Central bank digital currencies (CBDCs) are a game changer and can transform finance and banking as we know them today, the Bank for International Settlements (BIS) has stated in its latest report. The report centered on a CBDC project between China, Thailand, the United Arab Emirates, and Hong Kong.
Known as Project Inthanon-LionRock, it started in 2019 with the signing of an agreement between the Hong Kong Monetary Authority and the Bank of Thailand. They would later bring in the Digital Currency Institute at the People’s Bank of China and the Central Bank of the UAE in the third phase of the project which is known as the mCBDC Bridge project or, in short, mBridge.
According to the BIS, the prototype that the four have been working on showed great efficiencies, especially in cross-border remittances. The bank said it was able to improve cross-border transfer speed from multiple days to seconds. It was also able to slash the associated costs drastically, according to the report.
“It thereby demonstrates the potential of faster and lower cost cross-border transfers for participating jurisdictions,” the report stated.
It added, “The overall goal of the project throughout these three phases remains unchanged: to design and iterate a new efficient cross-border payment infrastructure that improves on key pain points, including high cost, low speed, and operational complexities.”
The report noted that cross-border remittance costs range from 2% in Europe to 7% in Latin America, with the global average at over 6%. While considering data obtained from the project and existing market data from McKinsey, PricewaterhouseCoopers estimates that a CBDC solution could cut remittance costs by up to 50%.
Speed is yet another significant challenge that a CBDC could solve, according to the BIS. Currently, cross-border remittances take up to five days to process. The mCBDC Bridge project was able to slash down this time to a few seconds.
In the near future, the BIS and participating central banks will work on developing the prototype into a production-ready solution. Legal, business, governance, and policy concerns are being cataloged and analyzed as the participants seek to focus on the production usage.
It’s not just the cross-border remittances sector that a CBDC can impact, however. A recent nChain paper outlined a new tool that can be enabled by a retail CBDC, allowing central banks to better target inflation rates.
With an ever-changing global economy in which shocks like the COVID-19 pandemic is devastating almost every other industry, central banks can no longer rely on generalized monetary and fiscal policy toolkits. The use of electronic cashback rates, enabled by the CBDC, can allow these banks to stimulate the economy through consumption expenditure. These rates can be especially critical when the interest rate hits the zero lower bound, which in today’s setup, leaves the central banks with little else to do.
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