Exploring Cross-Border and Domestic Payment and Contracting Platforms
IMF News, June 19, 2023
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- Published: June 19, 2023
Overview
- Speech by Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department, IMF.
- Event: Joint IMF—Bank Al-Maghrib High Level Policy Roundtable on Central Bank Digital Currencies, Rabat, Morocco.
- Date: June 19, 2023.
- Central message: New technologies (cryptography, tokenization, programmability) enable a new class of cross-border and domestic payments and contracting platforms that can improve speed, cost, safety, and governance of payments while preserving macro-financial stability.
The future of cross-border payments: problems and multilateral response
- Key problems identified:
- Cross-border payments are more complicated than domestic payments because parties are in different jurisdictions and subject to different laws.
- Example friction: payments routed through interlinked banks (possibly via Paris and New York) where credit is passed along rather than cash changing hands, causing delays and high fees that hurt exporters.
- Remittance costs: about 6.5 percent on average; costs fall disproportionately on the poor.
- Underlying causes: limited infrastructure, risky settlement, sporadic governance, substantial legal and operational costs, and expensive recourse.
- Scale of the issue:
- "Some of the 45 billion dollars paid to remittance providers every year may then go back in the pockets of the poor."
- Multilateral efforts:
- International community enhancing cross-border payments following the G20’s 2020 Roadmap.
- Collaboration among IMF, World Bank, BIS, and FSB emphasized.
Framework of the XC platform (vision and purpose)
- Concept: platforms as trusted ledgers—digital town squares—where digital versions of central bank reserves in any currency can be traded among participants.
- Platform goals:
- Faster, cheaper, and safer cross-border payments.
- Enable complementary services: foreign currency access, risk management, identity and intent information transfer.
- Maintain careful information management so only necessary parties can access data.
- Three layers of XC platforms:
- Settlement layer
- Programming layer
- Information management layer
Settlement layer (design choices and mechanics)
- Proposed settlement asset: central bank reserves—the safest possible to reduce counterparty risks.
- Tokenization approach:
- Create unique and standardized digital representations of central bank reserves on the platform.
- Participating banks deposit 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.
- Operational features:
- Platform ledger controlled by the platform operator; only this operator would settle transactions.
- Single ledger ensures unique description of ownership and prevents double spending.
- Multicurrency system allowed without imposing a single or new settlement asset; currency choice remains at participants' discretion.
- Central banks remain in full control of which institution receives reserves to start with.
- No changes in legacy systems, arrangements, or institutions are needed.
Programming layer (customization, automation, and contract safety)
- Purpose:
- Allow customization and bundling of basic functions to obtain foreign currency, synchronize or delay payments, manage risks, and implement capital flow management measures.
- Analogy:
- Smartphone apps accessing predefined safe functions—innovation separated from core operating system to preserve safety.
- Benefits of programmable contracts:
- Automate concurrent swaps (e.g., currency-for-currency when price conditions are met).
- Reduce information leakage to market makers and lower the risk of counterparty walking away.
- Escrowed money prevents settlement failures—counterparties cannot walk away from automated trades.
- Programs running on the same ledger can be consistent; contracts can pledge future receipts as collateral today, saving liquidity.
- Clarification:
- Programming applies to transactions using money, not to money itself; transacted money remains perfectly fungible.
Information management layer (privacy, compliance, and transparency)
- Unbundling settlement from non-settlement services (including compliance checks) for a cleaner separation of responsibilities.
- Jurisdictional control:
- Countries retain control over how much citizens and firms can hold or transact in foreign currency and over compliance checks.
- Compliance advantages:
- Potential to uphold high standards of KYC, anti-money laundering, and anti-terrorist financing.
- Privacy and anonymity:
- Transactions can preserve users’ privacy but not anonymity.
- Participants can bid truthfully in foreign exchange auctions without revealing private identities.
- Aggregate information can be shared transparently in real time while keeping individual identities hidden; anonymized bids can be visible and useful.
Governance (legal, oversight, and policy roles)
- Governance requirements:
- Solid, transparent, and effective governance accepted by participants as fair and representative.
- Strong legal framework, active oversight, and clear rules governing access, participation, and financing.
- Governance enables policy support:
- Platforms should allow countries to:
- Implement capital flow management measures and continue to intervene in 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.
- Rapidly dispatch funds to support the global safety net.
- IMF role:
- Oversee and strengthen payment foundations, bolster trust in governance and oversight, convene members, and suggest platform designs consistent with international monetary system stability.
Advantages of XC platforms (summary)
- Ensure safety by settling with central bank reserves.
- Offer interoperability among national currencies and with legacy systems.
- Bring innovation, efficiency, and safety in contracting.
- Help manage information flows to overcome economic frictions.
- Rest on transparent, rule-based governance consistent with international monetary system stability.
Platforms for CBDCs (domestic analogues and opportunities)
- XC platform design is general enough to support domestic systems via CBDC platforms.
- Observed domestic trends:
- Ledgers where banks, brokerage firms, and fintechs are tokenizing assets (equities, bonds, and commodities) and money.
- Stablecoins and tokenized deposits under exploration; tokenized deposits noted as a bank-led innovation.
- CBDC platform features:
- Single ledger compatible with private firms’ ledgers.
- Assets could be escrowed and paid with safe and liquid central bank money.
- Programmable exchanges to lower counterparty risks; tokenized deposits or assets could be escrowed and exchanged directly.
- Privacy-preserving technology and strong governance easier to define domestically than internationally.
- Scope:
- CBDC platforms could underpin wholesale CBDC and be leveraged to make retail CBDC available to households and firms depending on country preferences, needs, and policy objectives.
- Pilot activity mentioned:
- Several central banks have begun experiments along these lines, such as those of Brazil, the European Central Bank, England, France, Italy, and Singapore.
Conclusion and next steps
- Public sector should consider renewing payment infrastructure to capture opportunities from new technologies, new entrants, and new needs while preserving financial and monetary stability.
- The blueprint calls for further work on:
- Testing architectures and technology.
- Legal underpinnings.
- Governance arrangements.
- Implementation challenges:
- Multilateralism and governance design are hard but feasible; IMF can be a strong partner leveraging convening power and policy expertise.
- Closing inspiration:
- Encouragement to dream and pursue ambitious improvements, inspired by Moroccan examples.
Speech by Tobias Adrian, Joint IMF—Bank Al-Maghrib High Level Policy Roundtable on Central Bank Digital Currencies, Rabat, Morocco, June 19, 2023.