Ask any treasurer about the inefficiencies of the correspondent banking network and they will tell you about the high costs, the slow settlement, and not having any visibility on where their payments are. Then there are the costs of keeping funds aside while waiting for transactions to clear – effectively trapped liquidity that could be put to better use elsewhere if things were more real-time, and more efficient.
The costs of cross-border transactions are significant, and when totalled on a global basis - of all multinational corporations - the numbers are staggering. For a corporate to send funds cross-border, the average fee is US$27 per transaction. On a global basis, for all corporates, this scales up to US$120bn per year, which is roughly equivalent to a third of Singapore’s GDP. And with approximately US$23.5trn of funds moving across different countries each year, it’s no wonder that there are so many people exploring how this could be a lot more efficient.
There have been many initiatives that seek to address the problems, such SWIFT’s gpi or Ripple’s real-time payments solution. Private companies – such as Facebook – have been working on developing their own digital currency, or leveraging an existing stablecoin, while central banks are also exploring issuing their own central bank digital currencies (CBDCs).
The initiatives form something of a patchwork of options that are available for treasurers. However, none of them has been global, scalable or a seamless solution that works cross-border, in many currencies and with multiple payment systems, according to a recent report from Oliver Wyman and J.P. Morgan.
The report quotes one head of cash management at a global technology multinational corporation as saying, “I’m convinced that CBDCs could bring transactional cash management to the next level from the standpoint of accessibility (being able to access liquidity in their accounts without cut-offs and cross-border delays), convertibility (being able to convert to different currencies at will, enabling them to manage liquidity in smaller sets of currencies), reachability (beyond just bank accounts) and traceability (being able to have a clean trail of funds).”
The report outlines its view of how the issues can be overcome at a global level: with a multi-currency central bank digital currency network, or mCBDC for short.
The paper outlines how such a system could be built and implemented, with the end result being a network of central bank digital currencies that is ‘always on’, is real-time with ‘atomic settlement’ – or simultaneous settlement. Transaction chains would also be shortened, with no need for all the intermediaries that currently exist in the correspondent banking network.
The report outlines the ways in which central banks and commercial banks can come together to create a network for cross-border payments where this is all possible. It’s no mean feat, however, and there are many issues to consider. For the various parties to come together to create such a network, they need to agree on how the CBDCs will be minted and redeemed; what the roles and responsibilities of the central banks and commercial banks are; how the network and technology will be designed; and how such a cross-border network would be governed.
There are various ways such a network could be achieved. For example, it could upgrade existing real-time gross settlement systems, or it could leverage bilateral CBDC corridors; or it could craft a new mCBDC network. This new mCBDC model would have a single platform for a multilateral corridor which would be a shared settlement platform for multiple jurisdictions.
Naveen Mallela, Global Head of Coin Systems, Onyx by J.P. Morgan, commented on the report: “Central banks around the world who are at various stages of CBDC development are considering how to build an infrastructure where systems operate and work together with the necessary controls in place. In this report, we put forward robust design considerations for a successful mCBDC network and demonstrate how it can be practically implemented, using ASEAN corridors as an example.”