Is the world heading into a digital currency future?

IS THE world taking that great leap forward into a digitisation future towards official digital currencies?

The Innovation Hub of the Baselbased Bank for International Settlements (BIS), the gatekeeper of the global banking system, often dubbed the “Central Banks’ Bank”, recently took a major step in that direction “to test the use of central bank digital currencies (CBDCs) for international settlements”.

Codenamed Project Dunbar, the initiative is led by the Innovation Hub’s Singapore Centre and four of the world’s most stable central banks – Reserve Bank of Australia, Bank Negara Malaysia, Monetary Authority of Singapore, and SA Reserve Bank (SARB).

Project Dunbar aims to develop prototype shared platforms for cross-border transactions using multiple CBDC platforms, which “will allow financial institutions to transact directly with each other in digital currencies issued by participating central banks, eliminating the need for intermediaries and cutting the time and cost of transactions”, according to Andrew McCormack, head of the centre.

Given the instant and global reach of digitisation, accelerated by the impact of the Covid-19 pandemic,Project Dunbar is confined to CBDCs in their role in global payment solutions.

The wider market of digital currencies, including the cornucopia of cryptocurrencies, digital assets, exchanges and banks, are in a fragmented state of a digital Wild West bereft of necessary oversights, with central banks scurrying to learn on the job and how to rein in the exuberance and excesses with some semblance of regulatory order.

According to BIS, 60% of central banks are experimenting with CBDCs.

Cross-border payments are essential for settlement of global trade, workers remittances, e-commerce, tourism receipts and even sovereign debt obligations. Multi-currency and cross-border payments are more complex, adding to risks and costs.

Most are settled through correspondent banking arrangements, traditionally through banks in New York for dollar transactions, in London for sterling transactions and Frankfurt for euro transactions. But this was a highly neo-colonial process, given that most major correspondent banks are Western-owned, dictating price and terms.

In an era of the “Financial War on Terror”, sanctions and the US Patriot Act, which gives US authorities transnational jurisdictional sway over foreign nationals, especially when transactions involve the US dollar, this process is exacerbated. This despite the emergence of banking majors from China, Japan, Gulf Co-operation Council states and Singapore.

Will CBDCs be the great equaliser of cross-border payment solutions and democratise the whole process? Moody’s VP Stephen Tu maintains that “incentives to develop CBDCs have gained in strength since the outbreak of the pandemic, and if carefully implemented could produce large economic gains by increasing financial inclusion and reducing financial friction within the system”. To him, it could level the playing field for public money and provide citizens direct access to a faster, lower-cost digital form of money.

CBDCs would also give traditional banks a run for their money by dislodging them from their role as intermediaries in the financial system. As digital money becomes cheaper, faster and more inclusive and digital migration accelerates, banks and their historic credit risk skills and privileged access to customer data will likely wane as technology firms access new kinds of credit-relevant alternative data.

The danger is replacing one oligopoly with another. Digital money has the potential to transform the financial sector, with emerging markets standing to gain most. The World Bank estimates a $16billion (R227bn) a year boost to remittances to low-income countries simply on lower fees. Today, there are a billion registered mobile money accounts across 95 countries, with close to $2bn transacted every day. Sub-Saharan Africa is a leader in mobile money, accounting for almost half of mobile money accounts worldwide.