In the ever-evolving landscape of international finance, traditional systems continue to hold sway over the realm of cross-border transactions, despite notable advancements in blockchain technology.
Shift in Central Bank Preferences
Recent insights from the Official Monetary and Financial Institutions Forum (OMFIF) reveal a steep decline in enthusiasm among central bankers for central bank digital currencies (CBDCs), according to their latest Future of Payments survey.
The survey results indicate that nearly 47% of central banks prefer integrating existing instant payment systems, like the new US FedNow service, to enhance cross-border transactions. This preference mirrors last year’s findings and highlights a consistent interest in leveraging established infrastructure. On the opposite end of the spectrum, stablecoins failed to gain any traction, garnering a 0% approval rating.
Moreover, interest in CBDCs has plummeted from 31% in 2023 to a mere 13% this year. This drop could be linked to the intensified focus on CBDCs by select central banks, drawing attention away from broader discussions.
Changing Dynamics in Payment Systems
The Bank for International Settlements (BIS) made headlines in October by exiting Project mBridge, a decision widely interpreted as an acknowledgment of risks tied to international sanctions. This project, which had ties to China and other countries less aligned with Western interests, raised significant concerns.
Even though the BIS clarified that its decision wasn’t driven by political motives, it underscored the dominant role of the US dollar in global transactions. A mere 11% of central banks expressed intent to reduce their dependence on the dollar, suggesting that in the face of ongoing geopolitical tensions, many will look to increase their dollar reserves, thus reinforcing the current payment infrastructures.
Meanwhile, the correspondent banking system—where large banks facilitate international payments for smaller institutions—is experiencing a steady decline. This trend worsens due to rising operational costs associated with complex compliance frameworks, including Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
Future of Payment Innovations
Looking ahead, if the rollout of the new ISO 20022 messaging standard sees any delays, the decline in correspondents could accelerate, as the survey highlights a potential gap in the timeline for adopting this new standard.
This backdrop paints a clear picture of the rising interest in tokenization among central banks. Over 40% of central banks in advanced economies favor this innovative approach and plan to launch related projects within the next few years.
Collaborative ventures, such as the BIS’s Project Agora, which includes participants from France, Japan, South Korea, Mexico, Switzerland, the UK, and the United States Federal Reserve Banks, are investigating the viability of tokenized transactions. However, this initiative heavily depends on the uptake of wholesale CBDCs.
Ultimately, with a strong preference for traditional instant payment systems, it seems unlikely that blockchain technology will significantly disrupt the cross-border payment scene anytime soon. The BIS is actively working with Project Nexus, aiming to create a seamless platform for instant payment systems while utilizing the ISO 20022 standard.
Source: Cointelegraph
