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Central banks in Australia, Singapore, Malaysia and South Africa will join forces to test the use of multiple central bank digital currencies (CBDCs) on a shared platform for cross border payments and settlements.

Led by the Bank for International Settlements (BIS) Innovation Hub in Singapore, Project Dunbar is aimed at allowing financial institutions to transact with each other in the digital currencies issued by participating central banks, cutting the time and cost of transactions, the BIS said.

The development, which is in collaboration with technology partners in the public and private sector, is expected to publish its results early next year.

“The findings on how a common platform can be governed effectively and managed efficiently will shape the blueprint of the next generation payments systems,” said Sopnendu Mohanty, chief fintech officer at the Monetary Authority of Singapore.

As economies become cashless, around 86% of 65 central banks have carried out digital currency research, while 60% are conducting experiments or proof-of-concepts, the BIS said.

In the race for financial technology innovation, central banks in the United States, Britain, France, Canada, Sweden, Japan, Russia, South Korea and Singapore, plus a host of other countries and the European Central Bank, have announced their considerations for CBDCs in various forms in recent years.

“Things such as Facebook’s Libra and the ongoing pandemic have been a wake-up call that the digitalisation of the economy makes the digitalisation of banknotes inevitable,” said business consultant firm IDC in a recent research report.

“Central banks must address the needs of the future digital economy and should offer the digital economy a modern means of payment.”

IDC expects countries such as Sweden and South Korea to move forward with CBDCs, while it predicts by 2025 some 20% of consumer loans will be disbursed via digital currencies since mass adoption will take at least three to five years.

The People’s Bank of China (PBOC), Hong Kong Monetary Authority, Bank of Thailand and the central bank of the United Arab Emirates are also working on a separate BIS project to study the feasibility of using CBDCs for cross-border payments.

China’s digital yuan is one of the most advanced CBDC initiatives in the world. As of the end of June, there had been more than 1.32 million digital yuan pilot scenarios tested, covering dining, transportation, shopping and consumption as well as government services, according to a PBOC white paper last month. A total of 70.75 million transactions have already been carried out involving around 34.5bil yuan (RM22.21bil).

“The digital yuan is initially targeted at facilitating daily domestic consumption. However its cross-border use for retail purposes could set the foundation for wider use down the road,” said Sun Yu, vice-chairman and chief executive at the Bank of China (Hong Kong). “There is huge potential for the digital yuan in trade finance and for further internalisation.”

However Christopher Waller, member of the board of governors at the US Federal Reserve, said last month that he was sceptical about whether there was a compelling need to create a digital currency.

The emergence of private digital assets, such as stablecoins, in recent years has created an attractive payment instrument because the value can be tied to one or more assets, such as a sovereign currency, said Walker.

Stablecoins, as their name suggests, are a type of cryptocurrency whose value is pegged to another asset class, such as a fiat currency or gold, to stabilise its price.

Payments using such stablecoins might also be “free”, in the sense that there will be no fee required to initiate or receive a payment, he added. This means that if one or more stablecoin arrangement can develop a significant user base, they could become a major challenger to banks for processing payments, Waller said.

“The private sector is already developing payment alternatives to compete with the banking system,” Waller added. “Hence, it seems unnecessary for the Federal Reserve to create a CBDC to drive down payment rents. It seems to me, however, that private-sector innovations might reduce the mark-up charged by banks more effectively than a CBDC would.”

Chair Jerome Powell recently announced that the US Federal Reserve will publish a discussion paper on the benefits and costs of creating a CBDC, although he made it clear that the US dollar is not going to be replaced by a CBDC.

Oriol Caudevilla, a fellow at the Digital Euro Association, noted the US was falling behind with regards to CBDCs.

“Generally speaking, they are more sceptical than that of most Asian countries or even the EU towards CBDCs,” said Caudevilla.

“At the end of the day, the US does not see so much reason for a change because the dollar is very dominant in international payments.” – South China Morning Post



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