Some items on our site have recently moved. Visit our News Hub for selected articles, special reports, podcasts and other resources.
Libra prompts central banks to examine global payment costs, BIS study finds
01 Mar 2020 12:00 am by Jack Schickler
Facebook's proposed digital currency, Libra, poses such a disruptive threat that it is causing regulators to consider how they can cut costs in the cross-border payments market, according to a new study from the Bank for International Settlements, or BIS.
The changes could require a rethink of issues from opening hours to insolvency law, and raise the question of the respective roles of public-sector infrastructure and private innovation.
Blockchain-based Libra, announced last June and backed by a range of payments, technology and venture-capital companies, was promised to cut costs in global retail payments, raising fears among some that monetary sovereignty could be at stake.
Finance ministers from the Group of 20 largest economies, meeting in Riyadh last month, told Basel-based financial standard setters to get to grips with high complexity in international transactions.
The Financial Stability Board is working to set out “practical steps and indicative time frames” on how to make cross-border payments easier and cheaper, BIS General Manager Agustín Carstens said in a paper released.
Meanwhile, BIS’s own Innovation Hub aims to spur the public sector to come up with its own improvements, or even consider “whether money itself needs to be reinvented for a changing environment,” Carstens added.
Cross-border payments have traditionally been managed by a system of correspondent banks — in which a bank in one country holds deposits owned by foreign entities, and provides payment and other services to them.
That system is costly and slow, with payments that in theory could need only seconds taking up to seven days to process. It is also controversial, linked to several recent money-laundering scandals. Many institutions have abandoned a system that leads to reputational risks and costly diligence checks: The number of correspondent banks fell by about 20 percent between 2011 and 2018, Carstens noted.
Other “closed-loop” alternatives to pay across borders — old players such as Western Union, or new ones such as China’s Alipay — have been popular, but rely on both payer and payee using the same system.
Call to action
The idea of an alliance with a global giant such as Facebook as its figurehead stepping in and taking over the world monetary system has galvanized the central banks that run domestic centralized payment infrastructure into action.
There are plenty of obstacles to overcome, not least the foreign-exchange and liquidity costs common to anyone engaging in overseas transactions. Discrepancies between national insolvency laws could also leave a central bank with the risk that a transaction is considered final in one jurisdiction, but not in the other.
Other issues are more prosaic, such as central bank infrastructure that uses incompatible protocols, or operating in different time zones. Overcoming them requires political will, and sometimes even new laws or treaties, concludes a study by three BIS economists also published today.
But any final solution will need to find the right balance between state actors — ultimately responsible for currency, and the trust which underpins it — while also leaving room for private companies to play with new ideas, Carstens has concluded.
“Central banks amplify the efforts of private-sector innovators by giving them a solid base to build on,” he said in a speech at Princeton university in December.
16 Jul 2021 1:59 pm by Jack SchicklerThe EU banking watchdog's handling of probes into money laundering at Danske Bank and Pilatus Bank.
01 Jul 2021 8:00 am by Martin CoyleUK Bribery Act, which has helped the UK become one of the top enforcers of global bribery settlements.