24/7 multiple CBDC network could save global corporates US$100b yearly: whitepaper
GLOBAL corporates could save a cool US$100 billion annually with an "always on" multi-currency central bank digital currency (mCBDC) network that makes round-the-clock payments around the world.
This stands for an 80 per cent reduction in transaction costs, a fresh whitepaper on CBDCs by JPMorgan and Oliver Wyman showed.
They estimated that of the nearly US$24 trillion in wholesale payments that moved across borders each year, global corporates incur over US$120 billion in total transaction costs. This excludes potential hidden costs in trapped liquidity and delayed settlements.
Corporates now mostly rely on correspondent banking networks to facilitate cross-border payments, but this approach results in high transaction costs and long settlement times. On average, each transaction takes about two to three days to clear.
The current pain points corporates face in cross-border transactions are mainly due to gaps in the correspondent infrastructure setup and the lack of legal, regulatory and operational consistency across multiple jurisdictions, the researchers said.
"The correspondent banking system that underpins cross-border transactions today is essentially 40, 50 years old. Imagine the innovation you have personally experienced with your own iPhone in the last 10 years," Jason Ekberg, Oliver Wyman's corporate and institutional banking partner told The Business Times.
"Correspondent banking hasn't necessarily evolved at that pace. The infrastructure hasn't kept up with technology innovation," he said.
For one thing, the current setup involves sequential payment processing across multiple intermediaries, each with different operating hours, messaging standards, and pre-funding requirements.
This leads to uncertainty and a lack of transparency in payment processing, in addition to balances trapped in nostro/vostro accounts.
"Imagine the simplicity you have in Singapore, with using a phone number to pay somebody instantly. Why can't cross-border payments be like that?" Ekberg said.
And while there have been several initiatives in recent years led by private-sector players to resolve these pain points, they have yet been able to realise a truly scalable, seamless interoperable solution.
An mCBDC model, where a single platform serves as a shared settlement platform for multiple jurisdictions, is best positioned to achieve such a solution. Such a model will feature simultaneous settlements, 24/7 infrastructure availability, and shorter transaction chains.
In estimating cost savings, the researchers assume average transactions would come down from US$27 involving two correspondent banks to US$5 in an mCBDC world, thus arriving at a 80 per cent reduction.
There are issues to be thought through in designing such a structure. One includes its ability to support credit extensions, said Naveen Mallela, global head of coin systems at Onyx by JPMorgan. Mallela noted that nearly 20 per cent of all cross-border transactions rely on intraday credit, given the time difference between payments and collections.
Some rules also have to be established among participants, such as agreement on when the settlement of funds becomes final and irrevocable, agreement on interest-bearing schemes, and alignment on privacy settings.
It is likely that central bank-issued money and commercial money will coexist in an mCBDC world. mCBDC solutions could also present new opportunities for commercial banks that could tap their in-house technological capabilities to participate in the infrastructure build.
Mallela cited the example of Partior, a joint venture between JPMorgan, Temasek and DBS. It now operates as a commercial bank-driven infrastructure, with US dollar settlement services provided by JPMorgan and the Singdollar equivalent by DBS.
"We see the development of the infrastructure for mCBDC networks starting with private sector-led initiatives such as Partior," he said. "Once such initiatives deliver proven technology at scale, we see central banks coming on board, leveraging the same infrastructure to issue central bank digital currencies."
Read more:
