The pandemic continues to drive change in many industries and the financial sector is no exception. One of these developments is that international regulators involved with settlements and payments are starting to focus on prudential regulation and develop common approaches to regulating digital currencies.
New research from the Bank for International Settlements (BIS) highlights the inefficiency of cross-border payments and the role of technology in enhancing them through interoperating central bank digital currencies (CBDCs) by forming multi-CBDC (mCBDC) arrangements. The new research, “Agreements on multilateral transactions and the future of cross-border payments”, emphasises the potential for digital currencies of central banks to:
- Significantly improve cross-border payments by updating approaches to AML/KYC rules, as well as increasing processing time and implementing blockchain-based technologies
- Promote the diversification of convertible national currencies and strengthen monetary sovereignty
- Compete with stablecoins
The BIS is conducting experiments on mCBDC arrangements through its Innovation Hub to explore the potential of these ideas with central banks.
Finding the balance
While the BIS initiative presents opportunities for the sector, it does pose some challenges for traditional banks. Just one is the need to adapt business practices in order to collaborate effectively with fintechs and digital service providers.
Plus, while early collaboration in this work could well help central banks identify unwanted barriers and increase efficiency, it may also create a security issue with avoiding competition from stablecoins.
Despite the potential challenges, this initiative has the scope to enable the integration of centralised and decentralised finances. It could also expand opportunities for cooperation between central banks around virtual currencies. Yet another potential benefit is that it could help to enhance anti-money laundering and Know Your Customer (KYC) identification rules for banks and financial corporations.
BFI (Banks for Institutions), the sister company of PayCompliance, supports banks and Non-Bank Financial Institutions with KYC due diligence, on-boarding procedures and correspondent banking relationships.