![]() Replacing this system with digital wallets would remove all middlemen. There are too many handshakes, and the cost of keeping the ball rolling means banks end up overcharging for small payments. If you consider the flow above – it becomes clear why cross-border payments can be costly and time consuming. The correspondent bank branch in Australia will ultimately wire the money to the receiver’s personal bank. Your bank will in turn notify its correspondent bank to wire money to its Australian counterpart. If you send money from Singapore to someone in Australia, you will first instruct your personal bank to send the money. A correspondent bank is a financial institution with operations in two or more countries which have agreements to provide services for each other. ![]() The DCEP could provide a way to circumvent potential sanctions.Īt this point, it is worth a small digression to understand a key question: how do current cross-border payment systems work? Cross-border payments are effectively coordinated by what is known as the “correspondent banking” system. ![]() Poignantly, the US-China trade war also brought to light the subject of monetary sanctions, in which US policymakers can potentially restrict dollar access for China via its leverage over SWIFT. A CBDC would provide similar benefits, but without the associated price volatility. One of the greatest pain points in payments right now is the convoluted system of cross-border payments, which apart from being slow and cumbersome, also penalize small value payments. This has led many to search for alternatives, and a good example is Nigerian overseas workers who have turned to Bitcoin as a quick, cost-effective way to remit money home. The PBOC itself will not be responsible for interest rate transmission. The PBOC will release DCEP to the banks, who in turn will enable customers to swap their existing cash balances for DCEP units. More critically, interest will only be earned on deposits once customers place digital currency with banks. This is exactly what the digital yuan has done. Additionally, given the entire global system of modern credit is backed by banking deposits, disintermediation of traditional financial institutions could destabilize the entire financial system.įor these reasons CBDCs rollouts are all but certain to go the way of a two-tiered system, where banks remain involved. Central banks would need to scale their operations massively with customer service hotlines and compliance back office operations which are presently being quarterbacked by the private sector system. However, while possible, it remains unlikely to occur. Theoretically, it would be possible for Central banks harness CBDCs to put themselves in the position of sole financial intermediary where they directly face the customer. The decentralized nature of CBDC-based digital wallets eliminates the need for banking intermediaries. How Does the DCEP Work?Īs mentioned earlier, CBDCs present a significant threat to financial institutions. As China’s CBDC inches closer to launch, we take a look at key features of the DCEP’s design and the implications this could have for the wider political economy. That China is the global leader in this space should come as no surprise, given that the country is already a leader in electronic payment systems. ![]() The People’s Bank of China (“PBOC”) first initiated development on the DCEP in 2014 under the guidance of highly regarded governor, Zhou Xiaochuan. Long a holdout, Jerome Powell also recently announced that the US Fed intends to publish a discussion paper on a digital dollar this summer. The BIS reports that 86% of Central banks are developing a digital currency and around 14% are in the process of rolling out pilot tests. Going by the official moniker of “DCEP” (“Digital Currency/Electronic Payment”), the country is expected to have a mass rollout right in time for the 2022 Winter Olympics in Beijing. China’s progress on this front, coupled with Facebook’s 2019 announcement of its own digital currency, Libra (now known as “Diem”), were two of the catalysts for the latter day “space race” to develop CBDCs. Taken to the extreme, these forms of digital payment could potentially void the need for traditional banks altogether while the technology underlying tokenized forms of CBDCs opens up boundless possibility for novel forms of economic policy.Ĭhina is the furthest along in its CBDC development roadmap and has already rolled out pilot tests in several major cities. Central Bank Digital Currencies (CBDCs) could well be one of the most far-reaching advances of the 21st century. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |