 |
Get all the essential market news and expert opinions in one place with our daily newsletter. Receive a comprehensive recap of the day’s top stories directly to your inbox. Sign up here! |
(Kitco News) – As countries around the world work diligently to develop central bank digital currencies (CBDCs), the International Monetary Fund (IMF) is also “working hard” to develop a global infrastructure that will ensure the interoperability of settlements between national digital currencies, according to a report from Bloomberg.
“We are working on a principle of interoperability,” said Kristalina Georgieva, Managing Director of the IMF while speaking at a conference in Rabat, Morocco. She added that the platform being developed by the IMF has a shared infrastructure that would avoid the emergence of “settlement blocks,” which can lead to further economic fragmentation. The ultimate goal is to avoid the underutilization of CBDCs.
Georgieva highlighted the importance of getting the issue of interoperability solved soon as ten out of the 14 central banks that are exploring the issuance of a national digital tender are “already crossing the finish line,” and said that there’s “a lot that is still not decided” on regulating and organizing CBDCs.
“We will pursue relentlessly together” the development of CBDCs, she said.
Tobias Adrian, a financial counselor at the International Monetary Fund (IMF), also presented at the conference, delivering a speech titled “Exploring Cross-Border and Domestic Payment and Contracting Platforms.”
“In today’s digital age, technology presents an opportunity for money to evolve,” Adrian said. “Cryptography, tokenization, and programmability are explored around the world as a basis to improve money. From banks to central banks, the aim is to offer money that can sit alongside our messaging apps, work efficiently, and be even safer.”
Adrian went on to discuss the high cost of transacting on current banking payment rails, noting the complex web of interlinkages between banks results in delayed payments and high fees for businesses, which hurt their bottom line.
“Things are worse for those sending remittances who often pay even higher fees—about 6.5 percent on average,” he said. “Costs fall disproportionately on the poor. While cross-border payments work relatively well in the club of most advanced economies, they fall short for many emerging-market and lower-income countries.”
Adrian said the IMF is collaborating with the World Bank, the Bank of International Settlements (BIS), and the Financial Stability Board (FSB) to help address this and other issues. They are working on developing a trusted ledger, “which is essentially an electronic document representing property rights on which digital versions of central bank reserves in any currency can be traded among participants,” he said.
He added that such a ledger is required to be interoperable as cross-border payments require “complementary services like obtaining foreign currency and managing risks,” and they “involve the transfer of information on the identity of transacting parties and their trading intentions.”
“So our trusted ledger cannot exist in a vacuum,” he said. “It must exist in an environment allowing for basic financial contracts to be customized and exchanged in a safe and efficient manner. And it must allow information to be carefully managed—so only those who need it can see it.”
The platform being developed is designed to settle money denominated in many different currencies, likely in the form of central bank reserves, and will create “unique and standardized digital representations of them” for use on the platform, Adrian said.
“To make a payment, participating banks would deposit their domestic central bank reserves in an escrow account controlled by the platform operator, and in return obtain a digital version to trade on the platform,” he explained. “Settlement would be quick, final, and safe. The ledger would be controlled by the platform operator, and only this operator would settle transactions. The single ledger would ensure there is a unique description of who owns what, so no double spending can occur.”
A key feature of the platform is that it allows for a multicurrency system “without imposing a single or new settlement asset,” he said. “The choice of currencies used on the platform would remain at the discretion of participants. And central banks would remain in full control of which institution receives reserves to start with. No changes in legacy systems, arrangements, or institutions are needed.”
The platform also includes a programming layer, which would make basic functions available to be customized and bundled to complement payments, and allows contracts to be automated, he said. “For instance, the concurrent swap of one currency for another can be programmed to occur when a certain price is met.”
A third component is the information management layer, which “allows the unbundling of settlement and non-settlement services including compliance checks.”
“This leads to a cleaner separation of responsibilities,” Adrian said. “And countries retain jurisdictional control over how much their citizens and firms can hold or transact in foreign currency, as well as over compliance checks.”
The final component of the platform being developed by the IMF is governance. “A strong legal framework backing the platform, as well as active oversight and clear rules governing access, participation, and financing are essential,” Adrian said. “Governance is also a way to adopt rules and designs to support the stability of the international monetary system.”
He said that ideally, platforms should allow countries to “Implement capital flow management measures and continue to intervene in their foreign exchange markets when needed; extract aggregate information on capital flows to assist policymaking and detect fragilities; effectively resolve disputes to underpin trust and facilitate market integration; and rapidly dispatch funds to support the global safety net.”
“Payments, we must remember, are the foundation of the financial and trade links between countries,” Adrian said. “One of the important roles of the IMF is to oversee and strengthen these foundations for a stable and effective international monetary system.”
Closing his discussion with CBDCs, Adrian said, “As money, CBDCs provide safety. As infrastructure, CBDCs bring interoperability and efficiency among private networks for digital money and assets. CBDC platforms are a direction well worth investigating.”
“New technologies, new entrants, and new needs have opened a window of opportunity to think ambitiously and improve domestic and cross-border payment systems, while continuing to pursue public policy objectives such as financial and monetary stability,” he said. “Our blueprint for a new class of platforms would enhance and ensure greater interoperability, efficiency, and safety in cross-border payments, as well as in domestic financial markets.”
