BNM Joins BIS and Three Peer Central Banks to Test the Use of Central Bank Digital Currencies for International Settlements

BNM Joins BIS and Three Peer Central Banks to Test the Use of Central Bank Digital Currencies for International Settlements

Bank Negara Malaysia (BNM), together with three other prominent banking regulatory authorities, has teamed up with the Basle-based Bank for International Settlements (BIS), “to test the use of central bank digital currencies (CBDCs) for international settlements.”

The Innovation Hub of BIS, the gatekeeper of the global banking system often dubbed the ‘Central Banks’ Bank’, is spearheading this great leap forward into a digitisation future towards official digital currencies.

Codenamed Project Dunbar, the initiative is led by the Innovation Hub’s Singapore Centre and four “of the world’s most stable central banks,” namely the Reserve Bank of Australia, Bank Negara Malaysia, Monetary Authority of Singapore, and South African Reserve Bank (SARB).

The fact that BNM has been invited to participate is a recognition of its reputation and integrity as a financial services regulator. BNM is widely respected by the IMF and Basle Committee for Banking Regulation, and its peers. Its participation is also important given the fact that it has a 31-year experience of regulating Islamic finance and capital markets.

“The multi-CBDC shared platform explored under Project Dunbar has the potential to leapfrog the legacy payment arrangements and serve as a foundation for a more efficient international settlement platform. We hope the project will spur greater public-private collaboration to enable fast and frictionless cross-border payments, combining both the benefits of distributed ledger technology and the efficiency of a common platform,” said Assistant Governor Fraziali Ismail, Bank Negara Malaysia.

According to Andrew McCormack, Head of the BIS Singapore Hub Centre, Project Dunbar brings together central banks with years of experience and unique perspectives in CBDC projects and ecosystem partners at advanced stages of technical development on digital currencies. “We are confident that our work on multi-CBDCs for international settlements will break new ground in this next stage of experimentation and lay the foundation for global payments connectivity,” added.

The aim is to develop prototype shared platforms for cross-border transactions using multiple CBDC platforms, which “will allow financial institutions to transact directly with each other in digital currencies issued by participating central banks, eliminating the need for intermediaries and cutting the time and cost of transactions.”

Given the instant and global reach of digitisation, accelerated by the impact of the COVID-19 pandemic, Project Dunbar is confined to CBDCs in their role in global payment solutions. According to BIS, 60% of central banks are experimenting with CBDCs.

Cross border payments are essential for settlement of global trade, workers’ remittances, e-commerce, tourism receipts and even sovereign debt obligations. Multi-currency and cross-border payments are more complex, adding to risks and costs. Most are settled through correspondent banking arrangements traditionally through banks in New York for dollar transactions, in London for Sterling transactions and Frankfurt for Euro transactions.

Moody’s Vice President, Stephen Tu, maintains that “incentives to develop CBDCs have gained in strength since the outbreak of the pandemic, and if carefully implemented could produce large economic gains by increasing financial inclusion and reducing financial friction within the system.” To him, it could level the playing field for public money and provide citizens direct access to a faster, lower-cost digital form of money.

To Fitch Ratings, CBDCs could be the Damascene road to “authority-backed cashless payments with innovations in step with the wider digitalisation of society,” but warns that the “widespread adoption of CBDCs may be disruptive for financial systems if associated risks are not managed, including the potential for funds to move quickly into CBDC accounts from bank deposits, causing financial disintermediation, and for heightened cybersecurity.”

 

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