Dive Brief:

• Central bank digital currencies hold promise for improving the efficiency of cross-border payments, but the various systems being tested around the world show there are associated risks too, according to a report issued last week on the topic from the Faster Payments Council.
• While various CBDC models are being tested around the world, “there have not yet been successful pilots or demonstration projects proving the viability of using CBDCs for transactions between commercial banks and for using CBDCs for digital transactions in the general economy,” the report said.
• Countries where central banks have participated in testing various models for cross-border payments using CBDCs include Canada, Singapore, France, Hong Kong, Israel, the United Arab Emirates and China, according to the report released May 31.

Dive Insight:

The report from the council, a private company group that focused on advancing U.S. payment systems, comes as countries and businesses worldwide fret over the complexity and cost of cross-border payments. While fintechs springing up over the past decade have sought to tackle the problem and improve the international payments network, CBDCs have also been held out as a possible solution.

CBDCs efforts are largely based on blockchain technology, the same digital ledger technology that has undergirded private cryptocurrencies such as bitcoin.

Any CBDC would still require monetary authorities to have back-up systems that could handle payments on a real-time basis, the report said. It also noted that a fundamental key to building an international system would be a set of common rules and standards, allowing for interoperability between public and private blockchains.

“The global CBDC ecosystem risks becoming fragmented with numerous central banks developing digital currencies based on different technologies, standards and protocols,” the report said.

Security and privacy are also a major concern for any such systems, the report noted, suggesting tools such as encryption and authentication protocols are necessary in addition to building defenses against cyberattacks. 

It’s not just national governments that are involved in pilots related to blockchain technologies. JPMorgan Chase, the largest U.S. bank, has also been involved in testing related systems with its Onyx unit taking part in a Banque de France experiment with the Monetary Authority of Singapore in July 2021, the report said. 

Onyx, formed in 2020, touts itself as the “world’s first bank-led blockchain platform for the exchange of value, information and digital assets.” JPMorgan is also using that blockchain system in a new partnership with six banks in India “to settle interbank dollar transaction,” Bloomberg reported Monday.

At the same time, many U.S. banks and their trade groups have opposed the pursuit of a U.S. CBDC.

The U.S. has been on the fence about moving ahead with a CBDC. While the Federal Reserve has studied the technology, it has said that legislation would likely be required to proceed and it would only do so with the support of the White House. Indeed, some lawmakers have sought to prohibit the Fed from pursuing a CBDC.

Still, the Fed has continued to test the technology with the Federal Reserve Bank of New York issuing the results of a project with Singapore earlier this year.