Cryptocurrencies are all the rage. But beyond the retail investors, hype and memes, there’s an institutional and regulatory application which has the potential to revolutionise the way money – and payment – works.
Central banks around the world are curious, if not outright interested. Almost 50 central banks globally are currently investigating and developing ‘proof of concepts’ in their own currencies.
But how this digital-asset technology rolls out, within domestic networks and across borders, will be critical in determining its success. And there’s some crucial lessons to be learned from a previous significant rollout in payments tech – real-time payments networks.
Central bank digital currencies – or CDBCs – are likely to have a number of applications, including at a retail and consumer level, where a number of commercial propositions are already arising.
In the institutional space, any technology which will reduce the burdens and complications around payments will be welcomed. Everyone wants something that makes doing business and processing payments easier – as long as it works.
For banks and their customers – including fellow financial institutions – those are the critical questions: will it help? And will it work?
The more things change
From a perspective within the sector, the way CBDCs are unfolding is very similar to how Real-Time Payment Networks – or RTPNs - were established. Across many geographies, the tech began its journey with a very domestic focus, looking at specific use cases for regional needs.
And RTPNs were a game-changer. They really did work – locally. But the domestic iterations ran into issues when usage rose to the point that customers wanted to use these systems across borders. A global system, or network of systems, is not a pipe dream – but difficult given the circumstances where each were created in relative isolation.
As a sector and global community, it’s important we consider global utilisation just as critically as we consider local utilisation.
For CBDCs, a crucial part of the design and rollout of these networks ought to be interoperability in a cross-border sense. And I am confident that will come in the fullness of time. But at the present time, there's a largely domestic focus. But as we saw with RTPNs, interoperability is a whole different ball game.
There is an opportunity for the central banks designing these CBDC to work with and connect with one another to define a global pattern, and for this to became a global, economically viable option for settlement - as opposed to just a domestic use case.
Within our domestic markets there is a need for this tech, but there is also a cross-border need. All economies around the world depend on each other for certain services and materials. I think that should be front of mind as this tech takes shape.
It’s not a race
Sweden was widely reported as the location of the first proposed CBDC. ANZ’s Raymond Yeung literally wrote the book on China’s active interest in the space. In Australia, the Reserve Bank announced plans in 2020 to partner with a number of large private organisations to look into the tech for the purposes of supporting syndicated loans. The list goes on.
But what’s critical is understanding it’s not a race. What’s more important is making sure we've got the model right, in a cross-border sense. The chevrons that go with being first to the to market on CBDCs will be largely meaningless if there's no global network to connect it to.
Security is another key point to consider. Control and compliance checks will be critical. As time goes on, as ANZ’s Andrew Cornell writes, these digital assets will become “…more regulated, more transparent, more taxed, more integrated into the traditional economic system”.
The other piece is how CBDCs may impact the financial sector in the long term. It’s interesting to considering whether central banks might even become a centralised funding source, or even sentiment source, and how that may impact the broader industry.
Some way to go
There’s certainly a lot to play out in the space. I think where we're at now is really about testing the validity of the technology. I think it's fair to say it works. It works within the scope and the paradigm of what the various central banks are testing it for today.
In banking, and in payments in particular, there has been a huge amount of change come through the industry in the last 10 years. And to be honest, I think it's just going to continue down that path.
As more and more innovative tech rises, what I have learned is the one thing customers want is for it to be seamless. They want to be able to trust it, to depend on it. At ANZ, through all the engagement we have with customers, the biggest compliment I can possibly receive is that it works.
One of the things I think about when we talk about innovation is, how are we addressing pain points? Technology is great when it is useful and has a purpose. What we need to ask ourselves is how we use tech to actually solve fundamental problems for our customers.
And we need to keep asking that.
Luke Perkins is Executive Director and Head of Global Cross Border Payments Product at ANZ