With the world now accustomed to completing business transactions in three seconds or less, there is an opportunity for bankers to consider central bank digital currencies as a platform for innovation and a new way to accelerate cross-border payments.
A report by Juniper Research on CBDCs and stablecoins found that the ‘value of payments via CBDCs will reach $213bn annually by 2030; up from just $100m in 2023. This radical growth reflects the early stage of the sector; currently mostly limited to pilot projects.’ To understand the growth predicted for CBDCs, let’s examine the problems they can solve.
CBDCs offer similar advantages to the capacity of central bank money for settlement finality, liquidity and integrity. This makes digital currencies backed by central banks more attractive to businesses and consumers. They allow central banks and governments to bring the level of innovation to traditional domestic markets as seen by the wider cryptocurrency industry. The opportunity for central and commercial banks to work with technology providers to facilitate cross-border transactions will allow banks to acquire new consumer and business customers
CBDCs enable low-cost, virtually instant settlement of both domestic and cross-border payments, reducing risk and improving the user experience. Digital currency technology, like Ripple’s CBDC Platform, introduces instant settlement and capabilities that are not possible with legacy technology. This helps ensure that payments are quickly sent and received in local currency on either side of a transaction while providing a platform for further innovation.
With the use of blockchain technology, a digital ledger efficiently maintains an audit trail of financial transactions, lowering operational costs and reducing carbon dioxide emissions by minimising energy usage. An example of this is the energy-efficient XRP ledger technology, which stands in stark contrast to the energy used by cryptocurrencies like bitcoin. CBDCs also eliminate the high costs of printing and distributing fiat currency, thereby conserving paper, energy and lowering transportation costs that fiat currencies can
require.
Cross-border payments currently have high costs and slow transaction speeds. In traditional banking systems, banks may charge consumer and merchant fees for handling transactions, along with account fees and ATM surcharges. In a blockchain-based system using CBDCs, transaction fees could be dramatically reduced by the use of peer-to-peer wallets without the need for intermediaries to perform
settlement-related activities.
As CBDC pilots evolve, it is clear that there is no single magic bullet to develop and accelerate cross-border payments. There are risks inherent in using CBDCs for these transactions, including the translation of the values of some currencies into digital form and perfecting settlement times and interoperability in payments.
Through Ripple Payments, Ripple has significant experience in providing solutions across the world, enabling frictionless cross-border transactions, reducing risk and cost through harmonised standards.
In traditional bank systems, the complexities of cross-border payments have necessitated the use of third parties (such as payment networks and credit card companies) to facilitate the process. These third parties can charge high fees for their services in bridging disparate payment systems, while potentially having access to transaction data. As CBDCs can ensure that banks can make cross-border payments without intermediaries, this allows them to stop sharing data with third parties while reducing the cost of cross-border payments for everyone.
Finally, interoperability between blockchains and currencies is still evolving, but CBDC technology can allow for interoperability between disparate currencies. Financial institutions and technology providers must learn as they plan and execute pilots. The good thing about digital currency technology is that it can allow organisations to be nimble when making changes while providing greater governance on the changes. This allows central banks to implement much-needed adjustments throughout the production lifecycle.
From the few existing and completed CBDC pilots, we can see that the challenges include interlinking systems, achieving regulatory compliance between jurisdictions and incorporating effective business goals into the technology design.
A key differentiator of the Ripple CBDC Platform is the ability for central banks and governments to adapt their currency plans through each stage of the CBDC production lifecycle. Adapting CBDC plans to align with the goals of a specific country requires this type of flexible solution and business planning before a pilot commences. As more countries work to adopt CBDC plans, new ways of executing and accelerating cross-border transactions should continue to evolve, helping central banks deliver value to consumers and businesses.
Anthony Ralphs is Director of Product Management for CBDCs, Ripple.
This article was published in OMFIF’s Future of payments 2023 report.
