They reduce the risks associated with using cryptocurrency and provide a stable means of exchanging digital assets.

Interoperable CBDCs would be likely to lower costs for personal remittances abroad and for merchants, especially importers and exporters, Moody’s said.

“The capacity of CBDCs to reduce the costs, wait times and settlement risk associated with international payments would be particularly beneficial to small businesses and start-ups, but also to established corporates,” Moody’s said.

Last week, the UAE Central Bank said it had started implementing its digital currency strategy, Digital Dirham.

It signed an agreement with Abu Dhabi’s G42 Cloud and digital finance services provider R3 to be the infrastructure and technology providers, respectively, for the implementation of its CBDC, the regulator said on Thursday.

Most central banks are exploring the feasibility of a national digital currency, while some, like China, are in pilot phase, Moody’s said.

Bahamas, Nigeria and Jamaica launched their central bank digital currencies in 2020, 2021 and 2022, respectively.

“Concerns that the emergence of privately owned digital cryptocurrencies and stablecoins could eventually displace official currencies have pushed central banks to consider issuing their own national currencies in digital form,” Moody’s said.

“Such CBDCs could be retail or wholesale. A retail CBDC would allow individuals to transact in central bank money digitally, which is currently not an option.”

Retail CBDCs would have a critical advantage over privately owned digital currencies in that they would provide the same rapid means of payment and the formal backing of the central bank would remove any credit risk.

A widely accessible, reliable retail CBDC would support economic growth by speeding payment transaction times, reducing transaction costs and fostering financial inclusion.

Direct and immediate exchange of retail CBDCs in different currencies could also be achieved by individuals in different parts of the world, leaving banks and other financial intermediaries completely or partly out of the process, the agency said.

However, Moody’s said that if the CBDC payment system is widely adopted, it would reduce banks’ profits from payments, correspondent services and likely also from foreignexchange transactions.

Although banks would benefit from the elimination of settlement risk from payments and from developing more efficient digital systems, they would be likely to lose part of their revenues from cross-border payments, especially if governments insist that efficiency gains are passed on to customers, the agency said.