Future of Payments by Swift

1 omfif.
org
TURNING THE CROSS-BORDER

PAYMENTS ROADMAP INTO REALITY
2 DMI Future of Payments 2022 omfif.org/dmi 3
AUTHORS
REPORT SPONSORS
Lewis McLellan
Editor, Digital Monetary Institute Lead report sponsor
Taylor Pearce
Economist
Julian Jacobs
Economist
Simon Brady
Katerina Liu
Research Assistant
Official Monetary and Financial
Institutions Forum ADDITIONAL RESEARCH
Nikhil Sanghani
181 Queen Victoria St, London 4 22
Managing Director, Research
EC4V 4EG, United Kingdom
Lead chapter sponsors Foreword Chapter 2
T: +44 (0)20 700 27898 Dynamism in payments Crypto’s crucial
EDITORIAL AND PRODUCTION
but cross-border appeal for emerging
[email protected] Simon Hadley developments lagging 06 markets
omfif.org Director, Production
Fergus McKeown
5 30
Subeditor Chapter 3
Foreword
William Coningsby-Brown Promise and peril of
Enabling inclusive
ABOUT OMFIF Production Manager economies through central bank digital
Sarah Moloney the frictionless flow of currencies
With a presence in London,
Subeditor value
Washington and New York, 40
OMFIF is an independent
MARKETING 6 Chapter 4
forum for central banking,
economic policy and public James Fitzgerald CBDC Survey 14 22 Central banks
must take the
investment — a neutral Deputy Head of Events and Marketing Co-sponsors 2022
lead in payments
platform for best practice in Henna Rattu CBDCs sooner rather cybersecurity
worldwide public-private sector Marketing and Events Coordinator than later, say central
exchanges. banks
Maya Turnbull
48
Events and Marketing Coordinator
14 Chapter 5
Chapter 1 The metaverse: a
DMI TEAM model for digital
ACKNOWLEDGMENTS Turning the cross-
Philip Middleton border payments payments?
OMFIF thanks officials from Chairman, DMI roadmap into reality
the co-operating countries Katie-Ann Wilson 30 40
and cities for this publication, Managing Director, DMI
which will be joining us in Folusho Olutosin
launch partnerships around Commercial Director, DMI 48
the world. We are grateful to Sinan Yilmaz
many other associates and Account Manager, DMI
colleagues for their assistance Max Steadman
and guidance. Programmes Manager, DMI
David Coleman
Commercial Assistant, DMI
© 2022 OMFIF Limited. All Rights Reserved.

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Company Number: 7032533. ISSN: 2398-4236
FOREWORD FOREWORD
DYNAMISM IN PAYMENTS ENABLING INCLUSIVE

BUT CROSS-BORDER ECONOMIES THROUGH
DEVELOPMENTS LAGGING THE FRICTIONLESS FLOW
New entrants and existing players are working hard to reimagine OF VALUE
how payments work, writes Katie-Ann Wilson, managing director,
Digital Monetary Institute. New technologies risk fragmenting the payments landscape even more,
but they also hold the promise of bringing it together, writes Thierry
There has rarely been such a dynamic and introduce our first survey on central bank attitudes Chilosi, chief strategy officer, Swift.
innovative time for the payments industry. The and intentions regarding central bank digital
advent of novel technologies has galvanised efforts currency. Our survey shows that improving cross-
to improve the speed and security of payments, as border payments is not the primary goal central SINCE THE LAST edition of ‘Future of payments’, the same focus also needs to be applied to the
well as to bring down costs and broaden access to banks are pursuing with their development of the world has continued to undergo significant small business and consumer space, which is
financial services. CBDCs. Nevertheless, many survey respondents change. Digitalisation has continued at pace as among the fastest growing segments in the
Progress in domestic payments has been rapid, said that they saw promise in the interlinking of we emerge from the worst pandemic in 100 years, cross-border payments industry. Individuals and
with cheap and quick digital payments solutions domestic CBDCs as a means of improving cross- while geopolitical shifts, rising energy costs and small- and medium-sized enterprises that want to
already available, including in emerging markets border payments. inflation are all impacting people everywhere. At send money internationally face a time consuming,
where mobile payments have gained traction. We examine what promise CBDCs hold for the same time, the financial ecosystem continues costly and uncertain process. If we don’t fix that,
Progress in cross-border payments has been emerging markets, where development is taking to evolve with new entrants, new technologies and we’ll only be contributing to more fragmentation.
less impressive, however, and problems weigh place most rapidly, as well as looking at the innovative solutions, and customer expectations Access, as well, to the solutions that enable
heavier in emerging markets, with higher costs value cryptocurrencies and stablecoins offer are higher than they’ve ever been. the rapid flow of value across borders must
disproportionately falling on those least able to to jurisdictions with unstable and unreliable These external factors are having a knock-on increase. Thankfully, while technology has played
bear them. currencies. While they offer valuable havens from effect on the payments industry and contributing its part in fragmentation, it also brings us great
The problems of connecting different domestic inflation and, in some cases, cheap remittance to increasing fragmentation. Enabling inclusive opportunities. Cloud-based services and the rise
payments environments, many of which have channels, the absence of robust know-your- digital economies is therefore more important of application progamming interface technology
widely varying architecture, are incredibly complex customer procedures and tools to prevent financial than ever. Without fast, frictionless flows of value, mean that the financial industry can offer its
and there are many solutions being explored. crime could limit their potential. inequality will only increase. services to more people and businesses in more
The Committee on Payments and Market As these systems become more important, But for money to flow smoothly and quickly places.
Infrastructures has done an excellent job in defining the technological expertise central banks require across borders, interconnectivity is critical. If we are to overcome fragmentation and
the problems and laying out responses. grows. Our survey shows that cybersecurity is the Swift, and our community of more than 11,500 achieve our collective goal, we must come
Traditional players are making important top concern for central banks examining digital organisations in over 200 countries and territories, together as a financial community and harness
improvements to their services, improving speed currency. We explore the threats they face and the continues – as it always has – to be a symbol of our collective strengths. Standardisation,
and security with new frameworks, but there are policies they can employ, particularly in emerging global co-operation, finding opportunities to bring led by the industry’s adoption of ISO 20022,
still major obstacles that are yet to be surmounted markets, to mitigate them. us all together. which begins next year, will be critical to
including data localisation. Finally, we examine the development of the Our strategy for achieving instant and achieving interoperability between systems and
Outside of the traditional payments space, we metaverse and discuss what payments solutions frictionless cross-border payments is closely infrastructures.
examine the efforts of innovators to develop a new might be needed to serve the emerging use cases aligned to the priorities of the G20 for an Swift has championed responsible innovation
payments infrastructure that can sidestep some of that a new digital environment will necessitate. enhanced cross-border payments experience. for the future of payments, with experiments this
the challenges facing the established industry. This It is possible that by developing the Improvements to speed, transparency, cost and year demonstrating that we can use the power
is unlikely to be a ‘winner-takes-all’ kind of fight. infrastructure to support payments in globally access will be critical if we, as an industry, are to of central bank digital currencies across borders,
The variety of payments systems will grow, creating accessible digital environments, we might end up succeed in this mission. regardless of the underlying distributed ledger
competition and diversity in the marketplace. with a solution that can help solve some of the While the last few years have seen excellent technology, and integrate them seamlessly with
As part of this work, we are delighted to problems in cross-border payments. progress for wholesale cross-border payments, the ecosystems of today.
The payments industry is undergoing seismic Collaboration and partnership will be essential
changes. Both the established players and in achieving frictionless cross-border payments.
new entrants have work to do before they are We are delighted to support OMFIF’s ‘Future
THE PROBLEMS OF CONNECTING DIFFERENT able to address the challenges of cross-border of payments’ report, which provides valuable
WHILE THE LAST FEW YEARS HAVE SEEN EXCELLENT
DOMESTIC PAYMENTS ENVIRONMENTS, MANY OF payments, but the systems we use to send value thought-leadership in support of making the
PROGRESS FOR WHOLESALE CROSS-BORDER PAYMENTS,
WHICH HAVE WIDELY VARYING ARCHITECTURE, ARE to counterparties in other countries will change payments industry more efficient, accessible and
THE SAME FOCUS ALSO NEEDS TO BE APPLIED TO THE
INCREDIBLY COMPLEX AND THERE IS A VARIETY OF substantially over the next few years. • inclusive. •
SMALL BUSINESS AND CONSUMER SPACE
SOLUTIONS BEING EXPLORED.
CENTRAL BANK DIGITAL

CURRENCIES SURVEY
IN this year’s ‘Future of payments’ report, we 1: Two-thirds of central banks expect to issue a CBDC within 10 years
conducted a survey of central banks to uncover
When do you expect to issue a Central Bank Digital Currency? Share of
their aims and objectives for CBDCs, plans for respondents, %
implementation, availability of internal resources
and views on technology to improve cross-border
payments.
Within 1-2 years
CENTRAL BANK DIGITAL CURRENCIES
ARE GAINING MOMENTUM 24
Several central banks have launched CBDCs, either Within 3-5 years
as pilots or as fully deployed systems. Many of their
CBDCs SOONER
35
peers have been encouraged by the progress. Within 6-10 years
The Atlantic Council reported that 105 countries
RATHER THAN LATER,

are now exploring a CBDC, up from only 35 countries 12
in May 2020. Responses to our survey reflected 10+ years
that trend. Among survey participants, two-thirds
SAY CENTRAL BANKS reported that they expect to issue a CBDC within 10
years, while none expected to issue one in more than
10 years (Figure 1) Overall, if central banks decide
29 We do not expect to
issue a digital currency
to issue a CBDC, they expect deployment to come

sooner rather than later.
By Katerina Liu Among the central banks that said they do
Source: OMFIF Future of payments survey 2022
not expect to issue a CBDC, many are actively

researching the possibility of launching one. One 2: Central banks are not discouraged by CBDC developments
central bank survey respondent commented that Has your thinking on digital currencies changed in the past year? Share of
they ‘monitor the possible motivations and problems respondents, %
a CBDC can solve to see when will be convenient
or necessary to prioritise efforts on this topic,’ 70
while another stated that their ‘current stance on

60
the issuance of a local CBDC may change should
domestic or international factors justifying such a
50
change emerge.’
Many central banks surveyed have been
40
encouraged by their peers’ CBDC developments.
Compared to a year ago, none of the survey
30
participants are less inclined to issue a CBDC (Figure
2). Instead, their stances have either remained the
1. Two-thirds of central banks surveyed expect to issue a CBDC within 10 years. same (62.5%) or they are now more inclined to issue a
20
CBDC (37.5%). One survey participant more inclined

10
2. Central banks are pursuing CBDC for various reasons, but none cited improving to issue a CBDC explained that ‘central banks around
cross-border payments as the main motivation. the world have accelerated their CBDC research and
0
experiments, with more and more practical examples No Yes, we are now more Yes, we are now less
3. Nevertheless, many thought that inter-linking CBDCs offers a promising avenue for of positive experiences.’ inclined to issue a CBDC inclined to issue a CBDC
improving cross-border payments. The presence of dedicated CBDC employees in

Source: OMFIF Future of payments survey 2022
central banks is indicative of their monitoring and
4. Banks will not have the exclusive right to distribute CBDC. Instead, they will be research activities. The central banks surveyed –
joined by new, regulated players. including those who state that they do not intend
to issue a CBDC – have a median of five employees
5. Avoiding low adoption of CBDCs is a primary concern for central banks, while bank dedicated to researching or developing CBDCs CENTRAL BANKS AROUND THE WORLD HAVE
in some capacity. Many also involve employees in ACCELERATED THEIR CBDC RESEARCH AND
disintermediation is a secondary concern.
CBDC projects on a part-time basis and include team EXPERIMENTS, WITH MORE AND MORE PRACTICAL
members from various departments. EXAMPLES OF POSITIVE EXPERIENCES
3: No strong consensus of 50 100 5: Stablecoins also show

central banks’ objectives 45 90 some promise for cross-
for pursuing a CBDC border payments, but
40 80
What is your main objective remain a risk
by pursuing a CBDC? Share 35 70 Respondents which view
of respondents, % 30 60 stablecoins as: Share of
Source: OMFIF Future of payments respondents, %
survey 2022 25 50
Source: OMFIF Future of payments
20 40 survey 2022
15 30
10 20
5 10
0 0
Other Preserve the Boost financial Improving the Aid cross-border We are not An opportunity to A risk to financial A risk to financial An opportunity to Other
central bank’s role inclusion transmission payments pursuing a CBDC make cross-border stability because of stability because of make domestic
in money provision mechanism of payments more poor quality standards dollarisation payments more
monetary policy efficient efficient
4: Interlinking CBDCs 35 25 6: Low adoption and

shows most promise for cybersecurity tie as
cross-border payments 30 primary concerns over
What do you think is the most 20 deploying a CBDC
promising avenue to improve 25 What is your main concern
cross-border payments? over deploying a CBDC?
Share of respondents, % 20 15 Share of respondents, %
Source: OMFIF Future of Payments Source: OMFIF Future of payments
survey 2022 15 survey 2022
10
10
5
5
0
Interlinking CBDCs Interlinking real-time Global stablecoins Harmonising formats Other 0
gross settlement like ISO 20022 Cybersecurity Low adoption Bank Need for new Decline of cash Other
systems disintermediation infrastructure usage
NO CONSENSUS ON THE PURPOSE OF INTERLINKING CBDCS A PROMISING cross-border payments. To improve these payments LOW ADOPTION A PRIMARY CONCERN,
CBDC, BUT CROSS-BORDER PAYMENTS AVENUE FOR CROSS-BORDER in terms of timing, speed, fees and compliance costs, BUT THE RIGHT TOOLS MIGHT OFFSET
NOT A MAIN FACTOR PAYMENTS there must be a comprehensive view and harmonised THAT
In this year’s survey, there is a wide spread of central Although no central bank said it was their main approach. These include aspects such as technical, Central banks are particularly concerned about
banks’ objectives for pursuing a CBDC, though motivation for pursuing a CBDC, many said that operational, legal and possibly political.’ Simply the risk of building a CBDC that ends up not being
there is no strong trends towards any one objective interlinking CBDC systems was the most promising launching a CBDC is unlikely to solve many of the used. This is of particular concern for those central
(Figure 3). option for improving cross-border payments. challenges that cross-border payments face. banks that see boosting financial inclusion as a key
Surprisingly, no central bank listed improving Improving cross-border payments is a major Stablecoins may be another solution for cross- reason for launching CBDC. One survey participant
cross-border payments as their main objective for priority for the Bank for International Settlements border payments. Yet, only 13% of respondents stated that ‘low adoption would lead to significant
pursuing a CBDC. Instead, preserving the central and the G20, underpinning the committee on indicated that stablecoins would be the best avenue reputational damage, but there are adequate tools to
bank’s role in money provision was the second most payments and market infrastructures’ programme on to improve cross-border payments (Figure 4). ensure its usage.’
reported main objective. enhancing cross-border payments. Despite that, 88% of survey respondents viewed Many survey respondents stated that their
‘Other’ encompassed a range of alternative A survey respondent commented that CBDCs stablecoins as a possible opportunity for cross- respective institutions had not yet made any official
objectives: digitalisation, improving the resiliency and may ‘provide a building block for better cross-border border payments, but 75% also believed they decisions to drive adoption but are developing
efficiency of payments systems and interoperability. payments in the future,’ while another stated that the pose a risk to financial stability because of poor strategies. Several participants suggested that offline
Some 75% of participants that responded with ‘other’ ‘possible issuance of a foreign CBDC that could be standards (Figure 5). Stablecoins may become functionality is crucial, ensuring that CBDC can
said they had multiple objectives, adding that they available on a cross-border basis’ would encourage a viable option for cross-border payments if the operate in areas without widespread internet access.
believe these flow into each other, with one survey their central bank to pursue a CBDC. regulatory environment is conducive, as explained Other suggested measures include mandatory
participant explaining that they ‘do not necessarily The debate around CBDCs and cross-border by a participant who stated that global stablecoins distribution, interoperability, user-friendly wallets and
see one compelling motivation, rather a number of payments is still unsettled. A survey respondent will dramatically improve cross-border payments direct incentives such as discounts for consumers.
them’. pointed out that ‘there are a lot of factors involved in ‘assuming no adverse regulatory environment’. Some of these measures have been
7: There is almost an even 70 digital currencies, marketing, promotion of digital banks and 71% intending to work with them in the
spread showing central currencies, and KYC capacity (Figure 7). future.
banks’ need for third- 60 Central banks are clearly not working alone (Figure Looking to future involvement, 88% and 71%
party services 8). Central banks, including 33% of the share of those of respondents intend to work with technology
What services do you need 50 who do not expect to issue a digital currency, are providers and commercial banks respectively
private sector third-parties working with a range of third-party services. Central (Figure 8), reinforcing commercial banks’ beliefs that
for? Share of respondents, % 40 banks’ research and exploratory phases account for bank disintermediation will not be an issue. While
Source: OMFIF Future of Payments
most of the involvement of these services. few central banks are working with marketing and
survey 2022
30 Survey respondents are working with technology promotion providers right now (6%), many intend
providers (71%), academics (47%) and strategy to work with them in the future (47%), indicating
20 advisory services (47%) in this phase. The low concern that respondents are taking steps to pre-empt low
with bank disintermediation is highlighted here too, adoption as they move on to the pilot and launch
10 with 47% of respondents working with commercial phases of their CBDCs. •
Source: xxxx
0
THE FIRST CBDCs IN DEPLOYMENT

KYC capacity Technical development of Marketing and promotion of Other
digital currencies digital currencies
Developing economies, particularly those in the Caribbean, have been at the

8: Central banks are 90 forefront of testing and launching central bank digital currencies.
working with the full
80
range of third-party BAHAMAS EASTERN CARIBBEAN
services 70 March 2019: Selected NZIA CENTRAL BANK
Which of the following third- as the preferred solutions (eastern Caribbean states)
60
parties are you currently provider and announced its pilot 2019: Began development of
working with/intend to work 50 programme: Project Sand Dollar digital currency.
with on digital currencies? May 2019: Signed partnership 12 February 2021: First
40
Share of respondents, % contract with NZIA. DCash transaction was successfully carried out.
Source: OMFIF Future of Payments
30 November 2019: Special 31 March 2021: Launched DCash in Antigua and
survey 2022 session of the National Payments Council was Barbuda, Grenada, Saint Kitts and Nevis, and
20
convened to confirm the approach to the central Saint Lucia, becoming the first currency union
10 bank digital currency project. central bank to issue digital cash.
Summer 2019: The central bank conducted a 30 July 2021: DCash was launched in Saint
0
Technology Commercial Academics Advisory Legal services Marketing and Other targeted baseline survey on financial inclusion Vincent and the Grenadines.
providers banks services to help promotion and access for Exuma. 7 December 2021: DCash went live in Dominica
with strategy providers 27 December 2019: Began Project Sand Dollar and Montserrat.
Currently working with Intending to work with pilot in Exuma. 14 Jan 2022: DCash temporarily went offline
28 February 2020: Pilot expanded was to the due to a technical issue where customers could
Abaco islands. not transact using the wallet.
October 2020: National rollout of Project Sand 7 March 2022: DCash resumed service with an
employed by Nigeria (the Central Bank of Nigeria Only 17% of survey respondents said they were Dollar to the rest of the Bahamas. enhanced security design for the system.
did not complete the survey) to boost usage of the worried that CBDC issuance would compromise July 2022: Value of Sand Dollars in circulation 29 June 2022: DCash was launched in Anguilla,
eNaira, its CBDC. In August 2022, the CBN unveiled banks’ business models or funding habits. In a reached 300,000 Bahamian dollars, with its final member state
the use of unstructured supplementary service data separate survey on commercial banks’ thoughts on 30,000 individuals who have mobile wallets and
845 merchants who accept it.
short codes, which enable users without internet CBDCs, one respondent explained that they ‘do not
connection or bank accounts to set up an eNaira believe it would be in the interest of central banks JAMAICA
wallet using a non-smartphone. In October 2022, the to disintermediate [commercial] banks.’ Rather,
NIGERIA 17 July 2020: The Bank of
July 2021: Design phase of Jamaica issued its formal
CBN offered a 5% discount to drivers and passengers commercial banks expect to work alongside central
CBDC project invitation to CBDC providers
of motorised rickshaws who use the eNaira. While it is banks for their CBDC projects – all respondents in the
30 August 2021: Announced to join its Fintech Regulatory
too soon to determine if these measures will improve commercial bank survey indicated that they expect to a partnership with Bitt and Sandbo
adoption, it might take more time before the eNaira’s be involved with central banks as a wallet provider, for issued preliminary guidelines for May 2021: The BoJ started working with
adoption rates increase, but the CBN is still optimistic credit creation and know-your-customer compliance. Project eNaira. eCurrency Mint on regulatory sandbox project
– it is working with third-parties to innovate even 28 September 2021: The eNaira website goes 9 August 2021: The BoJ minted 230m
more solutions. BANKS WILL NOT HAVE EXCLUSIVE live. Jamaican dollars worth of digital currency.
One important method of driving adoption is to POWER TO DISTRIBUTE CBDC 25 October 2021: eNaira launched. December 2021: In partnership with the
employ CBDC for government payments. Delivering While it is widely expected that central banks will work December 2021: 600,000 eNaira wallets National Commercial Bank, the BoJ 57
had been created and more than 35,000 customers were on onboarded in the pilot.
pensions and benefits and taking taxes and other with commercial banks on CBDC, almost all surveyed
transactions had taken place. 31 December 2021: The BoJ announced the
payments in CBDC is likely to ensure a high adoption central banks intend for their CBDC to be distributed 25 August 2022: The Central Bank of Nigeria successful completion of the pilot.
rate. by a range of new regulated private sector providers releases the option to create an eNaira wallet February 2022: The BoJ announced name for
Other central banks focused on cybersecurity as as well as banks. with unstructured supplementary service data, CBDC, Jamaican Digital Exchange (JAM-DEX).
their main concern, which may indicate a need for Furthermore, survey participants reported the where users dial a four-digit code on their
11 July 2022: JAM-DEX launched on the Lynk
third-party cyber-security consultation services. need for all private sector third-parties enquired mobile phones.
digital wallet.
Bank disintermediation is a smaller concern. about, including for the technical development of
DRIVING INTEROPERABILITY IN
CROSS-BORDER PAYMENTS
New technology brings with it new challenges, such as integrating legacy systems
with novel ones. Swift is making this possible though, writes Saskia Devolder,
strategic programme director, cross-border payments, Swift
IN TODAY’S digital economy, transactions must be Transparency: By embedding a unique tracking Choice: Swift has not only focused on bringing
instant and frictionless — whenever and wherever code in every transaction, Swift has enabled these benefits to high value wholesale payments,
they need to go. banks to have complete visibility on the status it’s also improved the experience for small THE IMPORTANCE OF
That’s no small feat when money starts moving and costs of transactions with real-time tracking businesses and consumers who send low-value STANDARDISATION, TOO, HAS
across borders, especially when considering the all along the process – just like tracking a parcel payments around the world. Through Swift Go, RECENTLY BEEN RECOGNISED BY
myriad factors that must be taken into account, delivery. This has provided unprecedented insight we have established a new standard for payments THE G20 IN ITS REPRIORITISED
from navigating different time zones, processing into the frictions that slow down payments. We under $10,000, bringing new levels of speed, PROGRAMME FOR CROSS-BORDER
approaches and domestic payments systems, know from this data, for instance, that the biggest transparency and certainty for account to account PAYMENTS ENHANCEMENTS,
to understanding compliance requirements in impact on speed comes from capital controls and transfers. In 2022, signups for the service tripled PARTICULARLY THE IMPORTANCE OF
numerous jurisdictions. Increasingly, there’s a need domestic regulatory requirements. For banks in to more than 500 banks across more than 120 ISO 20022
to consider possible new forms of value too – from countries with capital controls, the time taken by countries.
central bank digital currencies to tokenised assets. the beneficiary side is nearly three times that for
Swift sits at the heart of the cross-border banks in countries without them. This issue has The pandemic kick-started digitalisation. And
payments ecosystem, ensuring payments been recognised by the Committee on Payments with new technology and shifts in the geopolitical between ISO 20022 messaging and legacy
reach their destinations quickly, securely and and Market Infrastructures as part of its focus landscape emerging, market players continue to messaging, thanks to an integral in-flow translation
compliantly. Through our network of more than on an efficient legal, regulatory and supervisory rush to develop new solutions to enhance cross- service. The platform provides new orchestration
11,500 institutions in over 200 countries and environment for cross-border payments. border payments, with a focus on front-end capabilities, providing banks with richer, better
territories, money can be sent anywhere in the solutions. Central banks, too, are exploring digital structured data to make use of new API-based
world – even to the most remote locations. And Costs: One of the other frictions is incorrect currencies to pursue the G20’s goals – but are technology for an enhanced payment execution
our commitment to responsible innovation means beneficiary information - such as typos and largely focusing on domestic use. Taken together, experience. Every bank in the chain will have
every day the experience gets faster and better transposed account numbers - that breaks these factors are increasing fragmentation. access to all required data for compliance
while maintaining the highest levels of security, automated processing and requires manual Without a focus on back-office evolution, we risk requirements. Other API-based tools, such as
resiliency and reliability. intervention to resolve. Swift has introduced the emergence of digital islands: solutions that pre-validation, help remove friction while gpi
We’ve made strong progress over the past two an application programming interface-based operate in silos and which are not compliant or instant allows an anchor bank to provide access
years with a strategic focus on enabling instant pre-validation service, which allows sending interoperable with each other. to the domestic instant payments system in
and frictionless processing between 4bn accounts banks to verify beneficiary data upfront, before With digital currencies, stablecoins and other the destination market – giving fast settlement
worldwide, aligned with the G20’s objectives of executing the transaction. For banks not ready digital assets set to enter the market at scale, we and the immediate posting of the funds to the
improving speed, cost, transparency, choice and for pre-validation, Swift provides a pre-check of need to guarantee interoperability with existing beneficiary account.
access in the cross-border payments experience. the account details against pseudonymised and systems that consumers and businesses rely on Swift continues to closely monitor new
Swift’s achievements include: aggregated data from more than 4bn accounts and that have proven their value to the economic payments methods, settlement mechanisms
to catch errors before a payment is sent. Its system. and currency types, including CBDCs. Our
Speed: Most payments over Swift today use gpi deployment, which could save the industry millions Swift has always focused on interoperability. It collaborative experiments early this year
and nearly half reach their end beneficiaries within each year, currently covers 70% of beneficiary is central to instant and frictionless payments. The successfully demonstrated interoperability
five minutes and two-thirds arrive within one accounts in major markets. importance of standardisation, too, has recently between CBDCs built on different distributed
hour, well on the way to achieving the G20 goal been recognised by the G20 in its reprioritised ledger technologies, and between these and
of having 75% of international payments settling programme for cross-border payments fiat currency. This solution is now being tested
within 60 minutes by 2027. Correspondent banking enhancements, particularly the importance of ISO further with 18 central and commercial banks. This
has been delivering secure, compliant cross- 20022. This new international standard can carry experiment forms part of our robust innovation
border payments and banks uses intermediaries much more information than older solutions, but agenda in support of our strategic goals.
to access the required currency within a specific
FOR BANKS IN COUNTRIES WITH CAPITAL that data is also more structured, ensuring the It is through experiments such as these that
jurisdiction. There has been a steady decline in
CONTROLS, THE TIME TAKEN BY THE efficient execution of compliance requirements we will achieve interoperability in cross-border
the number of correspondent banks involved
BENEFICIARY SIDE IS NEARLY THREE TIMES for cross-border payments. payments and enable customers of all types to
in a payment – today, 73.9% of all cross-border
THAT FOR BANKS IN COUNTRIES WITHOUT Swift’s new transaction management platform, make instant and frictionless transactions at any
transactions involve just one or no intermediary.
THEM set to roll-out in 2023, enables interoperability time, anywhere and for any purpose. •
migrant workers to send money to their home

countries, it is imperative to improve and expand
digital remittance services.
1. The reception of the G20 Roadmap for Hence, the data reveals that facilitating better
Enhancing Cross Border Payments has cross-border payments will bring down the cost
been positive. Regulators and private and processing time of international transactions.
sector stakeholders are largely aligned. For developing countries which receive a
substantial proportion of their gross domestic
2. Both technological and regulatory product via remittance flows, improving payments
progress is being made to enhance fiat- infrastructure is even more important.
based cross-border payments in areas
such as interoperability and regulatory PROPOSED SOLUTIONS: CPMI
harmonisation. ROADMAP
To understand the difficulties of enhancing cross-
3. The challenge of facilitating cross- border payments systems, it is important to note
border data exchange presents a the difference between a domestic payment and
significant hurdle, undermining the cross-border payment. Saskia Devolder, strategic
potential for a fully centralised cross- programme director, cross-border payments at
border payments system with a global Swift, noted a few key factors which differentiate
reach. cross-border payments from their domestic
counterparts: the need for foreign exchange and
4.Regionally integrated payment the need for compliance requirements, including
networks offer an exciting prospect. sanctions screening according to the regulation
in the destination country. For Devolder, although
technological innovations can offer some
improvements related to the speed and complexity
of both foreign exchange and compliance, there is
noted by the Committee on Payments and Market no ‘magic bullet’ to solving these issues.
Infrastructures' roadmap, mismatched operating Correspondingly, while many players are trying
hours of payments infrastructures can lead to to innovate their way around these challenges, ‘to
higher liquidity costs and settlement risk for banks think that this is about shaving off idiosyncratic
and financial intermediaries and to delays for differences between systems is wrong,’ noted one
payment recipients. OMFIF interviewee from the payments industry.
Moreover, in legacy systems, banks initiating As those operating in the cross-border payments
TURNING THE CROSS- cross-border payments rely on accounts in other

banks (known as correspondent banks) in other
space are discovering, the differences between
domestic payments infrastructures are nontrivial
BORDER PAYMENTS
jurisdictions to move money across borders and and the challenges facing legacy systems are
make payments on their clients’ behalf. This is not always able to be solved by technological
not only slow, but expensive — fees compound innovation: ‘Different countries have developed
ROADMAP INTO REALITY as multiple intermediaries in the payment chain

charge a fee. This can drive up costs even without
factoring in foreign exchange spreads, which can
payments systems in various social, political and
historical contexts, and the inputs they require are
genuinely different,' as noted by the interviewee.
themselves vary widely based on the user’s access Therefore, the first step to engaging with cross-
Progress has been made on interoperability and regulatory frameworks, to the best liquidity providers. border payments is recognising these challenges.
but bottlenecks remain on data localisation. By Taylor Pearce The frictions in cross-border payments systems The most comprehensive effort to address
are especially costly for developing countries. the persistent difficulties involved in the deeper
World Bank and IMF data indicate that the value integration of cross-border payments systems
CROSS-BORDER payments are the ‘forgotten BENEFITS OF ENHANCED CROSS- of personal remittances received reached $661bn is being spearheaded by the CPMI’s ‘Roadmap
corner of the world’s financial plumbing’. This BORDER PAYMENTS in 2019 and is still rising. A 2022 report on digital for Enhancing Cross Border Payments’ initiative,
bleak characterisation came in a 2020 stocktaking For both correspondent institutions and end users, remittances published by the Visa Economic overseen by the Financial Stability Board. Its
exercise conducted by the Bank for International there are myriad potential benefits of enhancing Empowerment Institute estimated that the objectives consist of five focus areas (Figure 1)
Settlements Innovation Hub, International Monetary cross-border payments. The turnaround on cross- average cost of remittances at approximately which, together with their respective building
Fund and World Bank. While significant progress has border payments conducted through traditional 6% of the total sent (in line with the World Bank’s blocks, address three cornerstone issues persisting
been made within domestic markets — within which bank transfers can take up to five days, compared estimate), with the average cost of cash-funded
payments have become markedly faster, cheaper to the nearly instant service offered domestically. remittances averaging slightly higher at 6.5%.
and more intuitive — sending payments abroad has Bank account balances can only be updated during While the same report found that a higher share of
developed much more slowly. Despite the manifold the hours when the underlying settlement systems remittances is digitally initiated than ever before,
THE CPMI ROADMAP INDICATES THE NEED
benefits of improving multilateral platforms, cross- are open. In most jurisdictions, these systems this number still only reflects about a third (34%)
FOR NBFIs TO BE SUBJECT TO REGULATIONS
border payments remain comparatively slow, costly are aligned to normal business hours, which can of remittance flows. Given that cash-initiated
“PROPORTIONATE TO THE RISK THEY POSE.”
and less transparent. cause delays in clearance and settlement. As remittances remain the most expensive way for
enable computers to communicate with one

1: Overview of CMPI focus areas and PUBLIC AND PRIVATE SECTOR COMMITMENT another, precluding the need for end user
associated building blocks
A 1. Developing a common cross-border payments
vision and targets
operation. Bringing APIs into alignment has the BUT THE CHALLENGE OF FACILITATING CROSS-
Source: FSB CPMI stage two report to the G20, 2. Implementing international guidance and
potential to help streamline payments operations BORDER DATA EXCHANGE PRESENTS A SIGNIFICANT
2020 principles though automation, significantly improving HURDLE, UNDERMINING THE POTENTIAL FOR A
3. Defining common features of cross-border efficiency. Harmonising APIs can also facilitate FULLY CENTRALISED CROSS-BORDER PAYMENTS
payment service levels payment orchestration. The latest iteration of SYSTEM WITH A GLOBAL REACH
the CPMI roadmap found that a growing number
of payments systems are in the process of being
interlinked by leveraging APIs, a trend that is The second regulatory gap identified by the
E B anticipated to continue. In response, the CPMI CPMI roadmap is the transparency of information
intends to ‘play an active role in kick-starting’ provided to end users about transactions. According
NEW PAYMENT the initiative for the harmonisation of APIs and to a Swift white paper from January 2022, unique
INFRASTRUCTURES REGULATORY,
is in the process of establishing a working group transaction identifiers could offer a solution.
AND ARRANGEMENTS SUPERVISORY AND
OVERSIGHT consisting of API developers and representatives Industry-wide adoption of UTIs would help reduce
17. Considering the feasibility of FRAMEWORKS from governance bodies to collaboration on risk and increase transparency across the transaction
new multilateral platforms and ENHANCE
arrangements for cross-border 4. Aligning regulatory, harmonisation. system, which could be brought to fruition with
payments CROSS- supervisory and oversight In addition, the increased adoption of payment- widespread migration to ISO 20022. Lastly, the
BORDER frameworks for cross-
18. Fostering the soundness of versus-payment mechanisms (building block 9) is roadmap highlights cyber/technology risk regulation
border payments
global stablecoin arrangements PAYMENTS 5. Applying AML/CFT helping streamline foreign exchange transactions as a potential regulatory gap, addressed by building
for cross-border payments
19. Factoring an international
rules consistently and across platforms. While PvP arrangements are block five by applying anti-money-laundering and
comprehensively available for the most-traded currency pairs, countering terrorist financing rules consistently and
dimension into CBDC design
6. Reviewing the
PvP adoption is needed in all jurisdictions to comprehensively.
interaction between data
frameworks and cross- help remove frictions in correspondent banking. In response to the potential regulatory blind spot
border payments The CPMI is consulting with both domestic and posed by a lack of comprehensive NBFI supervision,
D 7. Promoting safe payment international stakeholders until January 2023, the FSB is establishing a working group to further
corridors
the findings of which will be the basis of an explore and make recommendations related to
8. Fostering KYC and
identity information implementation plan. the application of supervision to banks and non-
DATA AND MARKET PRACTISES
sharing Discussions with practitioners in the cross- banks concerning their cross-border payments
EXISTING PAYMENT
14. Adopting a harmonised ISO
20022 version for message INFRASTRUCTURES C border payments space indicate that multilateral activities. Meanwhile, regarding the transparency of
formats (including rules for AND ARRANGEMENTS platforms are exploring the use of new tools information provided to end users about payment
conversion mapping) and innovations, such as distributed ledger transactions and cyber risk regulation, the FSB
15. Harmonising API protocols for 9. Facilitating increased adoption of PVP technologies, blockchain, cloud technology and is creating workstreams to evaluate both issues.
data exchange 10. Improving (direct) access to payment systems by banks, non-banks artificial intelligence. Although they are still in the Originally planned for March 2022-March 2023, but
16. Establishing unique identifiers and payment infrastructures
early stages of the development, these potentially delayed by one year, the next step for facilitating
with proxy registries 11. Exploring reciprocal liquidity arrangements across central banks
(liquidity bridges) more ‘disruptive’ technologies could also have regulatory harmonisation outlined by the CPMI
12. Extending and aligning operating hours of key payment systems to significant potential to facilitate payments system roadmap is for the FSB to provide a report for public
allow overlapping interoperability within fiat-based systems. consultation on these three key areas. This stage
13. Pursuing interlinking of payment systems for cross-border payments should help address the gaps identified by the
REGULATORY AND SUPERVISORY stock-taking exercise, which will then be followed by
FRAMEWORKS relevant national authorities to communicate their
Under building block four, the CMPI roadmap also plans for alignment the following year.
in present cross-border payments ecosystems: institutions and their payments ecosystems. highlights three areas where regulatory gaps exist
payments system interoperability and extension; Over 70 countries have already migrated and may need to be addressed by international CROSS-BORDER DATA EXCHANGE
legal, regulatory and supervisory frameworks; and to ISO 20022, from South Africa and Japan to standards. First, while robust regulation is in place Innovations like ISO 20022 are facilitating easier
cross-border data exchange. Switzerland. According to the ISO, convergence for banks in respect of their cross-border payments data exchange between financial institutions
into one standard is the long-term objective. And activities, non-bank financial institutions are not and payments services providers. But while
PAYMENTS SYSTEM it appears headed in that direction. From March yet subject to the same level of supervision. The demonstrable progress has been made on the
INTEROPERABILITY 2023, Swift will also transition to ISO 20022 CPMI roadmap indicates the need for NBFIs to be technical interoperability of cross-border payments
On interoperability, several technological and a BIS publication from this year anticipated subject to regulations ‘proportionate to the risk they systems, as well as harmonising their regulatory and
innovations are contributing to more efficient that most of the world’s payments systems will pose’, as inconsistent standards or implementation supervisory frameworks, an interviewee expressed
systems. One promising development is ISO adopt the standard by 2025. The hope is that could lead to blind spots about potential risks or concern that data localisation is ‘one area where
20022, a universal message standard for the the standardisation brought about by ISO 20022 risk management gaps within the financial system. things are moving aggressively and quickly in the
financial industry introduced by the International will alleviate some of the current bottlenecks in Devolder noted that creating a ‘level playing field’ wrong direction’. This, they explained, is in large
Organization for Standardization and associated data processing across jurisdictions. Interviewees among banks, NBFIs and fintechs is something part due to the proliferation of data localisation
with building block 14 of the roadmap. By providing shared a positive outlook on the standard’s the G20 is working towards. She emphasised that requirements, or laws requiring data to be collected,
a metadata repository along with a maintenance potential for easing interoperability. regulators in the fintech space need to strike the processed and/or stored within a given country
process, ISO 20022 offers a common language for Progress is also being made on building balance between fostering innovation and ensuring before being able to be sent abroad.
data exchange. In this way, the system provides block 15, harmonising application programming entities involved in payments are subject to the same According to data from the United Nations
a means for communication between financial interface protocols, software interfaces that regulations and operational requirements. Conference on Trade and Development, over 70%
of countries have implemented some form of data

localisation requirement. China, India and Russia
Export-Import Bank, PAPSS is seeking to transform
how payments are made across borders in Africa, 80% >70
have the highest number of localisation measures THE MOST COMPREHENSIVE EFFORT TO facilitating the expansion and diversification The majority of More countries
in place — three countries which have a low level ADDRESS THE PERSISTENT DIFFICULTIES of interregional and international trade on the cross-border are migrating to
of integration in cross-border payments system INVOLVED IN THE DEEPER INTEGRATION OF continent. transactions in the ISO20022,
networks (though India began accepting cross- CROSS-BORDER PAYMENTS SYSTEMS IS BEING At present, 80% of commercial cross-border Africa have to a universal
border payments this year following a law passed by SPEARHEADED BY THE CPMI. transactions within Africa must travel halfway travel outside of message
the Reserve Bank of India in September 2022). The around the world to be processed, mostly through the continent to standard for the
move towards mandated data residency has had the US or UK, before returning to the continent. be processed financial industry
tangibly negative impacts on the efficiency of cross irrespective of the opening outs of their local bank.’ This results in higher costs and more delays in
border payments systems. As a currency union, the euro area has the benefit cross-border payments, which PAPSS is aiming to
There are a variety of driving factors behind of bypassing the foreign exchange challenges alleviate.
this trend. For one, there are genuine security
concerns associated with storing data abroad. ‘Law
facing cross-border payments systems, making it
easier to develop payments infrastructure among
The PAPSS infrastructure supports multiple
settlement currencies. Within the platform, $661bn >70%
enforcement wants to know that they can access member countries. Since its inception, however, each country can set their rates against any Value of personal Data localisation
relevant data in order to pursue cases to keep the central banks of Sweden, Denmark and Norway other currency. Each transaction then creates remittances in rules have been
citizens safe,’ stated one interviewee. Therefore, ‘law have also expressed interested in joining TIPS. The a settlement obligation, with only net positions 2019 put in place by
enforcement sees keeping data on shore as one way Eurosystem and Sveriges Riksbank are actively moving between the different counties. Liquidity most of the
to do this and avoid what could be a complicated exploring a potential cross-currency settlement is provided by central banks, largely in line with world’s countries
process to subpoena someone if that data is feature (including PvP) with TIPS, which would the Principles for Financial Market Infrastructures’
stored abroad rather than if it is stored locally.’ The integrate transactions between the euro and krona. settlement model, but the system supports multiple
same case can be made for regulatory oversight, Among developing countries, Association of settlement models as well. ‘We recognise that there
evidenced in the US Securities and Exchange Southeast Asian Nations member states are also will be balance of trade issues and that flows may be
Commission initially pursuing data localisation for working towards a regionally integrated payments skewed in favour of certain entities,’ stated Ogbalu. payments systems of Singapore, Malaysia and the
financial oversight purposes before backtracking. network. In April 2021, the Monetary Authority of In response, a settlement guarantee fund of $500m euro area, with the hope of expanding to include
Another rationale for data localisation Singapore and the Bank of Thailand inaugurated was developed for west Africa, with intentions to more national payments systems.
requirements is countries’ concern about the a novel linkage of real-time payments systems, increase this to $3bn as PAPPS scales across the
prospect of data being used by others and not which resulted in markedly lower transaction costs continent. THE WAY FORWARD
by them for consumer protection considerations. and faster processing speeds for cross-border Currently, eight central banks, 50 commercial Conversations with experts in the cross-border
Another expert in the digital payments industry payments between the two countries. What and seven switches (including both national and payments systems space suggest that the CPMI
noted that 'cultural constructs and consumer originated as a bilateral system has since become a private sector ones) are connected to the PAPSS roadmap has been positively received — there
preferences around privacy vary significantly from blueprint for establishing a region-wide payments ecosystem. An additional five entities are in appears to be a general sense that regulators and
country to country,' with the European Union being ecosystem. alliance with the network, including the settlement private sector innovators are aligned in their desire
an outlier in prioritising consumer data protection In November 2022, a memorandum of platform operated by the Arab region’s payment to improve the cross-border payments landscape.
through its comprehensive General Data Protection understanding on co-operation in regional payment and clearinghouse system, Buna. And the PAPSS Technological and regulatory progress is being
Regulation. connectivity was reached by several countries at the network is expanding fast: ‘We should be able to made, with developments in both interoperability
A less benign rationale in favour of data G20 Bali summit, expanding the system to include double the footprint we have today by the end of and regulatory harmonisation.
localisation is digital industrial policy, whereby policy- Bank Indonesia, Bank Negara Malaysia and Bangko Q2 next year,’ stated Ogbalu. ‘We are hoping to But the challenge of facilitating cross-border
makers look to use data localisation requirements to Sentral ng Pilipinas. This collaboration is a part of cover 70%-80% of the continent in the next three data exchange presents a significant hurdle,
favour local cloud service providers. This strategy, Asean’s aspiration for a region-wide connected years,’ with the end goal being complete regional undermining the potential for a fully centralised
though it has gained support among United payments system by 2025. Speaking at the summit, integration in payments systems across Africa. cross-border payments system with a global reach.
Nations Conference on Trade and Development Ravi Menon, managing director of MAS, confirmed Ogbalu expressed optimism at the prospect Cross-border data flows are a crucial element to the
and other heterodox economists, is essentially a that Asean’s effort in the cross-border payments of developing region payments systems and development of any efficient multilateral payments
form of trade protectionism. And while countries, space ‘is aligned with the G20’s goal of addressing having another platform, such as Swift, facilitating ecosystem, but the protectionist trend reflects
especially emerging markets, may have legitimate existing frictions in global cross-border payments, transactions between regional systems, thereby a world which is becoming more fragmented,
developmental considerations which underly data creating new business opportunities and enabling offering a hub-and-spoke model of cross-border undermining the globalisation of payments systems.
localisation rules, the more barriers to cross-border inclusive growth’. payments. Dave Sissens, chief executive officer Concluding the final action for building block
data flows there are, the more difficult it will be to Another pioneering initiative in regional of RTGS.global, a financial market infrastructure 17, the CPMI will publish a report considering
facilitate cross-border payments. integration is the Pan-African Payment and facilitating cross-border payments in the the feasibility of new multilateral platforms and
Settlement System. PAPSS was developed in wholesale market, also expressed optimism about arrangements for cross-border payments by the
GLOBAL PROBLEM, REGIONAL response to a fundamental problem facing the a regionalised approach. He noted that: ‘Given end of 2022. In the meantime, regionally integrated
SOLUTION? African continent: ‘Africa doesn’t trade with itself the existing trust between trading countries and payments networks offer an exciting prospect.
In the absence of a globalised multilateral payment — it has the lowest trade among all continents, and counterparties, it makes perfect sense for regional Where multilateral initiatives stall, stand-out cases
system, an interconnected regional system could be trade is critical to economic prosperity,’ explained solutions to thrive.’ like Asean’s RPC and PAPSS illustrate the promise
the way forward. In 2018, the Eurosystem launched PAPSS Chief Executive Officer Mike Ogbalu. With the launch of its pioneering project Nexus, of regional projects, which could be especially
its Trans-European Automated Real-time Gross ‘Considering all the different things that affect a model for connecting national payment systems exciting for developing markets. As a completely
settlement Express Transfer (TARGET) Instant trade, we came to the realisation that, unless we into a cross-border platform, a hub-and-spoke globalised and centralised retail payments system
Payment Settlement (TIPS) infrastructure service, deal with the subject of payment, African trade model is also being support by the BIS. Having seems increasingly unlikely, a hub-and-spoke model
enabling individuals and financial institutions to will not take off, and that will have an effect on the entered the testing phase, the initiative is using is certainly an alternative worth exploring for the
‘transfer money between each other within seconds, prosperity of the continent.’ The idea of the African simulated payments to test the interlinkage of the future of fiat-based cross-border payments. •
WHY REMITTANCES
MUST GO DIGITAL
Remittance inflows are critical—and they have been resilient in MTOs and corridors declined to 3.9% from 4.2% in
challenging times, by Chad Harper, senior fellow, Visa Economic 2022, a drop of 10%.
• The average of the lowest costs declined to 2.1% MIGRANT WORKERS MUST BE ABLE TO COMPARE
Empowerment Institute
in 2022 from 3%, a decline of almost 30% — this OPTIONS AND SEND REMITTANCES DIGITALLY.
measure is roughly analogous to the World Bank’s THEIR FAMILIES MUST BE ABLE TO THEN SPEND
REMITTANCES proved surprisingly resilient during As of the second quarter of 2022, World Bank SmaRT index. THE FUNDS DIGITALLY AT BUSINESSES IN THEIR
the pandemic and inflows for 2021 were very strong, remittance price data show that: • By contrast, the average of the highest costs went COMMUNITIES
reaching $773bn globally and $605bn for low- and • The average $200 remittance costs 6% — this is the up to 7.1% from 6.2%, driven largely by two corridors,
middle-income countries. In addition to being a headline number policy-makers most often mention. where MTOs were offered dramatically different
critical lifeline for families, remittances play an • The digital remittances index (for remittances pricing. Migrant workers without the ability to check Second, focus on digital enablement broadly,
important role in the economies of many countries. digitally initiated in an online or self-assisted way) is multiple options could have paid exceptionally keeping both consumers and businesses in mind.
In 2021, 30 countries received over 10% of their gross 4.8%. high prices (and some undoubtedly did) during this While the digital receipt of remittances is critical
domestic product from remittances. • The Smart Remitter Target (SmaRT) index (a period. for further progress on efficiency, the larger goal
Border closures and business lockdowns in the measure of what a savvy consumer with access to Overall, while the average price of a remittance in is to digitally enable everyone, everywhere to fully
early days of the Covid-19 helped digital money sufficiently complete information could pay) is 3.4% the research was 3.9%, VEEI was able to find costs participate in this new world. Individuals need to
movement options flourish. These offer a variety — almost at the 3% UN sustainable development below 3% in 20 of the 25 corridors in 2022. be able to receive remittance funds and use them
of advantages for senders and receivers, including goal target. Clearly, the ability to send remittances digitally digitally, with ubiquity. This requires digitally enabling
cost, security and speed. However, only a third of These observations are confirmed by Visa and to easily compare transfer options make a big businesses, especially small businesses, helping
remittances are initiated digitally and only one-third Economic Empowerment Institute modeling of card- difference to senders and their families. So, what them to accept digital payments and to connect
of those are picked up digitally. Focus needs to be initiated digital remittances over the last two years. needs to happen? them to digital marketplaces. Therefore, consumers
on how to enable more of these digital transfers (see In the modeling, VEEI determined costs across Traditional remittances must become digital. and businesses must both be part of the equation in
Figure 1). several money transfer operators for 25 key global Cash-initiated remittances are the most expensive achieving digital ubiquity. Countries that have driven
Costs are still high for the average remittance, corridors and compiled three measures: the average way to send a remittance and it is perhaps worse on digital ubiquity most successfully over the last
but are much lower for digital remittances and in cost, lowest cost and highest cost. the receiving end — many MTOs maintain vast cash decade have worked to drive adoption on both sides.
cases where people can compare multiple options. • The average costs for a $200 remittance across all out networks in receiving countries and this adds Third, aim for an open, interoperable digital
appreciable costs to remittances today. ecosystem built on a foundation of resilience and
Migrant workers must be able to compare security. Interoperability should be favored over
Figure 1: There has been a shift to digital remittances, but most are still traditional options and send remittances digitally. Their families uniformity — more paths are better than one. A
Digital remittance trends over 24 quarters, 2016-2022 must be able to then spend the funds digitally at truly interoperable service should be able to reach
100 businesses in their communities. None of this can as many endpoints as possible: traditional bank
3 3 2 3 3 3 3 3 3 4 3 4 4 4 4 4 5 6 6 6
4 4 5 5 5 5 11 10 happen without basic digital infrastructure. accounts, prepaid accounts and digital wallets.
6 7 7 8 9 12 13 13
90 9 9 10 10 11 Innovation must be facilitated by more Fourth, streamline the compliance environment
12 12 12 13
consistently applied compliance rules and consumer to reduce cross-border frictions. While the private
80
23 24 20 21 21 choice needs to be promoted by making it easier sector is innovating, competing and improving speed
70 for remittance providers to bring new innovations to and efficiency, policy-makers have a key role to play.
market. Remittances go through a number of regulatory
60 regimes that currently add frictions. But these can
50
UNLOCKING THE BENEFITS OF DIGITAL be reduced by streamlining and aligning compliance
93 93 93 92 92 92 91 90 90 REMITTANCES rules as much as possible.
88 88 87 87 86 86 85
40 83 82 82 81 Five steps will help unlock the benefits of innovation Finally, simplify the licensing process to allow
66 66 68 66 66 and digitalisation for more people while also uplifting remittance innovation and competition to thrive.
30
businesses and communities. Policy-makers can also help the private sector
20 First, begin with digital enabling infrastructure introduce innovations more quickly and with less
if it does not already exist. The digital receipt and burden. Consistent licensing requirements would
10 use of remittances will be a non-starter without help remittance service providers enter and operate
basic enabling infrastructure. For millions of people, across multiple geographies with less friction.
0
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 basic infrastructure like electricity will be a barrier Streamlining licensing requirements and processes
2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022
to the digitalisation of remittances, payments and will help new market entrants bring the benefits of
Traditionally initiated Digitally initiated Digital end-to-end commerce. Beyond electricity, internet connectivity digital remittances to more corridors, and therefore
Source: VEEI/Devtech Systems analysis of WBG Remittance Prices Worldwide Quarterly data — and broadband connectivity — will be crucial. to more people. •
22 DMI Future of Payments 2022 omfif.org/dmi
omfif.org 23
it will necessarily continue to do so or that it will

remain stable. While money supply growth is a major
contributor to inflation, there is little evidence to
1. For countries with high inflation and suggest that a fixed supply of bitcoins would have
strict capital controls, cryptocurrency a constant stable purchasing power, particularly
offers a popular, though risky, alternative in a world where taxes and salaries continue to be
to the traditional financial system. denominated in fiat currency.
Gold is often regarded as a hedge against
2. Stablecoins offer many of the benefits inflation. On a sufficiently long timeline, demand
of cryptocurrencies without the volatility, has kept its price ahead of inflation, meaning gold
but not all are safe and robust solutions. holdings have maintained their purchasing power.
Bitcoin is often likened to a digital form of gold, with
3. Vulnerable nations should invest in fans claiming that it provides a similar hedge against
bringing down the cost of remittances inflation but can be held and transacted digitally,
and broadening access to financial without intermediaries.
services to reduce the exposure of Bitcoin, though it has proven relatively stable
vulnerable economic groups to volatile over the past few months, fell in value from around
and unsafe cryptocurrency products. $47,100 at the end of March 2022 to around $17,300
in mid-November. This kind of precipitous decline
undermines its value as an inflation hedge. It will be a
long time before bitcoin has earned the same trust as
an inflation hedge that gold has achieved.
However, some fiat currencies around the world
some corridors, settlement can take over a day as have long track records of painful inflationary
transactions wait for correspondent banks to open to dynamics. According to an article in El Pais,
be settled. Argentina’s average annual inflation over the last 100
Second, though cryptocurrency transactions are years has been 105%.
not free, many can offer savings versus some of the This kind of inflation is one of the principal reasons
more expensive remittance corridors. citizens lose faith in their domestic currencies. For
Crypto’s final advantage is accessibility. This is citizens of countries with comparatively low and
particularly an issue in emerging markets. According stable inflation, it can be difficult to imagine living
CRYPTO’S CRUCIAL APPEAL

to the World Bank, 1.4bn people around the world are in a situation where the purchasing power might be
unbanked. Whether the challenge is simply accessing drastically lower just a month after a salary has been
physical infrastructure, overcoming high fees, a lack paid.
FOR EMERGING MARKETS

of trust in institutions or the absence of the requisite Citizens in such countries typically turn to the
identity documents, cryptocurrency offers an dollar, where the value of their savings is relatively
opportunity for many of these people to have access stable, rather than being eroded by domestic
to digital money, rather than relying on cash. inflation. Many merchants will accept payments in
The benefits of accessibility offer the best hope for digital currencies There are, of course, risks that come with dollars for the same reason.
to have a profound impact on payments systems. By Lewis McLellan embracing cryptocurrency as an option, discussed A similar dynamic has been at play in Turkey,
below. However, there are drivers behind demand for where the latest annual inflation figure was 85.5%. In
cryptocurrency in emerging markets distinct from such conditions, the dollar becomes a more popular
IN developed markets, cryptocurrencies have cousins has added new alternative systems for the primarily speculative demand in high income option and hugely in demand.
had little hope of catching on as mainstream citizens and businesses. countries. Bitcoin is, for many, even more easily accessible
channels for payments. If one can rely on stable A cryptocurrency is a token traded on a than the dollar since it does not require either a bank
prices and trustworthy institutions, the volatility of distributed ledger — a form of record-keeping POTENTIAL DOMESTIC CURRENCY account or access to physical cash. Accordingly,
cryptocurrencies makes them an unpopular choice that can provide security without the need for an PROBLEMS adoption is high since it can provide a means for
as a means of exchange, though they are a popular intermediary. Stablecoins are cryptocurrencies Inflation citizens to shelter their savings from inflation. Some
speculative investment. that, rather than having a value determined by the Many cryptocurrency fans claim that one of the will choose to exchange as much of their salary as
The currency in which most goods and services marketplace, seek to maintain parity with another chief advantages of bitcoin over fiat currencies is possible for dollars or cryptocurrency, only buying
are paid for, and taxes and wages are paid in, is asset’s value, typically the dollar or another fiat that it provides a hedge against inflation: the erosion enough of their local currency to cover expenses.
typically the currency in which most citizens will keep currency. of purchasing power by price increases. Unlike fiat However, when collapses like this year’s
their assets. If the systems and institutions serving There are three basic advantages that currencies, bitcoin has a fixed supply. More bitcoins monumental decline do occur, many of the victims
fiat currency function effectively, then the primary cryptocurrencies offer in cross-border payments are being produced at a steady and declining rate. are likely to be in lower income economies in
appeal of cryptocurrencies for most will be as a when compared to traditional methods. First, There are currently around 19m bitcoins in existence economically fragile situations.
speculative asset. because cryptocurrencies can be traded in the and there will never be more than 21m. Stablecoins are a possible alternative to the
However, when a domestic currency is absence of an intermediary, they do not rely on Bitcoin proponents believe that this fixed supply instability of bitcoin and other cryptocurrencies.
dysfunctional, citizens are more eager to look for institutions’ opening hours for operations. This will protect bitcoin against inflation. While over its The most common stablecoins have values pegged
an alternative. Traditionally, this has been the dollar. simple distinction offers a major advantage in cross- 12-year existence, bitcoin’s value and purchasing to the dollar. Users are still exposed to the foreign
The arrival of cryptocurrencies and their stablecoin border payments, where time zones mean that, for power has grown on average, that does not mean exchange risk of a decline in the value of the dollar,
but this is a far less troublesome risk than exposure domestic product. Money transmitters often charge said that they used or owned cryptocurrency.
to bitcoin’s performance. substantial fees for remittance corridors. The Peer-to-peer networks like bitcoin might cut out
STABLECOINS ARE CRYPTOCURRENCIES THAT,
However, stablecoins bring their own risks, United Nations aims to bring the average cost of a the middleman, but cryptocurrency transactions
RATHER THAN HAVING A VALUE DETERMINED BY
discussed below. remittance down from 6.4% to 3%, with no corridors are not free. At present, bitcoin transaction fees are
THE MARKETPLACE, SEEK TO MAINTAIN PARITY
charging more than 5%. This would result in savings less than a dollar and are likely to provide savings
WITH ANOTHER ASSET’S VALUE, TYPICALLY THE
Capital controls of more than $18bn — a substantial contribution to compared with traditional remittance channels.
DOLLAR OR ANOTHER FIAT CURRENCY
Domestic inflation creates an incentive for citizens the GDP of remittance recipient countries. However, these fees can fluctuate widely based on
to buy foreign currency, particularly dollars. The Making remittances more efficient and reducing demand, peaking at over $60 in April of 2021.
frequent selling of domestic currency for foreign the share of value captured by money transmitters Nevertheless, despite the variability, these
exerts a downward pressure on the value of the access banking services, a frequent limiting factor is is a key policy aim for the Bank for International networks can, in theory, provide a valuable channel,
domestic currency, exacerbating inflation. To stem that they are unable to produce the documentation Settlements’ committee on payments market particularly with the addition of other layers like the
this, many governments choose to impose capital necessary to verify their identity to the satisfaction infrastructures. Lightning network (a layer 2 addition to the bitcoin
controls. of the banks. Though there are a variety of possible schemes blockchain that eases the load of transactions via
This can make purchasing goods and services One of the consequences of reliance on cash for the improvement of remittances, some are netting).
abroad — holidays, foreign tuition or international is that it is difficult or impossible to build up an already turning to cryptocurrency. The peer-to-peer However, not everyone is keen to adopt bitcoin
e-commerce for example — challenging and economic history that might be used by lenders to nature means there are fewer intermediaries and the for remittances. In September 2021, El Salvador’s
expensive. There is therefore a demand for a assess their creditworthiness. Without access to process can be completed more efficiently. president, Nayib Bukele, spearheaded a drive to
means of moving money across borders outside of capital, their economic opportunities are limited. Vietnamese remittances, around $18bn in 2021 make bitcoin legal tender in the country. One of
government scrutiny. Access to the internet and, in particular, mobile (just under 5% of GDP), cost an average of 7% in Bukele’s stated aims was to make it easier for citizens
Some governments in this situation attempt to phones has given many in emerging markets the 2020, according to statistics from the World Bank. to receive remittances from abroad.
control the value of their currency with a peg: an opportunity to use banking services in ways they Much of the population, particularly in rural areas, The move was, however, widely protested by
official exchange rate. As of November 2022, the would not previously have been able to. may struggle to access the services of conventional citizens and, according to a survey conducted by
Central Bank of Argentina will purchase dollars for But these still mostly require some identity fiat money transmitters. the Salvadoran chamber of commerce, only 14% of
157 pesos and sell them for 165. On the unofficial verification. Cryptocurrency offers many an It is perhaps unsurprising therefore that merchants in El Salvador had processed a bitcoin
market, buying a dollar costs 285 pesos and they sell opportunity to engage in investment, borrowing and cryptocurrency use in Vietnam is among the highest transaction as of March 2022.
for 289. international commerce with lower barriers to entry. in the world, much of which is driven by remittance Around 24% of El Salvador’s GDP came in the
Those holding dollars will therefore benefit hugely With internet access outpacing banking access, traffic. Second only to Nigeria, some 21% of form of remittances in 2020. World Bank data
from using illegal exchange rate providers, rather many turn to cryptocurrencies and stablecoins as Vietnamese respondents to a 2020 Statista survey suggest El Salvador already operates a fairly cheap
than the official sector. These conditions are far more a means of accessing digital payment systems and
fertile ground for the adoption of cryptocurrencies value storage, as well as credit via decentralised
than the conditions in much of the global north. finance.
105%
Traditionally, unofficial exchange rate providers However, the lower standards of investor
rely on smuggling physical cash over borders but protections and the volatility that periodically grips
these methods are always vulnerable to loss through the cryptocurrency market can result in severe Argentina’s
accident, robbery or seizure by law enforcement. financial losses in economically fragile communities. average annual
With peer-to-peer digital transactions enabled by inflation over
cryptocurrency, these risks can be mitigated. Lack of trust in institutions the last 100
While such techniques for circumventing capital A factor that often accompanies high inflation and
years’
controls are illegal and the resultant capital flight an unstable currency is low trust in financial or public
can prove damaging to vulnerable emerging market sector institutions. Argentina provides a valuable
economies, it is undeniable that using cryptocurrency case study. During the 2001 recession, many citizens
and stablecoin for this is part of the appeal they hold and companies were exchanging pesos for dollars
in these economies. and withdrawing them from banks, typically with the
intention of transferring them to offshore accounts.
Access To halt the flow of money out of the country, the
Many emerging markets have large rural populations government froze all bank accounts in early 2002,
with limited access to banking services. For those in allowing only small weekly withdrawals from peso-
remote, rural areas, they may simply have to travel denominated accounts. Eventually, dollar holdings
a long way to reach physical banking infrastructure, were redenominated into pesos at a rate well below
but even for those with access to remote banking the market rate of the time, with many people losing
services or local infrastructure, banking services can 65% of the value of their dollar holdings.
still be difficult to access. With risks of events like this, it is no wonder that
Some accounts cost money to open or maintain, citizens of countries with unstable economies have
which many in emerging economies can ill afford. concerns about leaving their assets in the control of
Even the cheapest accounts typically have overdraft financial institutions and the reach of governments
fees. Simply avoiding banking services eliminates the that most in more stable economies do not share.
risk of being hit with these fines. Particularly for those
who have never used the banking system, these risks Cheapening remittances
can seem uncertain and difficult to manage. For many economies in emerging markets,
Even for those who might be willing and able to remittances form a substantial part of their gross
remittance corridor, losing only 2.9% on average per market countries to get access to digital dollars, Some stablecoins have large, highly liquid, frequently
transaction — below the UN’s target of 3%. Despite which might otherwise prove challenging because audited reserves capable of meeting redemptions.
this, some corridors are markedly more expensive they cannot access traditional banking services. Others have less high-quality collateralisation and
and many require senders and recipients to present This can offer them a means of engaging in lower standards of transparency. Either through
and collect cash in person. Some 16% of remittance international e-commerce, buying and selling goods limited choice or limited information, emerging
corridors take more than two days. And 24% make and services internationally. Freelancers around the market users may not always be able to rely on the
funds available the following day. world can compete for jobs in a global marketplace. provision of high quality stablecoins.
According to El Salvador’s central bank, a mere The low transaction fees for on-chain transactions The risks grow as the size of the stablecoin grows
1.7% of the remittances sent from the US to El typically represent a saving versus most digital since even highly liquid assets take time to sell in
Salvador in the first half of 2022 were denominated payments providers and, combined with relatively large volumes and can cause market movements.
in cryptocurrency (almost all of it in bitcoin). quick settlement times (usually minutes rather Holdings large enough to collateralise a widely-used,
While it is possible that, over time, acceptance than hours or days) and smart contract automated globally-available stablecoin will have a wider effect
of bitcoin for remittances will grow in El Salvador, payment-versus-payment foreign exchange on the economy. A rapid sale of large amounts of
download figures for the state sponsored Chivo conversions. assets — short-dated government securities for
Wallet application have been low since the initial This also makes it a potentially valuable channel example — might drive down the price and force
surge. Many users downloaded the app and used for the distribution of aid payments. For those margin calls or otherwise disrupt funding operations.
the $30 worth of bitcoin they were given free by the without access to traditional banking services, but As well as issues around collateralisation, there
government but have made little further use of it. with internet access and smartphones, it offers a are potential operational risks. Stablecoins operate
There is another issue with using cryptocurrency means of making aid payments in a more secure, on blockchains. While the core of blockchain
for remittances. Since few people are paid in bitcoin traceable and useful manner than physical cash, cryptography is typically robust, there are several
or, even in El Salvador, can use it for many of their which can be lost, damaged or stolen more easily different layers of services — such as custodians/
day-to-day purchases, senders will have to buy it in than digital equivalents. wallets, interoperability bridges, on/off-ramps and
their local currency, send it to the recipient, who will The US government has made use of stablecoins smart-contract payments —which bring their own
have to sell it for their local currency or, more likely, to send foreign aid to Venezuela. Since they are vulnerabilities and have been exploited by hackers.
sell it for dollars and then buy their local currency peer-to-peer, they offer a means of circumventing
with dollars. transaction systems and banks that might be under DOLLARISATION
This adds foreign exchange risk to the transaction the control of a hostile or dangerous government. The very ease of access and use that stablecoins
that, particularly with bitcoin, can seriously impact Since stablecoins exist on blockchains, which can provide creates further risks for emerging market
the amount sent and received. process transactions 24 hours a day, stablecoins countries. While the risk of citizens moving their
This risk might be mitigated in cases where the can also facilitate foreign exchange transactions by savings into dollars has been present for far longer
domestic currency is suffering from high inflation or enabling payment-versus-payment transactions. than stablecoins have been around, the availability
an otherwise unstable value. This eliminates settlement risk by ensuring that one of physical cash, risk of storage and accessibility of
Using stablecoins might mitigate this risk,
although there may be liquidity issues in exchanging
the stablecoin for local fiat currency.
1.4bn currency is transferred only if the recipient currency
is also sent. This reduction of risk means less capital
is required and brings down the cost of currency
merchants prepared to accept dollars have all proven
checks on the viability of stockpiling the currency.
However, with the advent of a digital, globally
Number of people who are unbanked,
according to the World Bank exchange. accessible dollar-like cash instrument, many of these
STABLECOINS difficulties disappear.
Many of the risks and frictions relating to the use RISKS The International Monetary Fund warned in June
of cryptocurrencies for payments in emerging The risk profile for stablecoins is different to that this year that stablecoins could displace national
markets stem from the fact that for most day-to-day of cash or bank accounts. Indeed, it is difficult to currencies, particularly currencies seen as less
users, spending them creates foreign exchange risk damage. Interest offers some compensation to generalise since the risk profile will be different for convenient to use or volatile in value.
because, even where cryptocurrencies are accepted inflationary value erosion. Bank deposits, however, each protocol. The publication suggests that even volatile
for payments, prices are almost always denominated represent a claim on the bank’s credit and create Much of the risk stems from the assets that cryptocurrencies like bitcoin might ‘in addition to
in fiat currency. risk. To some degree, this can be mitigated with collateralise stablecoins. In early 2022, the world was enabling capital flight, be preferred to the local
Stablecoins obviate that risk since they are state deposit protection schemes, but particularly in treated to an example of the damage a collapsing currency during economic turmoil’. However, it adds
typically pegged to the dollar or another major fiat emerging markets, these are not infallible. stablecoin can do. Terra was an algorithmic that the dollar is likely to be the preferred choice,
currency. While bank accounts facilitate digital transactions, stablecoin that attempted to maintain parity with particularly if an easily available digital version exists.
Stablecoins, though designed to have a fixed many citizens of emerging markets are unbanked and the dollar through a peg to Luna, a cryptocurrency This substitution effect might exacerbate
value relative to a given fiat currency or commodity, find it difficult to obtain traditional banking services, promising yield based on staking (a form of high- fragilities in emerging market banking systems as
are nevertheless not risk free. limiting their value. yield lending operation in the cryptocurrency world). they lose deposits to stablecoins, particularly if these
It is important for stablecoin users to understand Many countries in emerging markets have, to When trust in Luna’s yield failed, a run on Terra are remunerated.
that the risks they face when holding stablecoins are a greater or lesser extent, adopted the dollar as began and the inability to meet investors’ demands
not equivalent to the risks posed by holding dollars, the currency for everyday use. Smaller currencies to cash out shook confidence in the cryptocurrency
either in cash or in a bank account. with thin foreign exchange liquidity struggle with ecosystem, triggering a broad devaluation, resulting
The risks of cash are simple and well-known. acceptability offshore. This means there is a need in several high profile margin calls and insolvencies.
The purchasing power may fall thanks to inflation for dollars to pay for imported goods and the To be sufficiently reliable for widespread use for THE INTERNATIONAL MONETARY FUND WARNED
or moves in foreign exchange rates, and theft or dollar therefore underpins substantial amounts of the purposes described above, stablecoins must be IN JUNE THIS YEAR THAT STABLECOINS COULD
damage are always risks. It is obviously limited in economic activity in many emerging markets. backed by cash and cash-like assets. There must be DISPLACE NATIONAL CURRENCIES, PARTICULARLY
applicability since it can only be used in person. Dollar-denominated stablecoins offer a a sizable proportion held in cash such that they are CURRENCIES SEEN AS LESS CONVENIENT TO USE
Bank accounts prevent loss from theft and potentially valuable means for citizens of emerging able to meet large-scale redemptions immediately. OR VOLATILE IN VALUE
BASKET-BACKED STABLECOINS CONCLUSION

Thus far, the discussion has focused on fiat- Many emerging market economies share certain
pegged stablecoins, since these are the most features that make them particularly receptive
common. However, there are a variety of proposals to cryptocurrencies and stablecoins. Unstable
for stablecoins backed by a basket of assets, with a currencies with high inflation encourage citizens to
CRYPTOCURRENCIES CAN
value determined by those assets. Libra, a project seek refuge in freely available digital alternatives
of Meta, sought to establish a global stablecoin like bitcoin. Strict capital controls encourage citizens
backed by a basket of currencies. to seek out less easily policed alternatives. Large
Such a project would have had an enormous
impact on cross-border payments. There would
unbanked populations, particularly those with cultural
mistrust of financial or government institutions, are IMPROVE SPEED, COST AND
EASE OF ACCESS OF PAYMENTS
have been a clear benefit for using it, since a inclined to seek out alternative methods of payments
sender could buy this basket-backed coin with outside of the traditional sector.
their local currency and send it to a recipient in There are certainly benefits. Competition in
another country who could redeem it in their own the remittances space can only encourage better
currency. outcomes in terms of speed and cost for users and
However, the structure underpinning a basket- merchants. Reducing dependency on cash and Proper regulatory guardrails are needed for people to enjoy the benefits of a
backed currency is complex. Either the value will promoting access to global markets can promote payments revolution, writes Rana Kortam, director, global public policy at Binance.
fluctuate based on the changing value of the economic development.
components, or the components must be adjusted Insofar as cryptocurrencies and stablecoins can
dynamically. provide cheap and efficient payments systems, as ALTHOUGH CRYPTOCURRENCY is still in nascent stages, underprivileged segments, with fees for cross-border retail
If redemptions are unbalanced — if a great many well as opportunities to shield assets from inflation, 91% of crypto holders believe it’ll become as common as card payments reaching 10%.
of the stablecoin are redeemed in euros, but not they offer more value for emerging markets than payments. Despite making major strides, existing electronic The Financial Stability Board wants to get remittance fees
in dollars — then there will have to be purchases of they do for developed markets. payment systems suffer in regards to cost, efficiency and to the UN sustainable development goal of 3% and 1% for
euro assets to keep the composition stable. This However, many emerging markets users are access. retail fees by 2027. International stablecoin transactions cost
kind of system can have destabilising effects on in economically fragile situations and are not Legacy systems still fall short of providing access to less than 0.1%. Sending crypto to another user on the Binance
the broader economy, particularly for smaller and equipped to deal with the losses that the volatility financial services to 1.7bn adults or efficient cross-border Smart Chain costs between $0.01-$0.10.
less liquid markets. of cryptocurrencies make likely. It is important for retail payments. Blockchain technology brings the benefits Cross-border retail payments can take days to clear due
The risk of currency substitution is clear. Libra’s central banks, commercial banks and payments of faster settlement, access to new customers and lower to the number of intermediaries. Crypto transactions clear
main proposal for the avoidance of substitution services providers to work together to ensure they barriers to entry. within seconds; a great way to meet the FSB’s target of
was to assist in the development of local currency can establish alternative systems that can offer the Blockchain networks handle international transactions clearing 75% of transactions within one hour.
stablecoins for concerned central banks. same benefits with fewer risks. • in minutes as opposed to the traditional days or hours. All financial institutions must have a cross-border
They can settle transactions for under $0.01, considerably payments option, for retail, wholesale and remittances.
cheaper than traditional payment card networks. The rise Cryptocurrencies can address access challenges such
of stablecoins has highlighted shortcomings in traditional as multilateral settlement eligibility and the lack of
cross-border payments. Studies show that distributed correspondent bank relationships.
ledger technology improves the efficiency of cross-border Users must be provided with information about how much
payments and blockchain technology could help banks save a transaction will cost, how long it will take, its status as well
BITCOIN IS, FOR MANY, EVEN $27bn by 2030 on international transactions. as terms of service - all automatically visible in a blockchain’s
MORE EASILY ACCESSIBLE Cross-border payments matter. They account for 15%-20% public ledger.
THAN THE DOLLAR SINCE IT of ecommerce value. Small- and medium-sized enterprises, These improvements are consistent with the G20
DOES NOT REQUIRE EITHER A making up 90% of businesses and 50% of jobs globally, Roadmap for enhancing cross-border payments and its four
BANK ACCOUNT OR ACCESS need easier access to international payments. Remittances challenges and targets, covering cost, speed, access and
TO PHYSICAL CASH are a $589bn market and a major source of capital for transparency, to be met by 2027.
developing countries. They are also a lifeline for 281m CBDCs offer ‘the unique advantages of central bank
migrants. Cryptocurrency is making a dent in this market, money: settlement finality, liquidity and integrity,’ with
dominated by international operators, with Africa seeing emerging markets leading on adoption. Interoperable CBDCs
$562m worth of cryptocurrency inflows. Although various are key for cross-border payments. Interlinking CBDC
forms of cryptocurrencies are used for payments, stablecoins systems through a hub and spoke or single system might
and central bank digital currencies have won favour for their bring more improvement to the market than compatibility
stability. Stablecoins are primarily used for trading, lending or single access points. International co-operation in early
or borrowing digital assets, but could become used widely stages is necessary to address underserved cross-border
as a means of payment if well designed, interoperable and corridors. Crypto for payments regulation should follow a
buttressed by regulatory guardrails. risk-based approach specific to the tool’s structural features,
Payments giants are taking notice: Visa’s network allows usage and risks.
people to settle transactions in USD Coin, a dollar stablecoin, With risk management and regulatory guardrails,
and Moneygram partnered with Stellar to offer stablecoin stablecoins and CBDCs could become the go-to payments
for fiat remittances in India. International remittances cost an solution for cutting edge technology, such as in the
average of 6.4% for $200. A transaction could involve up to metaverse. Stablecoins have been critical to decentralised
four intermediaries. Fluctuating exchange rates exacerbate finance’s. The future of payments, backed by new digital
inefficiencies. And the burden is disproportionately borne by currencies, is looking bright. •
argue it could greatly reduce the presence of

these elements in the economy for one reason:
using a distributed ledger makes it easier to track,
1. Central bank digital currencies hold monitor and account for the movement of a digital
the potential to significantly improve currency. Illicit activity would be easier to spot
payments efficiency, particularly across and governments would have more transparent
borders, strengthen financial inclusion access to all market behaviour denominated in their
and ward against illicit economic activity currency.
These elements may be true for both developing
2. Despite these benefits, poorly and developed countries. However, they are
constructed CBDCs threaten to erode particularly helpful in emerging markets, where
trust in a country’s currency and there is often more limited infrastructure to track
monetary systems, while also assisting and ward against illicit finance. This is only true
excessive government oversight and the insofar as illicit activity is conducted in digital
growth of financial fraud currency, since cash remains difficult to trace
and monitor. Although cash is still an extremely
3. Although developed countries continue important channel for illicit economic activity,
to research and conduct small pilots of the presence of a CBDC might reduce legitimate
CBDCs, early evidence from deployment reliance on cash and improve enforcement
in several emerging markets is promising. agencies’ ability to pursue criminal activity.
Moreover, cross-currency CBDC These mechanisms of oversight and access
exchanges, which are underdevelopment, are also what can make a CBDC an excellent tool
may greatly improve foreign transaction to help reduce barriers to financial inclusion. By
efficiency. bringing individuals who might otherwise not meet
the baseline requirements of a traditional bank into
the system, governments can use the technology
to extend financial access to underserved groups.
Such efforts would be helped by using e-wallets
with weaker existing financial infrastructure and and more simplified digital banking tools, which can
a greater share of the economy outside of the be used on any smartphone. Nigeria’s e-naira, for
banking system. The benefits of a CBDC for example, provides financial access to individuals
developed countries will require a different analysis without identification or traditional addresses.
PROMISE AND PERIL OF of its relative risks and rewards. A promising sign for CBDCs is that digital
technology and mobile phone use is outpacing
CENTRAL BANK DIGITAL

CENTRAL BANK DIGITAL CURRENCIES the growth of transaction bank accounts. The
MAY IMPROVE FINANCIAL INCLUSION, implementation of a CBDC can exploit that
SECURITY AND EFFICIENCY divergence by helping phone-owning individuals
CURRENCIES A general purpose CBDC would transform any

economy. Instead of currency being largely
deployed in physical cash and commercial bank
access bank and transfer services without having
to hold cash or visit a physical location. Access to
mobile banking will, of course, need to improve.
liabilities, a government sponsored digital currency However, greater access to digital technology would
Both developed and emerging markets are working toward implementation would assemble a digital ledger tracking and make the impact of CBDCs on financial inclusion
executing transactions between parties. Although greater, given transaction account growth is
of CBDCs, but much of the action is concentrated in emerging markets, some central banks are considering deploying lagging. It is also possible to offer simplified digital
where the value propositions are clearer. By Julian Jacobs a CBDC, not to replace cash but instead to or mobile banking tools with limited ID verification
complement it, the movement towards a wholly requirements without launching a CBDC. Indeed, a
digital economic system would nonetheless be CBDC may not be the simplest means of achieving
CENTRAL bank digital currencies may overhaul how cyclical poverty dynamics. These elements were significant. The Bank for International Settlements this kind of financial inclusion.
the global financial and monetary system works. exacerbated by the Covid-19 pandemic. A well- predicted that 20% of the global population will use
By supplanting traditional fiat cash with a digital designed and implemented CBDC could improve a CBDC over the next three years. According to the
equivalent, CBDCs promise greater ease of use, access to the financial system, while also helping Atlantic Council’s CBDC tracker, some 72 countries
access, convenience and oversight. These elements stamp out criminal activity and making cross-border are exploring or developing CBDCs with a further 26
are, of course, beneficial for developed countries. payments more efficient. either launched or running pilots.
Yet, it is in emerging markets that the benefits Yet along with the benefits of central bank The potential benefits that emerge from this
of CBDCs are clearest. As of 2022, 1.7bn people digital currencies, there is also the potential for are distinctive. Estimates about illicit activity
FOR A CBDC TO BOOST ECONOMIC
remain outside the traditional financial system, the considerable risk, most notably in the form of unsurprisingly range. About 2%–5% of global
INCLUSION, GOVERNMENTS MUST
vast majority of which are in emerging markets. The financial instability, obstacles to CBDC adoption GDP ($800bn–$2tn) is hidden to avoid taxation.
PUT DIGITAL WALLETS AND BANKING
results are economic inefficiency and less impactful and trade-offs between security and freedom from Meanwhile, about $500bn is tied up in the illegal
TOOLS IN THE HANDS OF INDIVIDUALS
stimulus policy. And limited access to affordable governmental oversight. A CBDC, then, is likely narcotics industry. A central bank digital currency
WHO ARE OFTEN EXCLUDED FROM THE
financial products can also lead to debt traps and to be immediately useful in developing countries would not eliminate these issues, but proponents
FINANCIAL SECTOR.
20% financial infrastructure. In emerging markets

with less robust financial infrastructure, a weaker
The Bank for capacity to enforce regulations and a reliance on OVER THE COMING YEARS, NEW PILOTS
International cash, which aids both leakages and opportunities for IN THAILAND, MALAYSIA, GHANA,
Settlements crime, CBDCs hold great potential. SINGAPORE AND KAZAKHSTAN MAY
predicted RESULT IN THE OFFICIAL LAUNCH OF
that one-fifth CBDCS MAY POSE RISKS TO STABILITY, NEW CBDCs
of the global ECONOMIC FREEDOM AND SECURITY
population will It is not inevitable that central bank digital
use a CBDC currencies will spur greater economic inclusion
over the next and efficiency. Indeed, there are considerable
three years. challenges that complicate the overall picture. that have traditionally not engaged in mainstream
The key issues around CBDCs take on a few forms. banking often have lower levels of financial and
First, to promote inclusion, governments may need digital literacy. This corresponds with a preference
to take significant actions to reduce barriers to for cash as well as possible scepticism of financial
entry, presenting new security challenges. Then institutions — many central banks cite such lack of
there are legal, political and ethical challenges of trust as a blockage to financial inclusion.
greater oversight. Finally, there is a threat of more Given these dynamics, a crucial question for
significant volatility due to the speed of transferring central banks and governments is how to establish
currencies and the possibility of currency exchange guidelines that will enable easy access to CBDCs
rushes. while simultaneously ensuring its security. If a
For a CBDC to boost economic inclusion, CBDC — or any currency — is particularly vulnerable
governments must put digital wallets and banking to fraud, theft or illicit activity, businesses and
tools in the hands of individuals who are often consumers will avoid it in favour of other assets. This
excluded from the financial sector. The challenges may reduce the utility of the CBDC, as individuals
in doing this, particularly in emerging markets, is and businesses opt for safer forms of money.
individuals that are most likely to be excluded from Indeed, history is filled with examples of how the
the financial sector also tend to have more limited ease of counterfeiting a currency led to a cratering
exposure to digital technology, internet access and of its value (for example, the continental currency
formal identification. As a consequence, the CBDC notes of 1775). The risk, then, is that disruptions and
financial inclusion mission presents a conundrum: fraud erode trust in a CBDC, which in turn hinders
how can governments provide access to a central central banks’ ability to maintain monetary stability
Yet if a CBDC does succeed at opening banking to people in need of support. Almost 35% of adults bank digital currency if the vehicle to do so relies and macroeconomic health. Modern cash contains
to individuals traditionally outside of the financial in low-income countries opened their first financial on digital technology and requires some form of numerous tools to ward against counterfeiting
system, the compounding effects of this could be account to receive government payments. identity verification? — from holograms to watermarks. Central banks
considerable. Since individuals who do not engage The second benefit is the increased ease CBDC optimists have an answer. Through the will face a corresponding challenge to ensure that
in online banking may have little to no financial of transfer for migrant remittance payments. existing mobile phone infrastructure — smart their digital currencies cannot be counterfeited.
history, their access to credit, investments and Instead of incurring the often significant costs and and otherwise — central banks can extend mobile They appear aware of these risks, however. In our
finance is limited. The concentration of financial barriers that can emerge through cross-border banking access to individuals who have only the survey, issues around CBDC security were the most
activity, access to credit and equity exposure have payments, migrants would be able to transfer most basic access to digital technology. Offering widely cited challenge among respondents. Even
grown more pronounced both globally and within cash with greater ease, speed and at lower costs. reliable broadband and mobile data can be costly though cryptocurrencies have a poor reputation
domestic markets. If a CBDC offers an opportunity In 2019, migrants sent about $554bn home and and physically challenging in remote places, but it for cybersecurity, these problems typically are
for new demographics to develop a credit history migrant workers send between $200-$300 home is likely to be more cost-effective than establishing not inherent to the underlying technology itself.
and savings structure, global financial access every one or two months. About 75% of these bank branches. So, while providing access to the Security issues tend to emerge from layers built
inequity could be reduced. remittances are used to provide food and coverage connectivity necessary to process payments is on top of the base blockchain technology, such
Benefits also include speed and cost efficiency, for medical, education and housing expenses. Yet both a logistical and financial challenge, it may be as smart contract operated payments and digital
both of which can support individuals typically kept these payments remain expensive and are often the least difficult option to encourage an economic wallets.
outside the financial system. The cost to serve logistically challenging. World Bank data indicates system that is more powerful than a closed network Given the need to maintain security,
customers restricts access for some, so bringing that the average cost of a remittance is over 6% of of cash only transactions. governments might be compelled to adopt greater
this down can help with financial inclusion. the money sent home, with some corridors much Beyond this, many individuals outside of oversight over transactions. This brings with it
According to analysis by the Tony Blair Institute more expensive. the traditional financial system are missing economic freedom and government overreach
for Global Change, CBDCs could lower transaction Given these benefits, CBDCs may be most identification documents necessary to fulfil basic concerns. Given the decentralised finance visions
costs by up to 50% while simultaneously improving productive and useful for those countries with more know-your-customer requirements. This would from which cryptocurrency emerged, it is ironic
the speed and directedness of financial flows. In limited existing financial infrastructure and a greater make it difficult for CBDCs to promote universal that CBDC diffusion could increase government
OMFIF’s survey of central banks, all respondents share of individuals outside of the financial system. inclusion without either a concerted effort to oversight. With a CBDC, there is effectively no
said a key benefit of a CBDC might well be its This is why CBDCs appear to, at least for now, make improve dedicated identification resources or a limit to how much control a government could
capacity to make cross-border payments more the most sense and provide the most benefits lowering of KYC standards. The former may be exert, since it could completely see how money
efficient. This has two positive implications. The in developing countries. Developed countries, in challenging for a myriad of social and practical flows through the economy. For governments
first is that it might support direct transfers from contrast, might find it ultimately cheaper and more reasons. And the latter comes with significant risks. with poor human rights records, this might serve
governments or non-governmental organisations productive to extend the coverage of existing Moreover, there may be cultural barriers. Regions as an additional tool to stamp out dissent and
to limit financial resources for already harassed a bank account. This is part of a broader effort to
demographics and undesirable socio-political expand China’s efforts for improving cross-border
entities. For societies which value economic
freedom and less oversight, CBDCs might be
politically toxic.
$14bn transactions through its multiple central bank digital
currency (m-CBDC) bridge.
As of June 2022, there were 261m
CBDC proponents might argue, however, that individual digital renminbi wallets, EMERGING MARKETS CONTINUE TO
these issues of oversight would not necessarily be which have spent almost $14bn PILOT AND IMPLEMENT THEIR OWN
exclusive to a digital currency. Indeed, governments across 360m transactions. DIGITAL CURRENCIES
are already capable of exerting substantial control Despite growing interest in CBDCs among
over traditional finance. They can still instruct banks developed countries, the presence of
and money service providers to restrict payments more advanced digital currency projects is
to accounts. Canada exercised this power when overwhelmingly concentrated in emerging markets.
it used emergency government powers to freeze Indeed, all 11 CBDC projects that have been officially
the accounts of truckers during the protests of launched are in developing countries. This includes
early 2022 in Ottawa. The greater capacity for Jamaica, Nigeria, the Bahamas and several eastern
government to intrude on people’s finances might Caribbean islands. The Bahamas’ sand dollar —
be a feature of an increasingly digital financial launched in October 2020 — was the first, with
system, rather than a quality unique to CBDCs. the digital currency available now for all Bahamas
And yet there is little question that CBDCs offer citizens. Nigeria, meanwhile, launched the eNaira
governments a greater ability to track the flow of in 2021 as part of its phased integration into the
money. They represent an increase of the overwatch economy. At the start of 2022, over 600,000 eNaira
capacity. wallets had been created and 90% of transactions
Perhaps the greatest challenge CBDCs pose were between individuals and businesses. Finally,
is far more systemic and innate to the nature of Jamaica’s work with the Ireland-based eCurrency
a fully digital currency. In a best-case scenario, Mint organisation supported the country’s efforts
where CBDCs do proliferate and offer improved to launch the Jamaican digital exchange (JAM-
efficiencies and speed in transferring currencies, DEX) in February 2022.
these improvements could also expose economies Each of these CBDC projects was created at
to greater systematic financial risk brought on by least partly to support countries’ efforts to improve
volatility and sudden foreign exchange fluctuations, security and inclusion. The Bahamas’ swiftness
particularly if the CBDC is available for offshore in releasing the sand dollar came from an explicit
use. Just as the ease of investing in financial entities goal of promoting financial inclusion while warding
kindled the potential for violent and rapid crowd- against enduring issues of illicit economic activity.
driven instabilities — for instance, Game Stop equity in early 2022 declared there would be little benefit countries, their swift but cautious development The eNaira, meanwhile, is expected to help Nigeria
price volatility — CBDCs risk causing extremely from a CBDC for Britain. Despite this, the Bank of indicates that some form of CBDC will emerge more reach its target of increasing financial inclusion
disruptive currency fluctuations, particularly for England is continuing to explore the topic through widely in the coming years. by extending access to banking from 64% of the
emerging markets where thinner liquidity makes a collaboration with the Massachusetts Institute of A major exception to the slow moving population to 95%. It is projected that a well-
prices more vulnerable to movements. Such swings Technology’s Digital Currency Initiative. approaches of developed countries is Sweden, managed eNaira could add $29bn to the country’s
could result in rapid fluctuations in debt burdens, The Bank of Canada, meanwhile, is also which has already started its CBDC pilot. In 2017, GDP over the next 10 years. JAM-DEX is projected
net exports and GDP growth. partnering with MIT’s Digital Currency Initiative to the Riksbank began studying the utility of a CBDC. to save Jamaica $7m a year due to the waste and
Central banks must manage these trade-offs help it assess the merits of testing and launching a And in 2020, it began work to build a Swedish storage costs of relying on cash.
between security and access. A CBDC that does CBDC. Canada’s Project Jasper is a CBDC initiative CBDC with Accenture, culminating in the Riksbank’s Over the coming years, new pilots in Thailand,
not provide sufficient security would risk imploding that includes testing cross-border payments development of the e-krona, which is currently Malaysia, Ghana, Singapore and Kazakhstan may
a country’s economic and monetary system. A with the UK and Singapore. The European Union being tested for both large commercial and small result in the official launch of new CBDCs. Yet it
CBDC that offers no benefits to how easily money is is also developing a digital euro with the support retail payments. The country’s ministry of finance is is too early to say how successful current CBDC
transferred, however, would be an expensive project of individual euro area countries. In May 2022, planning to use the results of this project to assess projects have been. This is partly because they
with limited benefits. Christine Lagarde, president of the European whether the e-krona should be launched, with a are still incredibly young, but it is also in large part
Central Bank, gave her support to the digital euro goal of moving away from the inefficiencies of cash because they are subject to gradual roll outs. What
DEVELOPING COUNTRIES ARE and the EU announced partnerships with Amazon, and towards a more optimised system of digital is clear, however, is the confidence some central
RESEARCHING AND DEVELOPING the European Payment Initiative, Nexi, Caixabank transactions. In Eastern Europe, a similar pilot has banks have in the notion that they might be able to
DIGITAL CURRENCIES and Worldline to support its development. At the emerged in Lithuania, through its development of use a CBDC to move forward the size, sophistication
Most CBDC pilots are taking place in emerging individual country level, France has been conducting LBCOIN. and inclusion of their financial systems.
markets. By contrast, advanced economies are successful tests of CBDCs, while Germany’s China became the first major economy to pilot
developing and, in some cases, still researching Bundesbank tested the blockchain-enabled use a CBDC when it launched the digital renminbi in 28 COUNTRIES ARE WORKING TOGETHER
their own CBDC models. The US, for instance, of distributed ledgers for digital securities in 2021, cities across 10 regions. As of June 2022, there were TO CREATE MORE ROBUST CROSS-
issued executive orders looking into the topic and which could limit the need for CBDCs. In Spain, 261m individual wallets, which have spent almost BORDER CBDC NETWORKS
in September 2022 released seven reports that Iberpay in 2021 conducted experiments with 16 $14bn across 360m transactions. This included A key promise of CBDCs involves making cross-
examined key issues around security, environmental Spanish banks to test the possible functions of a the People's Bank of China’s pilot during the 2022 border payments easier, encouraging greater global
damage, illicit activity and risks associated with digital euro. All this implies that, while CBDCs are Winter Olympics in Beijing, during which 2m yuan financial market cohesion and efficiency while
CBDCs. Meanwhile, in the UK, the House of Lords generally not being deployed in pilots by developed was used daily, without foreigners having to create simultaneously supporting the ease of migrant
$29bn
How much a
well-managed
eNaira
ONE YEAR LATER: ENAIRA AS A could add to

Nigeria’s GDP
FORCE FOR FINANCIAL INCLUSION

over the next
10 years.
AND DIGITAL PAYMENTS

Despite successes, some marginalised groups still face financial exclusion.
The eNaira’s continuing development is trying to solve that, writes Olugbenga
Agboola, founder and chief executive officer of Flutterwave.
CENTRAL BANK DIGITAL CURRENCIES are one of the cross-border payments and transfers. Remittances represent
innovative ways central banks are diversifying. A key one of the most compelling use cases for digital currencies.
consideration for decision-makers is how such digital By eliminating intermediaries, the eNaira could be a reliable
currencies could improve the efficiency of commerce and low-cost payments solution for consumers and businesses. remittances. Current cross-border payments in Dunbar and in Project Aber, PvP foreign exchange
cross-border payments. CBDCs have launched already in 11 The Bank for International Settlements outlined in a 2021 many corridors are very sluggish. While domestic settlements that reduce complexities and barriers
countries, while 15 more are testing and 26 are developing report the benefits of CBDCs in reducing costs and increasing payments offer an opportunity to transfer money to foreign money transfers. Cross-border CBDCs
one. Nigeria is a leader here, with its already launched eNaira the speed of remittances. It stated that CBDCs could reduce directly between banks on a single platform, could therefore be an important piece of the future
already impacting local and cross-border payments. transaction times from 3-5 business days to seconds. It also there is no such platform for settling international financial ecosystem that might make remittances
During the 2022 eNaira Hackathon, Central Bank of Nigeria reported a PricewaterhouseCoopers estimate showing a transactions. A multi-currency CBDC platform cheaper and more accessible. They would create
Governor Godwin Emeiele pointed to the encouraging growth possible 50% reduction in the cost of cross-border payments. would enable more effective settlement without the greater international financial cohesion and
in eNaira adoption. Emefiele said, ‘Since the launch of this Flutterwave has recently announced the integration of need for intermediaries. connection, which could bolster the free flow of
great initiative, the eNaira has reached 840,000 downloads, eNaira on Flutterwave for Business. Merchants and consumers This is where multi-CBDC initiatives come in. capital and value, spurring economic growth and
with about 270,000 active wallets comprising over 252,000 can now transact using the safe and convenient eNaira on all Consider, for instance, Project Dunbar, which is a dynamism.
consumer wallets and 17,000 merchant wallets. In addition, Flutterwave channels. project led by the BIS Innovation Hub and includes It is important to get a cross-border CBDC
the volume and value of transactions on the platform have One year on from its launch, the eNiara continues to grow. the Reserve Bank of Australia, the Central Bank of right, however. With greater ease of currency
been remarkable, reaching above 200,000 and ₦4bn[$9m], But there’s still a long way to go, especially in local and cross- Malaysia, the Monetary Authority of Singapore and exchange and foreign movement of capital,
respectively.’ border payments. the South African Reserve Bank. So far, the project there is the prospect for significant exchange
At the first anniversary of the eNaira’s launch, Bitt, CBN’s Out of the 19 recommendations made in the 2021 BIS has a developed platform that might support rate volatility and herd-driven capital flight.
technology partner, talked about introducing unstructured report, there are five that stand out as the most important. international settlements for digital currencies Regulations are necessary to ensure stability in
supplementary service data, or quick codes, as a way to Institutions and firms must first develop a common cross- issued by different central banks and offers global exchange rates and capital movement. In
further develop the digital currency. This represents a massive border payments vision and targets and then implement suggestions on how to expand such a model to G20 the absence of such restrictions, a cross-border
opportunity to bridge the gap in national and sub-national international guidance and principles. The community must countries more broadly. Meanwhile, Project Jura — a CBDC might serve to promote widespread
financial inclusion levels. also align regulatory, supervisory and oversight frameworks, collaboration between the French and Swiss central currency substitution, exacerbating the reliance
By implementing quick codes, the eNaira could improve as well as factoring in an international dimension into CBDC banks — is experimenting with the more specific on desirable ‘dominant’ global currencies to the
access to finance for individuals and businesses through designs. Finally, it must pursue the interlinking of payments case of direct transfers of euros and francs, using detriment of others. A consequent lack of confident
digital channels, lower the cost of transactions and increase systems. a single distributed ledger to use payment-versus- in a particular currency’s value could then erode
the flow of credit to consumers and businesses. If the frameworks and building blocks are available, payment and delivery-versus-payment mechanisms countries’ monetary and economic systems while
Financial inclusion is key for Nigeria’s economic Africans will adopt CBDCs, just as they did smartphones. The to settle trades. Finally, there is LionRock: another simultaneously spurring global instability.
development strategy. Despite the obvious successes, continued adoption of the eNaira would provide more data multi-CBDC platform, which includes participation Such disruption in the global financial and
women, youth, small- and medium-sized enterprises, and for the design of better macroeconomic policies that will from the BIS Innovation Hub, Hong Kong Monetary currency exchange system is not inevitable, however.
people living in rural areas are still disproportionately excluded positively affect consumers and business owners. Authority, Bank of Thailand, People’s Bank of China Initiatives like Project Dunbar, Project Jura and
from the financial system. The introduction of USSD shows and the Central Bank of the United Arab Emirates. LionRock represent major steps to better grasp the
that there is a roadmap towards deepening access for the The project began in the aftermath of Thailand’s promises and risks of cross border CBDCs. With the
unbanked. Project Inthanon in 2018, during which the country right regulatory framework and exchange movement
Payments networks must be able to integrate the eNaira began testing a wholesale domestic CBDC. control, countries may be able to strike at an often-
to fully onboard these new entrants into the national financial BY IMPLEMENTING QUICK CODES, THE Free flowing cross-border CBDC systems elusive balance: between the need for greater
system. Then they can take part fully in ecommerce and other ENAIRA COULD IMPROVE ACCESS TO would help reduce the fragmentation of the efficiency, ease of use and the free flow of capital on
value-adding financial services without having a bank account. FINANCE FOR INDIVIDUALS AND BUSINESSES global financial system. It would enable more the one hand and the need for security and limits on
Beyond financial inclusion, the eNaira is also useful in THROUGH DIGITAL CHANNELS. efficient integration through, in the case of Project violent, frenzied swings in value on the other. •
Figure 1: Central banks have been testing several transaction networks for use in a future CBDC rollout.
Ethereum Hyperledger Fabric Corda Quorum
Reserve Bank of Australia European Central Bank Bank of Canada Monetary Authority of Singapore
Bank of Canada Bank of Japan Monetary Authority of Singapore South Africa Reserve Bank
Hong Kong Monetary Authority Monetary Authority of Singapore Bank of Thailand Bank of Canada
MONETARY AUTHORITIES MUST PUT

Bank of Thailand Banque of France Banque of France Banque of France
New York Federal Reserve Saudi Arabian Monetary Authority Hong Kong Monetary Authority BIS Innovation Hub
INTEROPERABILITY AT THE CORE

Norges Bank Central Bank of the United Arab Bank of Thailand Swiss National Bank
Emirates
Eastern Caribbean Central Bank BIS Innovation Hub Bank Negara Malaysia
OF THEIR DIGITAL TRANSITION

Swiss National Bank South Africa Reserve Bank
Stellar OpenCBDC Bank Negara Malaysia Hong Kong Monetary Authority
National Bank of Ukraine Federal Reserve Bank of Boston South Africa Reserve Bank Bank of Thailand
Bank of England Peoples Bank of China Peoples Bank of China
Future of central bank digital currencies will involve multiple ‘layer 1’ transaction Bank of Canada Central Bank of the United Arab
Emirates
Central Bank of the United Arab
Emirates
networks, writes Simon Chantry, Chief information officer at Bitt. Unknown Swiss National Bank Reserve Bank of Australia
Bank of Jamaica Reserve Bank of Australia

Peoples Bank of China National Bank of Khazakstan
MANY MONETARY AUTHORITIES have been waiting Bitt’s CBDC platform enables smooth integration
Central Bank of the Bahamas Riksbank
for US authorities to reveal their central bank digital with multiple transaction networks, with proven network
currency roadmap. While official publications from the US security and privacy protections. It has been engineered Source: Bitt
Department of Treasury and New York Federal Reserve do to provide financial intermediaries with a way to compete
not commit the Fed to a digital dollar, they could signal the to drive down the cost of payments, integrate with network, if not multiple networks. This includes all EXPANDING MANDATES
way ahead for the world’s pre-eminent reserve currency. new digital currency networks and provide technically elements of managing the digital currency lifecycle, Historically, a monetary authority’s mandate is to use
With high expectations in the international financial provable security and privacy guarantees to users. These the most crucial of which is the monetary authority’s monetary policy to optimise growth and ensure price
community, CBDC functionality is coming under increased tools should be interoperable with the most advanced ability to confirm that only authentically minted digital stability. As central banks evolve to provide public
scrutiny, and for good reason. transaction networks, including private permissioned currency is circulating. Central banks also recognise financial infrastructure, they will be taking on new
One critical CBDC element is interoperability, with networks, such as Hyperledger and Corda, and MIT’s the possibility to improve the precision through which responsibilities, including CBDC platform security,
respect to cross-currency integration as well as integration OpenCBDC-tx, as well as public networks, such as bitcoin. they implement, monitor and adjust monetary policy availability and instant payments. Central banks must
with legacy financial networks. All signs point to a future Ethereum, and Stellar. This is where Bitt’s efforts are in real-time. A robust CBDC platform should include level up on the technology front as a result. This is
where CBDCs are issued on multiple ‘layer 1’ transaction focused – in providing next generation monetary platforms, such functionality, while preserving privacy and happening in the form of public-private partnerships,
networks or protocols. tools and applications. being flexible enough to adapt to future financial and increased IT hiring and international collaboration
Many CBDC design choices are yet to be made. However, monetary conditions. through bodies such as the Bank for International
the US Treasury has identified eight key objectives that the INTEROPERABILITY CREATES NETWORK This list illustrates the criteria central banks are Settlements and World Bank, and the International
digital dollar must meet: EFFECTS using to evaluate networks. Each transaction network Monetary Fund.
1. Provide benefits and mitigate risks for consumers, While the public may not recognise it, all credit card comes with its own unique structure and capabilities, Given the competition, it is difficult for central
investors and businesses. payments, Venmo transactions, ATM cash deposits or including: banks to decide on a transaction network layer.
2. Promote economic growth and financial stability, and remittances leverage numerous integrated payment - Unspent transaction output or account-based The financial system of the future is likely to be a
mitigate systemic risk. systems that work together to deliver money from sender structure composite of multiple transaction networks, working
3. Improve payment systems. to receiver. As we lay the rails for the financial system of - Hosting structure with one another to process and settle transactions.
4. Ensure the global financial system has transparency, the future, we can assess the strengths and weaknesses, - Developer and community support Therefore, in order to achieve their traditional mandate,
connectivity, and platform and architecture interoperability pros and cons, and integrative capabilities of the existing - Availability and depth of supporting documentation as well as new responsibilities in operating a CBDC
or transferability, as appropriate. financial system to inform how the shift towards internet- - Compatible software languages and libraries network, monetary authorities require toolsets that
5. Advance financial inclusion and equity. native payments networks will enable new services, bring - Transaction throughput and scalability metrics are interoperable with multiple underlying transaction
6. Protect national security. about efficiencies, lower costs, and decrease fraud and - Validation process and consensus mechanisms networks.
7. Provide the ability to exercise human rights. abuse. CBDCs should be designed to make users’ lives - Governance structure The Digital Currency Management System’s Numa
8. Align with democratic and environmental values, easier, with the ability to work with new payments networks - Security considerations architecture, created by Bitt, defines deployment
including privacy protections. and methods at their core. parameters for any digital currency issued by the client
Interoperability enables network effects and provides Further practical considerations include the use of the monetary authority. Numa allows for many monetary
While it’s straightforward to list policy objectives, it’s more users with options for participating in connected financial network in other projects, which enables collaboration policy actions, integration with any transaction network,
complex to design a CBDC architecture that achieves ecosystems. These options can be useful in times of and shared operating experiences. Similarly, a given role-based permission settings for all stakeholders
them, not least because some of these objectives are, at distress, but also for expanding business activity and monetary authority may have previous bias, based and configurable wallet types and tiers, along with
times, operating at cross-purposes. Promoting growth, accessing more counterparties. Interoperability also on their exposure to a particular network, or the the capacity to develop and implement both internal
ensuring stability and mitigating risks require a focus on creates a greater opportunity for central banks to facilitate experience and inclinations of their IT department. and external application programming interfaces and
interoperability, allowing central banks to better adapt to innovation and competition, to promote inclusion and Ultimately, central banks will decide on several software development kits for a wide array of use
the multi-network future and to integrate with a variety to provide opportunity for all economic stakeholders. networks with which to test and pilot their CBDC, but cases. Bitt is enabling monetary authorities to transition
of tools. The future of payments and web3 depends on However, it demands that monetary authorities have they must be ready to integrate with one another’s smoothly to web3 with a CBDC architecture and toolset
interoperability, as participants continue to build valuable modern and comprehensive tools that can help them networks as cross-currency and multi-currency and a resilient and secure platform that has been
use cases on different platforms. manage their national digital currency on at least one new functionality is critical to the success of CBDCs. designed for the future of finance. •
may penetrate or disable them as an act of cyber-

warfare or espionage. In a society that has become
dependent on digital payments, disruption can not
1. The rapid spread of digital payments has only disable important financial functions, it can also
spurred the development of a complex quickly cause broader issues and even civil unrest.
and often unregulated ecosystem of new As emerging markets become more significant
payments providers in emerging markets. players on the world’s stage, these nation-state
attacks will only increase.
2. Emerging markets are particularly These issues are not confined to one country or
exposed to cyberattacks as they are more region, but the characteristics of emerging markets
lightly regulated and businesses spend favour cybercriminals and the potential for material
less on cybersecurity. damage is greater.
At an organisational level, there is already a
3. Central banks have not yet fully security divide between financial services firms in
grasped the threat these new entrants the developed and developing worlds. As digital
pose to the financial system nor put in payment flows increase in the latter, malign actors
place sufficient cybersecurity-related will shift their attention from well-protected entities
regulation. in developed markets to the comparatively less
secure firms in emerging economies, many of
4. Central banks and the financial which still have small to non-existent cybersecurity
sector as whole must take the lead in budgets.
lobbying for better legislation, driving At the level of the individual, the widespread and
cybersecurity best practice down rapid adoption of new financial technologies by
into supply chains, raising consumer those previously unbanked creates an opportunity
awareness and setting cybersecurity for sophisticated fraudsters and cybercriminals
and resilience standards for payments to take advantage of populations with little
systems as well as traditional banks. education or experience around cybersecurity.
And many emerging markets also have large
populations of low-income earners and those
in precarious employment. They are frequently
Kenya and Kazakhstan. targeted by criminals who exploit financial distress
Open banking initiatives, which are key drivers of to persuade employees to give them access to key
payment system innovation, continue to be rolled network resources which they then use to launch
out across developing markets. In November, the ransomware and other attacks. The younger and
CENTRAL BANKS MUST TAKE Saudi Central Bank announced a new open banking
framework along with ‘tracking the development
more technically skilled may also turn to cybercrime
as a lucrative source of income.
THE LEAD IN PAYMENTS

of banks and fintechs to ensure their readiness to
launch open banking services within the first quarter FINANCE MUST LEAD
of next year’. Some fintechs have already been Digital payments are here now and payments
CYBERSECURITY testing open banking services through the SCB’s

regulatory sandbox.
platforms, accessed via mobile apps, whether
built by central banks or fintechs, are becoming
the de facto money transmission infrastructure
NEW PLAYERS, NEW RISKS of emerging markets. This is an opportunity for
Once new rules and regulations are in place, the finance sector must However, the extraordinary proliferation of the finance sector to extend good cybersecurity
set the standard in defending this new component of critical national alternative payments providers in emerging practices to customers and suppliers. If central
infrastructure. By Simon Brady markets, combined with the many government- banks and financial authorities put in place effective
driven digital initiatives, including cross-border security and resilience regulations now, and banks
payments solutions and central bank digital and other financial services firms drive these
THE benefits of payments innovation are clear. According to the International Monetary Fund, in currencies, create their own complexities and standards down into their supply chains, customers
Digitalisation of payments lowers transaction India alone, digital payment volume ‘has climbed at problems. Most significantly, the proliferation of and countries will be much better protected against
costs, increases transaction speed and reduces the an average annual rate of about 50% over the past payments platforms and ecosystems creates a the threats posed by cybercriminals.
complexity of making payments. It allows millions five years. That itself is one of the world’s fastest hugely attractive new target for cybercriminals and The first step is for central banks to ensure that
of the poor and the unbanked to use their mobile growth rates, but its expansion has been even more digitally enabled fraudsters.
phones to access financial services that those in rapid — about 160% annually — in India’s unique, Many of these will aim to steal directly from
developed markets take for granted. The benefits real-time, mobile-enabled system, the Unified the platforms, extract ransoms and steal user
of reduced fees to the billion migrants paying Payments Interface where transactions more than credentials to commit fraud. But they will also
an average of between 6%-7% in fees on their doubled, to 5.9bn, in June 2022 from a year earlier increasingly be joined by others. Payments systems, THE PROLIFERATION OF PAYMENTS PLATFORMS
remittances demonstrate the gains to be made as the number of participating banks jumped 44%, whether private or public, also become, by default, AND ECOSYSTEMS CREATES A HUGELY
from improving the efficiency of payments. to 330.’ Growth of this kind is occurring throughout part of a country’s critical national infrastructure. ATTRACTIVE NEW TARGET FOR CYBERCRIMINALS
And users have not been slow to take advantage. emerging markets, from Brazil and Indonesia to They are then a target for nation-state actors who AND DIGITALLY ENABLED FRAUDSTERS
they themselves are secure. Not only should they be its networks. During the attack, on a central bank officers to discuss both tactical and strategic cyber
setting the best possible examples of best practice office on the island of Sumatra, the perpetrators resilience topics, were surveyed.
for those they supervise, but they also need the allegedly stole ‘non-critical’ employee data and It revealed that emerging market central banks
DIGITALISATION OF PAYMENTS LOWERS
highest standards of security to protect critical deployed ransomware payloads on several devices are ahead of their peers in the advanced economies.
TRANSACTION COSTS, INCREASES TRANSACTION
financial infrastructure. on the network. The attack was said to be the work Asked if ‘the relevant supervisory authority in your
SPEED AND REDUCES THE COMPLEXITY OF
This is not a given. In February 2022 security firm of the Conti ransomware group, hackers ultimately jurisdiction provides a risk management framework
MAKING PAYMENTS
Kaspersky found evidence that hackers had stolen tied to Russian actors. to financial firms on cyber security?’, more than
data that allowed them to gain access to the entire 80% of emerging market respondents replied in
infrastructure of an unnamed central bank, including DEVELOP EFFECTIVE, SPECIFIC the affirmative, compared to just over 60% from
the systems for international money transfers. They REGULATION AND SUPERVISION advanced economies. The report also stated that services,’ with the bank now specifically mandating
were offering this data to others on the dark web, Beyond their own security, central banks, as ‘while supervisory authorities in most emerging ‘a migration from SMS one time passwords to more
which is how Kaspersky found it. They contacted supervisors and overseers of banking and payments markets provide a framework for the collection secure forms of authentication for online activities
Interpol and in a joint investigation all vulnerabilities systems, are responsible for ensuring that of information on cyberattacks on financial or transactions relating to account opening, fund
in the corporate networks of the bank were closed appropriate regulations on operational and cyber institutions, less than half of those in advanced transfers and payments.’
and any opportunities for additional attacks were risk are in place. In developed markets, for example, economies do. Similarly, while supervised firms are This detailed guidance from a central bank is rare
blocked.  the Bank of England and the Federal Reserve have mandated to report losses related to cyberattacks and to be welcomed. As Yunus pointed out, ‘these
Stephen Kavanagh, executive director of Interpol published detailed operational guidelines and cyber to the central bank in almost all emerging markets, controls may also inevitably lead to some friction
Police Services, said: ‘Over the past few years, we’ve resilience expectations which are likely to develop only two-thirds of advanced economy respondents or inconvenience in the online banking experience
seen many ransomware attacks carried out by these into more prescriptive regulations on technology report that such disclosure is required.’ As yet, no of customers… while these measures entail some
“hybrid” teams. Previously, however, their targets and security over time. Emerging market central jurisdiction requires firms to disclose such losses inconvenience, they are important to protect the
were mainly commercial companies. We are happy banks must follow suit, in conjunction with other publicly. interests of customers.’
that together, with our partner Kaspersky, we were bodies responsible for the supervision and Of direct relevance to payments innovation, The governor of the Central Bank of Nigeria,
able to prevent an attack that could have affected oversight of payments systems. respondents reported that they see fintechs to be Godwin Emefiele, has also issued a risk-based
the region’s economy. It is only through effective Emerging market central banks certainly more at risk from a cyberattack than big techs, even cybersecurity framework and guidelines for the
co-operation on the international level and striving understand the issues. In a September 2022 Bank though most respondents agree that a successful financial sector which include specific minimum
to be ahead of the curve that we will be able to for International Settlements working paper, ‘Cyber attack on a big tech would lead to materially higher requirements. In addition, there are a series of
effectively protect the global community.’ risk in central banking’, members of the Global costs than an attack on a fintech. fintech-based policies and guidelines which
This is not an isolated example. In January 2022, Cyber Resilience Group, a group set up in 2020 as ‘Relative to a financial institution, three-quarters cover regulatory sandboxes, open banking and
Bank Indonesia confirmed a ransomware attack hit a forum for central bank chief information security of respondents from advanced economies and two- cybersecurity, among others. Revised versions of
thirds of emerging market economy respondents these guidelines must be adhered to by early 2023.
think that fintechs are more at risk of becoming the ‘The extent of technology risks and the level
target of a successful cyberattack. When it comes of sophistication of cyber-attacks are rapidly
to aggregate losses in terms of gross domestic expanding. This development has demanded that
product, however, these patterns are strikingly financial institutions, including other financial
different. Among emerging economy and advanced intermediaries, strengthen their cyber resilience
economy respondents, the majority thinks that a and take proactive steps to secure their critical
successful attack on a fintech will lead to a similar or information assets to ensure their safety and
lower loss in terms of GDP than a successful attack soundness,’ Emefiele added in a recent speech.
on a traditional financial institution. Among big In Brazil at the end of 2021, new rules came
techs, however, only one-quarter of AE respondents into effect that subject cloud service providers
and no respondent from an EME assess the cost to greater scrutiny by the country's central bank
to be lower than that of an attack on a traditional but stop short of banning bank data from being
financial institution.’ sent abroad. The regulation was the first issued by
This points to other ways in which central banks Brazil's National Monetary Council (CMN) to deal
can contribute to payments system integrity. with cybersecurity issues and is the first that forces
They can establish sandboxes or other types of organisations of any kind in Brazil to appoint data
similar arrangements in which fintech firms and protection officers.
firms involved in cybersecurity can collaborate on The CMN not only forces financial institutions to
projects and build in cybersecurity from the outset. be fully compliant with its cybersecurity policies,
Second, they can regulate and incentivise the but also gives the central bank unfettered access
fintech industry to further improve its cybersecurity to data hosted by third parties anywhere, at any
THIS ECOSYSTEM IS RIPE FOR
capabilities. time. It also allows the central bank to block deals
EXPLOITATION BY CYBERCRIMINALS
Some central banks are doing a better job of this with third-party data handlers located abroad and
AND WITHOUT A MUCH QUICKER
than others. For example, in late September 2022, urges financial institutions to only send information
RESPONSE FROM GOVERNMENTS
in a speech on financial crime, Nor Shamsiah Mohd to countries that have information-sharing
AND REGULATORS, THERE WILL BE
Yunus, governor of Bank Negara Malaysia, focused agreements with Brazil.
SYSTEMIC REPERCUSSIONS
predominantly on the cyber threat to banking However, there is still too little explicit
and payment systems, saying that ‘BNM requires cybersecurity regulation and oversight from central
banks in Malaysia to adopt high standards of banks and governments given the scale of the
security, especially for internet and mobile banking threat. And there is too little oversight of non-bank
payments providers. develop efficient and credible judicial and law challenge. The African Union – as part of its agenda
As the threats to financial systems grow, it may enforcement systems around cybersecurity. 2063 for transforming Africa – has identified
also be necessary for regulators to go further than THESE ISSUES ARE NOT CONFINED TO Currently, that legislative framework and the cybersecurity as a key priority to ensure that
broad guidelines and to develop more detailed and ONE COUNTRY OR REGION, BUT THE resourcing of law enforcement are insufficient. emerging technologies benefit African people and
prescriptive rules around specific technologies CHARACTERISTICS OF EMERGING MARKETS Cybercrime pays well because many countries do companies. The initiative is guided by the African
and operational details such as testing. Given the FAVOUR CYBERCRIMINALS AND THE POTENTIAL not have adequate security and privacy laws in Union Convention on Cyber Security and Personal
importance of threat-led penetration testing in FOR MATERIAL DAMAGE IS GREATER place. Data Protection (known as the Malabo Convention),
assessing cybersecurity, it may be that central For example, Interpol’s latest Africa cyberthreat which was drafted in 2011 but only adopted in
banks and related regulators should set up testing assessment report stated that ‘This [digital June 2014. Its purpose is to establish ‘a credible
frameworks for entities they regard as systemically financial] transformation highlights the urgent framework for cybersecurity in Africa through
important. Few do. secretariat in Riyadh, Saudi Arabia. The meeting need to ensure cybersecurity parameters and organisation of electronic transactions, protection
focused on co-operation between the GCC states standards meet the demands and future needs of of personal data, promotion of cybersecurity,
STRENGTHEN THE SUPPLY CHAIN in the field of cybersecurity, including developing this community… However, the absence of these e-governance and combating cybercrime.’
A significant challenge for both regulators and the frameworks, policies and joint procedures to standards is pervasive in Africa. 90% of African However, by May 2022, the convention had only
regulated in the financial sector is the reliance of address cyber threats, and the exchange of businesses are operating without the necessary been ratified by 13 out of 55 AU member states. By
participants on each other and on critical third- knowledge, expertise, studies and experiences cybersecurity protocols in place. Without these the same month, only eight African countries had
party service providers, such as cloud service related to cybersecurity. It has the aim of creating protocols, threat actors are able to exploit in place national cybersecurity strategies and only
operators, security vendors and hardware providers. a safe cyberspace to protect the GCC states from increasing vulnerabilities as they continue to invent a handful of countries had laws in place to protect
Hackers often attack via these third parties because threats. Additionally, the first Gulf cybersecurity new cyberattack vectors.’ consumers and businesses. The International
they are weaker links in the security chain. exercise was launched during the meeting. The report quoted Tarek Sharif, executive Telecommunication Union’s global cybersecurity
As the World Bank recommended, ‘Financial In January 2022, the Association of Southeast director of the African Union Mechanism for Police index 2021 showed that of 54 African countries
authorities and central banks [should] conduct Asian Nations digital ministers' meeting announced Cooperation: ‘On this young continent, every assessed, only 29 had introduced cybersecurity
sector mapping to establish a clearer understanding the launch of the Asean cybersecurity co-operation economic challenge generates an innovative legislation.
of which third-party service providers are of strategy 2021-25. A key objective of this is to solution that may sometimes, unfortunately, be at Africa is not an exception. India is not party to any
systemic importance to their financial sector and strengthen the collective efforts of member states, the limit of what the law allows. For example, the low convention on the protection of personal data which
ensure that the relevant providers also comply with a view to securing the region's cyberspace and rate of banking facilities for African populations has is equivalent to the EU’s General Data Protection
with the applicable cyber regulations, operational to promoting the digital economy. And there are led to the creation of new financial services such as Regulation and it has not yet enacted specific
guidelines and cyber resilience expectations.’ longer-standing initiatives from the African Union mobile banking, but also to the resurgence of new legislation on data protection. Countries such as
Here there are templates available in developing and Organization of American States. forms of scam linked to these new technologies.’ Vietnam and Indonesia have no consolidated data
markets, notably the European Union’s digital In July 2022, Bank Indonesia and the Governments have responded slowly to the protection law, just scattered legislation covering
operational resilience act. The significance of DORA Reserve Bank of India signed a memorandum of
is two-fold. First, it does not cover only financial understanding for closer co-operation in areas
institutions and service providers, it also covers including fintech.
critical information and communications technology Signed on the sidelines of a G20 meeting in
third party providers, including cloud service Bali, the central banks of two of the four biggest
providers. It imposes significant penalties on ICT countries in the world by population have pledged
service providers for non-compliance. For example, to work more closely together in payments systems BEYOND THEIR OWN SECURITY,
a daily penalty payment of 1% of the average daily and digital financial innovation, including in the CENTRAL BANKS, AS SUPERVISORS
worldwide turnover of the ICT service provider areas of cyber- and financial crime. AND OVERSEERS OF BANKING AND
in the preceding business year can be levied until The MoU is the latest to be signed by BI with PAYMENTS SYSTEMS, ARE RESPONSIBLE
compliance is achieved. other central banks – it signed a similar arrangement FOR ENSURING THAT APPROPRIATE
Second, it recognises the limitations of with the Central Bank of the United Arab Emirates REGULATIONS ON OPERATIONAL AND
uncoordinated national initiatives in combatting in November 2021 and with the Bank of Korea in CYBER RISK ARE IN PLACE
a cross-border, global threat. Reliance upon February 2022.
country-by-country regulation results in overlaps, More initiatives like this are needed. Central
inconsistencies, duplicated requirements, as well banks and financial authorities should reach out to
as high administrative and compliance costs. In their peers in their region to coordinate follow-up
Europe, this can be addressed by the EU. Emerging actions regarding recommendations and to co-
markets must leverage existing regional forums to operate in joint initiatives where appropriate. As the
promulgate consistent regional regulation to avoid European Commission and the European Central
beggar-thy-neighbour approaches and to present Bank do at the level of the EU, the institutions
a united front against borderless cybercrime. Again, of African co-operation and/or economic and
there is clearly a role for central banks to play. monetary integration initiatives could play a
facilitating role in this.
ENCOURAGING CROSS-BORDER
COLLABORATION LOBBY FOR BETTER LAW
Here there are encouraging signs. For example, Ultimately, central banks can only do so much to
in October 2022, the Gulf Cooperation Council’s improve the cybersecurity of payments systems
ministerial committee for cybersecurity held its by themselves. However, they can call upon
first meeting at the headquarters of the general governments to bring forward legislation and to
specific sectors. That is just data privacy, not creates privacy issues (and could be used to
cybersecurity. Many other emerging markets are monitor citizens’ payment activity, movements and
in the same position. Across all these markets, other sensitive personal information), it also creates
DIGITAL MONEY IN THE CLOUD:

cybercriminals threaten the availability of payments a hugely attractive target for hackers, meaning it
services, the integrity of payments infrastructure would require impenetrable security.
and the confidentiality of citizens’ data. The underlying technology chosen also changes
BUILDING THE FUTURE OF All need programmes to raise cybersecurity

awareness among their populations. They
the security and privacy calculus of any given
CBDC. Retail CBDCs, such as the eNaira launched
PAYMENTS ON AWS
need additional policies and legislation to fight in Nigeria in October 2021, that use blockchain
cybercriminals. And they need to put in place technology require the involvement of third parties
technologies on a national and international scale to as validators of transactions. This introduces a
reinforce cyber defence. new role for third parties in central bank money
Stakeholders need secure, resilient and scalable infrastructure to deploy CBDC and operations. Critically, the security guarantees
digital asset ecosystems, writes Xiaochen Zhang, global head, innovation and GTM, MORE RISKS COMING of the ledger would depend on the integrity and
As payments innovation accelerates, the availability of third-party validators, over which the
Amazon Web Services, and Hugo Dante, Market Insights & GTM Analyst AWS
cybersecurity risks inherent in the payments system central bank may not have direct control.
will increase. Populations will become ever more The BIS also found that central bank CISOs
IN A RAPIDLY CHANGING digital landscape, public finance around the world, which comprise of physically separated reliant on a complex ecosystem of private sector believe that the introduction of CBDCs will require
institutions worldwide face an array of opportunities and risks. datacenters. It has data and network redundancy to ensure platforms whose security posture will be hard to an increase in cybersecurity budgets.
They must explore ways to update their national monetary high availability, quick recovery and operational continuity with control. And central banks have one final role to play
systems and asset management approaches to meet the minimal intervention in case of disruption. Automated scaling in that risk landscape. CENTRAL BANKS AT THE FOREFRONT
needs and demands of a new digital economy. As a result, of cloud resources, automated data backup and failover, and The Atlantic Council’s central bank digital Emerging markets are likely to leapfrog many years
according to Atlantic Council, at least 105 central banks, databases delivered on the AWS Cloud provide multi-region currency tracker now shows that 105 countries of payments systems evolution, moving directly
representing over 95% of global gross domestic product, are design disaster recovery and high availability benefits. and currency unions are currently exploring the to a world in which consumers and businesses
exploring central bank digital currencies. In addition, central possibility of launching a CBDC, either retail — transact via dozens of different mobile and web-
banks and other public finance institutions are investigating Data collection and analysis: As central banks explore issued to the general public — or wholesale, used based applications, some of which will bypass the
new ways to create and manage digital assets to meet their and launch CBDCs, they must develop frameworks for primarily for interbank transactions. That’s up from traditional banking system entirely. This ecosystem
policy objectives. supervision, data collection and risk mitigation. AWS offers an estimated 35 as recently as 2020. But to what is ripe for exploitation by cybercriminals and without
To build and deploy CBDC and digital asset systems, a broad set of tools for public sector customers to automate extent do CBDCs embed cybersecurity and privacy a much quicker response from governments and
stakeholders require secure, resilient and scalable secure data collection and analysis, monitor illicit activities risks and what do central banks have to do to design regulators, there will be systemic repercussions.
infrastructure. Amazon Web Services provides cloud services and identify risks. AWS Artificial intelligence and machine safe CBDCs? Central banks must be at the forefront of efforts to
and tools that can be used to experiment, develop and launch learning services support anti-money laundering compliance, CBDCs generally involve the centralised secure both traditional banks and newer entrants
secure, scalable, interoperable and resilient fit-for-purpose large scale data analysis and fraud detection. Additional collection of transaction data. This data not only into the payments space. •
CBDCs and digital assets. Performance requirements for advanced analytics products can be deployed to incorporate
CBDCs and other types of digital assets are similar. Some of CBDC transaction data as an additional source for research-
the benefits of CBDC development and deployment on AWS focused use cases.
include:
Prototyping and design: Keeping up with rapid
Security: Security is the priority at AWS and is a critical design technological innovation requires infrastructure that is flexible
consideration for CBDC solutions. AWS offers a set of cloud and open to experimentation. AWS offers opportunities for
security tools that can support central banks in safeguarding customers to engage in low cost experimentation to support
CBDC systems. These tools support user authentication, the rapid and secure deployment of new CBDC features.
security from threats and error, incident response, Central bank customers can leverage AWS services such as
cryptographic tools to secure messages and compliance. Amazon Managed Blockchain and specialised AWS partners
AWS’s core infrastructure is built to satisfy the security to develop sandboxes, as well as to prototype and deploy
requirements for the military, global banks and other high- CBDC solutions.
sensitivity organisations. Security services like AWS Shield
and AWS WAF protect against distributed denial of service Sustainability: Sustainability is a hallmark of AWS. By
attacks and structured query language injection attacks. AWS building CBDCs on the cloud, central banks can make sure
supports 90 security standards and compliance certifications, that the innovation of tomorrow does not come at the
and all 117 AWS services that store customer data offer the expense of the planet today. Amazon is on a path to power its
ability to encrypt that data. operations with 100% renewable energy by 2025 — five years
ahead of its original target of 2030. AWS provides customers
Resiliency and scalability: CBDC infrastructure requires
high resiliency, with global connectivity and internet of
with tools to help them meet their sustainability goals. The
AWS customer carbon footprint tool calculates the carbon 105 5.9bn
things integration being critical considerations for CBDC emissions generated from using AWS, enabling customers to Many countries around the Transactions
development. AWS global infrastructure is designed for incorporate this into their own sustainability reporting. AWS globe are investigating processed by India’s
the scalability and resiliency required to support our global data exchange offers a wide variety of environmental, social launching a central bank Unified Payments
customers including CBDC systems. The AWS Cloud spans and governance, and sustainability datasets that central bank digital currency Interface in June 2022
multiple availability zones within 30 geographic regions officials can use as they design their CBDC. •
payments infrastructure already exist.

The first question to address is the degree to
which traditional fiat digital payment systems are
1. Traditional payment rails may prove viable in the metaverse. They have already made
too slow and costly to enable the instant themselves key to the functioning of e-commerce
micropayments that are expected to be a but there are some unique features in the
major use case in the metaverse. metaverse that may make them less able to adapt
to its requirements.
2. Cryptocurrencies are a natural fit for
the metaverse, but have achieved little THE NEED FOR AN ON-CHAIN
traction as a means of payment. PAYMENTS SYSTEM
Digital payments made through conventional
3. Stablecoins, with increasing systems work reasonably well for e-commerce
government involvement and regulation, transactions, so it is not inevitable that new
are likely to offer most people a more payment solutions are needed for the metaverse.
convenient and familiar means of Mastercard, Visa and American Express
payment in the metaverse. are making moves to support the provision of
payments in the metaverse, filing trademark
4. Developing the infrastructure to make applications to provide their suite of services in the
metaverse payments stable, secure, new arena.
interoperable and free from financial However, if many of the assets transacted in
crime will have a huge impact on the the metaverse will be either blockchain native or
broader payments landscape. blockchain tokens representing ownership, then
providing a means of payment on the blockchain
brings a number of benefits.
First, cost. Although conventional digital
payments are typically free for users, the fees
must have value beyond that imparted by a single levied on merchants by payments providers mean
institution. Licensed digital cosmetic assets, for that only transactions above a certain threshold are
example, will be much more valuable if they can be economically viable.
used throughout a broader ecosystem than if they This is one of the main reasons behind the
are only usable within one game or platform. dominance of the subscription model for digital
THE METAVERSE: A MODEL

Tracking ownership of assets like this will, almost content provision, rather than paying per use.
certainly, be a function of blockchains, which can Processing a payment for a month’s access to a
register ownership in a decentralised fashion. service is economically viable where paying to read
FOR DIGITAL PAYMENTS? This kind of capacity might lead to a reduction in

unauthorised trading in digital assets and help to
protect creators’ revenue.
a single article may not be.
Instant micropayments, available 24/7, are likely
to be the main mode of payment in the metaverse.
This is likely to mean major changes to business Operations like paying small fees to unlock
The metaverse should prove a catalyst for development in the models. In gaming — one of the few industries in additional features or distributing royalties to
payments industry. By Lewis McLellan which virtual asset ownership is already prevalent, creators are likely to require extremely small value
generating some $54bn of revenue in 2020 — payments at high volume. Delivering this with the
developers’ revenue comes increasingly from present system is challenging and expensive.
AS a term, metaverse has leapt from the pages virtual reality space — perhaps because that is sales of game cosmetics, rather than from game There are speed and efficiency benefits that
of Neal Stephenson’s 1992 novel Snow Crash and how it was used in the novel that coined the term or platform sales. A metaverse that enables those come with a new system. One of the benefits of
entered common parlance thanks, in no small part, — but the definition is broader. After all, VR — and assets to travel between game environments could exchanging assets in a blockchain environment
to Facebook’s decision to rebrand itself as Meta, more particularly, shared VR spaces — may grow in bring major changes for these business models, is the opportunity for instantaneous, atomic
and the company’s colossal spend on infrastructure popularity as the technology improves and access since a user who purchases a skin, which changes settlement and the removal of counterparty risk.
to develop the metaverse, which it calls the next grows but it is likely to struggle to achieve the same the appearance of a character, in game A and Achieving this within the metaverse will not be
evolution in social connection. ubiquity as smartphones. wears it in game B is less likely to spend money on a simple. Exchanging delivery and payment on the
Huge promises of the economic activity the While virtual and augmented reality applications similar cosmetic in game B. same blockchain is a simple and efficient matter.
metaverse will enable are becoming commonplace. will form part of the metaverse offering, for many The metaverse, then, will consist of a shared
Citi estimated the total addressable market people, computers and phones will continue to ecosystem of digital asset ownership running on
as between $8tn and $13tn. McKinsey, more be their main method for interacting with digital a variety of interoperable blockchains. Some but
conservatively, estimated that it could reach spaces. not all these digital assets will be used in virtual and
$5tn by 2030, of which around $2.6tn will be in That does not mean that nothing will change, augmented reality. ALTHOUGH CONVENTIONAL DIGITAL PAYMENTS
e-commerce. Exactly what the payment rails however. Along with Web3, the metaverse is, first The infrastructure regarding asset ownership ARE TYPICALLY FREE FOR USERS, THE FEES LEVIED
enabling this kind of activity will look like remains an and foremost, a model for a digital economy. It will is developing gradually, with interoperability a key ON MERCHANTS BY PAYMENTS PROVIDERS MEAN
unsettled question. be the venue for the exchange of digital goods and area of focus. To some extent, several competing THAT ONLY TRANSACTIONS ABOVE A CERTAIN
The metaverse is often conflated with a shared services. For such a marketplace to take off, goods or complementary models for the metaverse THRESHOLD ARE ECONOMICALLY VIABLE
Exchanging assets between blockchains requires This is a radical vision for what payments in the
interoperability bridges. metaverse may eventually look like at some distant
The metaverse will not consist of a single time, but it is worth considering that our conception IN THE FUTURE, IF THE METAVERSE BECOMES
blockchain. Rather, it will consist of multiple, of money is not necessarily fixed permanently and UBIQUITOUS AND HIGHLY LIQUID, SOME
interconnected networks of blockchains. may evolve over time. ENVISAGE A FULLY INVESTED WORLD WHERE THE
Developing this infrastructure is a significant DISTINCTION BETWEEN A MEANS OF PAYMENT
challenge. Many efforts to create interoperability STABLECOINS AND AN INVESTABLE ASSET COLLAPSES
bridges between blockchains have been the subject Stablecoins might offer a more promising means
of cyber-attacks and hacks, causing major losses. of providing an in-metaverse on-chain payments
The challenges such systems will face are solution, particularly in the short term. Stablecoins
similar to those faced when providing cross- are crypto-tokens pegged to the value of fiat
border payments networks in fiat currency. While currencies. They maintain this peg typically by
domestic payments may operate efficiently,
sending payments between domestic networks $1tn holding reserves of the fiat currency, which users
can withdraw at will, redeeming their stablecoins.
TOKENISED DEPOSITS
Banks hold a privileged position in finance because
can be challenging because they are differently Market touted by In essence, this replaces the counterparty of the regulation they are required to comply with.
configured. They might have different numbers and JP Morgan as it or credit risk that depositors take on when they These risk management principles should make
types of participants, different formats for data, opened a lounge deposit fiat currency in a bank and replaces it deposits relatively safe and, in the event of the
and different levels of security and protection. in Decentraland with counterparty risk on the stablecoin issuer. bank failing to meet its obligations, there is state-
Harmonising all of these disparate standards is While banks are typically stable and insured provided insurance that can reimburse depositors.
an immense challenge in the fiat cross-border institutions, it is possible for a stablecoin with These protections are unique to banks. As
payments world and is likely to remain a challenge robust, transparently audited reserves to command discussed above, well-designed stablecoins can
in the metaverse. If there is sufficient, consistent demand for a a similar degree of confidence. offer extremely high levels of security. However,
While such a metaverse system may well be service paid for in a cryptocurrency, this can give Not all stablecoins have this high quality of some individuals may prefer to operate only within
developed, it will need to meet extremely high it a stable value across the metaverse and make it reserves to draw upon and some have failed the sort of regulated banking framework with which
standards of resilience and security in order for it to more suitable for use in payments. If the connective catastrophically, resulting in huge losses for they are familiar, and some businesses may operate
underpin the payments network. architecture provides a sufficiently seamless and investors. The collapse of the algorithmic under mandates that prevent them from taking on
risk-free experience, then the value of MANA and stablecoin Terra and its associated cryptocurrency unfamiliar risks.
CRYPTOCURRENCIES its ilk should not fall even when it is being traded in Luna triggered a substantial fall in the value of the Accordingly, as the metaverse grows in scale and
For many, payments in the metaverse means a different environment from the one where it can cryptocurrency market. reach, there will be a demand for traditional bank-
payments using cryptocurrency. In some sense, this be redeemed. However, a secure and well-collateralised operated transaction services within it. Creating
makes sense. Cryptocurrencies were the first use One potential issue with this is that it can lead to stablecoin would give people a means of tokens tradeable within the blockchain that
case of blockchains and, given blockchain is likely a large range of cryptocurrencies that metaverse transacting on-chain and in-metaverse. represent deposits will be the first stage.
to form a major part of the infrastructure for the users might wish to pay with. This is a particularly attractive option because it Although these are conceptually similar to
metaverse, it is no surprise that they are an early This can lead to a great deal of difficulty for should be invisible to the user. Individuals should be stablecoins, in that they are crypto-tokens
contender to become a payments solution. merchants, who might struggle to manage the able to transact freely and instantly in stablecoins designed to maintain the value of a fiat currency,
The infant stages of the metaverse have, complexity of such a range of cryptocurrencies, in the metaverse without considering that the they are different in that the security of
in many cases, been constructed by and for where fungibility and interoperability are not money is any different from the digital commercial stablecoins rests entirely on the quality of their
cryptocurrency users. Decentraland, for example, necessarily simple. bank money they use to buy groceries with outside collateralisation, while tokenising bank deposits
is on the Ethereum blockchain. Users buy plots of If they have to pay suppliers with a particular of the metaverse. allows users to trade in digital money that has the
virtual land (where ownership is represented by currency but are typically paid in a range of others, same risk profile they are used to.
non-fungible tokens), using a Decentraland native they will have a complex liquidity management BANK SERVICES IN THE METAVERSE
cryptocurrency called MANA, which is typically operation to conduct. As the metaverse becomes more mainstream, LENDING
purchased with ether, Ethereum’s cryptocurrency. It may be possible for service providers to existing players in financial services are already As these services develop, it will become possible
However, cryptocurrencies have, overall, failed remove this complexity, managing an automated seeking ways to offer their services to a new hub of for in-metaverse assets to be used to collateralise
to take off as a mainstream means of payment. exchange system that allows users to pay in the economic activity. loans in traditional fiat currency, and vice versa.
Most people are reluctant to transact in units method of their choosing and merchants to receive Some have already planted a flag in the Tokens that can be redeemed in the metaverse
other than those in which their salary and taxes are the cryptocurrency or other payment method of metaverse to ensure they are not left behind. JP for goods and services, or assets that have
denominated. The exchange risk this entails puts their choice. Morgan opened a lounge in Decentraland, touting demonstrated a consistent value in a digital
off most except those who wish to speculate. In the future, if the metaverse becomes a market opportunity of $1tn. HSBC and Standard marketplace — perhaps in-game cosmetics or non-
At present, the lack of stability in the value ubiquitous and highly liquid, some envisage a fully Chartered also purchased land in the metaverse, fungible token equivalents of designer products
of bitcoin and the rest of the cryptocurrency invested world where the distinction between choosing the Sandbox for their first digital space, — might form the security for loans made in fiat
ecosystem renders it too volatile for use as a major a means of payment and an investable asset as has Thailand’s Siam Commercial Bank. currency.
channel for payments since costs and revenues collapses. Digital tokens representing entitlement Banks are anticipating a world of digital However, most lenders will likely demand
would be too unpredictable. to future earnings or discounts on goods and economic activity in which they can offer their extremely steep overcollateralisation at present
Many metaverse infrastructure providers will services can all theoretically be used as a means traditional services in new ways, providing credit since the performance of digital assets in 2022 has
launch their own cryptocurrencies, which are of payment in a world where such assets are and transaction services to individuals and been so poor.
typically redeemable for services they provide. sufficiently liquid and can be efficiently and businesses in the metaverse. Liquidating digital asset-based collateral can
While they may only be redeemable for services impartially valued and traded. Matthew Harris, a There are also digital first challenger banks like be a difficult process since, in many markets, the
in a specific environment, ideally they should be partner at Bain Capital Ventures, believes this is Zelf and Sokin, which tailor their offerings to the liquidity is so thin that the value can crash rapidly if
tradeable across the metaverse. where the metaverse will take us. needs of metaverse users, particularly in gaming. forced sellers begin offloading large volumes.
This has been demonstrated in the Accordingly, services must exist to allow them For this reason, the necessity to verify identity
cryptocurrency market, where the collapse of to on-board value from fiat to the metaverse at the level of the service provider is key to the
the Terra/Luna ecosystem and the subsequent
reduction in the value of bitcoin resulted in
$13tn environment and the reverse.
Many cryptocurrency exchanges already offer
development of a safe and secure metaverse
payments environment.
widespread margin calls and the bankruptcy of Total addressable this service, allowing users to buy stablecoins and
several firms. market in the cryptocurrencies for fiat. Perhaps because of the RENT-SEEKING IN THE METAVERSE
Having a large, liquid market for these assets metaverse newness of the industry, many exchanges offer Virtual payments can, in theory, be substantially
will be pivotal to the sustainability of their value. estimated by Citi wallets as part of their service, but there is no cheaper and more efficient (particularly for
Ensuring that such a market exists requires that reason why this would necessarily be the case for low-value payments) than traditional digital fiat
these assets be valuable to the broadest possible payments in the metaverse. payments. However, platform providers may
network, which requires interoperability between Making this process both secure (adhering to constrain growth by levying transaction fees. These
networks. local standards of KYC and other regulation) and would be justified as a means of paying for the
efficient will be important to the success of the development and maintenance of the platform,
INTEROPERABILITY AND DIGITAL metaverse. rather than processing the payment securely, but
IDENTITY One way to achieve this is through integration would have a similar effect.
Ensuring that assets and the means of payment are with existing services. Banks, and other financial While payments providers in the real world
not bound to a single chain or institutional network institutions and payment providers, are the most typically charge a fee of up to a couple of
but can be traded freely between users in different obvious choice. If they begin providing digital percentage points of the transaction, major
environments will be important to ensuring a stable, wallet architecture, one could seamlessly move technology providers routinely charge much higher
liquid marketplace. Simply purchasing a cryptocurrency, sending it to a money between a fiat and a digital account without fees for transactions on their platforms. Apple’s
Technically, this is complicated. Ensuring contact (who may be in another country) who then additional layers of identity verification. approach to monetising its app store is the clearest
environments are compatible means solving some sells it for their local currency is a quick and simple Other service providers are likely to attempt to example. Transactions in the app store or on
sophisticated engineering challenges. means of sending value across borders. Right now, compete with banks for this market. Since wallet services distributed by it are subject to a 30% fee.
One of the key components of the metaverse is this kind of system is likely to have wider foreign provision does not need a full banking license, there Meta wishes to adopt a similar model, levying a
likely to be a form of verifiable digital identity that is exchange spreads and therefore higher costs, will be opportunities for providers to generate 30% store fee, and variable platform fees on top,
valid across multiple environments. Users must be which might offset the transaction fee savings, value by integrating payments with their own suggesting that creators will receive around half
able to verify that their counterparty is appropriate but if sufficiently large liquidity providers join the services. Social media and messaging services of the revenue from sales in Meta’s version of the
for the type of transaction they are undertaking. space, then this gap could be minimised. could add a digital payments function to their metaverse.
Age and location verification will be important, as However, a system like this is partly cheaper service and offer convenient payments within an Whether these fees are justified by the work
will a successful know-your-customer check. and quicker because it does not adhere to the environment that people are already comfortable the providers do to construct and maintain the
The ideal solution here is that digital identity can same standards of KYC, anti-money laundering, with. platforms on which creators rely is a complicated
be verified to a counterparty’s satisfaction without countering terrorist financing and other regulations Integrating purchase methods within apps, and difficult question, but whatever the answer, this
exposing personal data. that prevent financial crime. Without monitoring rather than having to set up verification through level of fee will restrict the type of development
For it to be valuable in the metaverse, this systems in place, cross-border stablecoin a separate provider as is typically the case, might that is economically viable in the metaverse.
verification must be able to operate across a broad transmission could become a channel for criminal improve conversion in online sales, lowering the
range of environments. payments. barrier for purchases. A CATALYST FOR DEVELOPMENT
This kind of verification will be key for payments The metaverse, particularly with a robust system Another method which already exists is Momentum around the development of the digital
in the metaverse, ensuring that people can safely for digital identity verification, might provide an the crypto-debit card. Services allow you to asset ecosystem has understandably stalled
and securely exchange value. opportunity for this type of cross-border payments pay in fiat currencies, directly realised from because of the destruction of so much value in
Ideally, this identity should form the core of a solution to function more effectively, giving the your cryptocurrency holdings. This allows the NFT and cryptocurrency marketplace over the
wallet, which can be used to hold various digital benefits of simple peer-to-peer transfer in an cryptocurrency holders to pay from their holdings past year. But the demand for digital assets to exist
assets and methods of payment, whether these are environment where identity is verified, so KYC and to merchants that do not accept cryptocurrency beyond the issuing institution will grow and the need
cryptocurrencies, stablecoins or something else. AML standards can be enforced. without having to maintain a fiat balance. The for a payments industry designed to service those
This wallet should be able to ‘travel’ to different money they need is converted automatically from needs will expand too.
environments in the metaverse, enabling a variety ON-RAMPS AND OFF-RAMPS their cryptocurrency account on demand. The trajectory is not yet certain — and
of different interactions without losing the core A key component to all of this is the design One can easily imagine this relationship working interoperability remains a substantial technical
identity. of the on- and off- ramps that allow users to in both directions, where a debit card or other hurdle. For the moment, cryptocurrencies dominate
transfer value between the metaverse and their payment platform might automatically convert fiat the metaverse and discussions around it, but
CROSS-BORDER PAYMENTS conventional fiat accounts. holdings into a cryptocurrency or stablecoin at the they are unlikely to ever to achieve dominance
Although interoperability between different In the future, it is possible that the payments point of sale to meet the method required by the as a means of payment. Stablecoins offer a more
metaverse environments will be a challenge, one systems used in the metaverse will become so merchant. promising path and there will likely be growing
of the opportunities that the development of the commonplace that this on-ramp/off-ramp process Convenient payments services are, of course, involvement by the state and existing financial
metaverse presents is a means of simplifying the will be theoretical only and that we will use the same desirable, but it will be even more important players in their provision.
process of sending money across borders. tools to pay in real life as we use to pay for digital that authorities are able to oversee and police Stablecoins offer a means of quickly sending
At present, the challenge of connecting the goods and services in the metaverse. payments. money across borders. But doing so in the absence
widely varying types of domestic payments For the moment, however, users are With cryptocurrency’s pseudonymous nature, of a rigorous monitoring infrastructure opens too
networks is proving immensely difficult to address. likely to maintain a balance in stablecoins or the primary means of combatting criminals who many opportunities for crime. The development of
Stablecoins and cryptocurrencies present one cryptocurrencies for use in the metaverse, distinct make use of it for payments is to police off-ramps, the metaverse, and the digital identity infrastructure
possible means of circumventing some of the from their main stores of value with which they pay where criminals sell their cryptocurrency for fiat required to serve it, might carry the institutional
problems (although they bring their own issues). for rent, taxes and groceries. currency. heft to offer a solution to this problem. •
PAYMENTS IN THE METAVERSE:

these digital currencies will remain intangible and
dependent upon the benefits that they provide
within the metaverse itself. EXPERIMENTATION IN THE METAVERSE IS GOING
INNOVATION FOR BOTH THE Will the need for on and off-ramps for the
metaverse drive new innovations in payments?
TO CONTINUE AND THE INNOVATION IN THIS
VIRTUAL WORLD IS GOING TO SHAPE COMMERCE
PHYSICAL AND DIGITAL WORLDS

Not necessarily, at least at first. Right now, existing AND CREATIVITY AROUND THE GLOBE.
rails and forms of money, including digital currency,
provide a variety of options for accessing value
in the metaverse. However, regulation around system. The bilateral link model connects two
stablecoins and cryptocurrencies could impact their payments systems to each other so that participants
Experimentation in the metaverse could spark innovation in physical world utility as a medium between fiat and metaverse can directly access all participants in the other
payments, writes Robert Clarkson, chief revenue officer of Payoneer. currencies. system. The hub-and-spoke model links multiple
systems through a common intermediary or hub that
INTRA-METAVERSE PAYMENTS takes care of accounting and settlement. This model
What is fundamentally different in payments within envisages a common payments system, running
When thinking about what payments in the FROM PHYSICAL TO VIRTUAL VALUE the metaverse is the potential impact on the scale on an integrated technical platform, so that all the
metaverse will look like, it’s easy to get distracted Flows into and out of the metaverse have strong and speed demanded of payments. This is true participants are operating within a single system.
by the idea that the metaverse represents a new parallels with existing flows in the real world, as for a single metaverse and is only amplified when Each of these models could translate into
world or dimension. It does, of course. It’s a fifth it is fundamentally a question of transferring fiat it comes to payment flows between different the metaverse, but each would face the same
dimension, a virtual environment where commerce currencies to digital currencies. This is already done metaverses. challenges and constraints they do in the physical
and creativity will take place in ways that might not with credit cards, digital wallets and new digital Within a specific metaverse, the parameters of world — challenges that are only magnified in the
even be possible to be imagined right now. currencies like bitcoin and stablecoins. commerce could be upended. These virtual worlds virtual, instant world. For example, one metaverse
Value, however, will be moved into, out of and Value will need to enter the metaverse in a way offer literally infinite supply, with expectations of could agree protocols through a single gateway for
within the metaverse. And by disaggregating that is recognised as valid and having specific instant delivery that also create demand for truly transferring value with another or a hub could offer
payments into discrete components, we can better value. If a distinct metaverse has a coin or token instant payments to the supplier, beyond today’s multiple metaverses the opportunity to interlink.
understand where the current models and systems that is used to purchase (virtual) goods or services expectations. If a metaverse customer purchases a Such approaches, however, would result in the same
are well-prepared to serve a purely digital world — within that environment, that token needs to be designer shirt for their avatar using that metaverse’s frictions that institutions like the BIS are trying to
and where innovation is still needed. denominated in a way that allows us to value it in digital currency, they will expect to see it on reduce in the physical world. While the common
First, it’s important to clarify what is meant by the the physical world. This is neither difficult nor novel, their avatar immediately. Currently, they can use platform model might seem to be the ideal way to
‘metaverse’. It won’t just be one single new system. as gamers around the world are already doing credit cards to purchase Robux, the currency of build a fully interoperable metaverse when it comes
There will be a collection of different metaverses this. And it’s already happening in the metaverse: Roblox. Once it is in their account, they can use it to payments, it is difficult to conceive of all the
that we can collectively call the metaverse. buyers purchase ‘real estate’ in The Sandbox to instantly purchase that shirt. While the platform various metaverse stakeholders from the public and
using The Sandbox’s currency $SAND. Those accepts the associated friction, will this work for the private sectors ceding such authority to a single
THREE COMPONENTS TO THE purchases originated from fiat, for example to fund potentially billions of micropayments that could take entity.
METAVERSE FOR PAYMENTS a cryptowallet or by purchasing $SAND with a credit place within any metaverse? And if the traditional
Breaking down the use cases for payments in the or debit card. payments methods are replaced by blockchain- PAYMENTS IN THE METAVERSE: NEXT
metaverse, there are three distinct components. A second factor is that the value derived from based payments mechanisms, will that system be STEPS
The first refers to putting value into the metaverse commerce in the metaverse will still need to be able to handle them? Experimentation in the metaverse is going to
from the physical world. The second covers extracted to the physical world so that creators Furthermore, the metaverse can be seen as continue and theinnovation in this virtual world is
transactions within and between metaverses. The and businesses can benefit from their metaverse transcending physical borders, but the truth is going to shape commerce and creativity around
third is about repatriating value from the metaverse labour. Digital value already exists in our daily lives. that there will be digital borders between different the globe, including in ways that cannot even be
into the physical world. Because the first and third One common example is when we use frequent flier metaverses. When it comes to payments, these imagined today. It will drive important discussions
components are simply different directions of miles, originally purchased with fiat, to buy luggage borders could have the same impact as borders about payments in the real world, most significantly
the same payments flow, they can be addressed allowances or flights. between nations, adding considerable frictions to around enhancing cross-border payments. Enabling
as a single aspect of payments pertaining to the It is entirely possible that some value created in a the transaction. How will one metaverse’s currency interoperability and ensuring know-your-customer
metaverse. metaverse in the form of digital currency will remain be used in another metaverse? and anti-money laundering standards will be as
This breakdown between putting value into there and be reinvested. However, unless and until The current discussions around interlinking fiat challenging — and as necessary — in the metaverse
and out of the metaverse as opposed to intra- it is extracted into the physical world, the value of payments systems might offer some hints on how as they are in the existing global financial system.
metaverse payments provides a useful framework cross-border payments in the metaverse could Payoneer looks forward to working with the public
for identifying where innovation might be work. In its July 2022 report to the G20, the Bank and private sector stewards of this system to tackle
anticipated and required. It also supplies instances for International Settlements outlined four stylised the opportunities offered by the metaverse, not
where existing models and infrastructure might THIS BREAKDOWN BETWEEN PUTTING VALUE models for interlinking cross-border payments only to build a robust and reliable payments system
already be suited for meeting the needs of the INTO AND OUT OF THE METAVERSE PROVIDES A systems. Under the single access point model, in the fifth dimension, but also to improve cross-
different actors expected to be active in this new USEFUL FRAMEWORK FOR IDENTIFYING WHERE a single gateway entity gives participants in one border payments in the service of global commerce
virtual environment. INNOVATION MIGHT BE ANTICIPATED. domestic payments system access to a foreign in our physical world. •
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What are some of the challenges facing cross-border payments?

What are some of the challenges facing cross-border payments?

What are some models proposed for linking cross-border payment systems?

What are some models proposed for linking cross-border payment systems?

1 omfif.

TURNING THE CROSS-BORDER

© 2022 OMFIF Limited. All Rights Reserved.

DYNAMISM IN PAYMENTS ENABLING INCLUSIVE

CENTRAL BANK DIGITAL

RATHER THAN LATER,

to issue a CBDC, they expect deployment to come

not expect to issue a CBDC, many are actively

while another stated that their ‘current stance on

CBDC (37.5%). One survey participant more inclined

improving cross-border payments. The presence of dedicated CBDC employees in

3: No strong consensus of 50 100 5: Stablecoins also show

4: Interlinking CBDCs 35 25 6: Low adoption and

THE FIRST CBDCs IN DEPLOYMENT

Developing economies, particularly those in the Caribbean, have been at the

migrant workers to send money to their home

TURNING THE CROSS- cross-border payments rely on accounts in other

ROADMAP INTO REALITY as multiple intermediaries in the payment chain

enable computers to communicate with one

of countries have implemented some form of data

it will necessarily continue to do so or that it will

CRYPTO’S CRUCIAL APPEAL

FOR EMERGING MARKETS

BASKET-BACKED STABLECOINS CONCLUSION

argue it could greatly reduce the presence of

CENTRAL BANK DIGITAL

CURRENCIES A general purpose CBDC would transform any

20% financial infrastructure. In emerging markets

ONE YEAR LATER: ENAIRA AS A could add to

FORCE FOR FINANCIAL INCLUSION

AND DIGITAL PAYMENTS

MONETARY AUTHORITIES MUST PUT

INTEROPERABILITY AT THE CORE

OF THEIR DIGITAL TRANSITION

Stellar OpenCBDC Bank Negara Malaysia Hong Kong Monetary Authority

Bank of Jamaica Reserve Bank of Australia

may penetrate or disable them as an act of cyber-

THE LEAD IN PAYMENTS

CYBERSECURITY testing open banking services through the SCB’s

DIGITAL MONEY IN THE CLOUD:

BUILDING THE FUTURE OF All need programmes to raise cybersecurity

payments infrastructure already exist.

THE METAVERSE: A MODEL

FOR DIGITAL PAYMENTS? This kind of capacity might lead to a reduction in

PAYMENTS IN THE METAVERSE:

PHYSICAL AND DIGITAL WORLDS

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