Triggered by the expansion of cryptocurrencies and private stablecoins, new intergovernmental initiatives are emerging in order to solve problems of the global financial system and keep public cryptoassets at bay.
Earlier in April, the “central bank of central banks” said that the world might see central bank digital currencies (CBDCs) sooner than expected. And today, the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system, announced that it has completed the first of three steps asked by the Group of 20 (G20) major economies in developing a roadmap for cross-border payments.
As a reminder, in October 2019, the Group of Seven (G7) largest advanced economies instructed its members to compete with cryptocurrencies and stablecoins by improving the existing financial system – and consider issuing digital fiats.
Meanwhile, in February, the G20, with the Saudi Arabian Presidency, asked the FSB to coordinate a three-stage process to develop a roadmap to enhance cross-border payments, says FSB in the press release. The Saudi Arabian Presidency has cross-border a priority, it adds. The first step – Stage 1, Assessment – is done, and the FSB published its report today, which will be submitted to G20 Finance Ministers and Central Bank Governors before the planned virtual meeting next week, along with a technical background report.
The report states that “improvements to the operational aspects of cross-border payments could improve the efficiency and speed by which these payments are processed,” and it provides an assessment of existing arrangements and challenges for global cross-border payments.
The report finds that the challenges faced by cross-border payments – namely high costs, low speed, limited access, and insufficient transparency – affect end-users and service providers, but particularly individuals and small companies when it comes to retail cross-border payments. “The unbanked and individuals and firms from fragile states are amongst those who may not be able to access payment services at all,” says FSB.
To solve issues and improve cross-border payments, frictions in existing cross-border payment process must be addressed:
- fragmented data standards or lack of interoperability;
- complexities in meeting compliance requirements, including for anti-money laundering and countering the financing of terrorism (AML/CFT), and data protection purposes;
- different operating hours across different time zones;
- outdated legacy technology platforms;
- all of which increases the need for intermediaries that hold precautionary funding;
- the length of the transaction chain increases costs and delays;
- cost barriers to entry is raised, and that further weakens competition.
Solutions and the role of new technologies
“A number of public sector initiatives have sought to address these challenges and frictions by enhancing existing payment arrangements,” says FSB, such as the G20 and UN setting targets to reduce the cost of sending international remittances on the retail side, and central banks working on interlinking projects between individual national payment systems on the wholesale side.
New technologies have a major role here as these can facilitate fast, low cost, transparent, and scalable payments for a broad range of users, while using internet-based infrastructures for payments creates opportunities for new business models, as well as for various providers and nonbanks to offer payment services.
All of this, however, requires further examination, as the new technologies carry risks and challenges of their own. For example, says FSB, “recent private sector proposals to create so-called “stablecoins” for payment purposes have highlighted the possibility of new digital payments gaining scale quickly, potentially globally.” Therefore, more questions need to be answered in order to ensure proper regulation, supervision, and oversight.
That said, this will be a complicated process that requires a number of steps and cooperation between national and international levels, as well as between public authorities and the private sector. “Technological innovation could build on existing cross-border and domestic payment arrangements or take the form of new structures and ecosystems,” writes FSB. Short-term, improvements could be done in interoperability among payment arrangements, the standardization of payment messages, interconnectedness between payment systems, currency conversion mechanisms, etc. Long-term, certain actions could be proposed to improve the systems’ structure, but these come with “greater uncertainties in their development.”
“The roadmap should recognize that, while greater consistency and a more efficient interlinking are important goals, these do not imply a “one size fits all” approach for the diverse set of users of the different payment system networks and their differing needs,” concludes FSB.
Next steps and current trends
Two more stages remain in the submission process:
- Stage 2 – Building Blocks: The Committee on Payments and Market Infrastructures (CPMI) will provide an update to the G20 in July this year on the areas where further public sector work could assist in moving to an improved cross-border payments system and in public goods or removing unnecessary barriers.
- Stage 3 – Roadmap: the FSB, CPMI and other relevant organizations will develop a roadmap containing practical steps and indicative timeframes, which will be submitted to the G20 in October 2020.
Meanwhile, the technical background report listed some trends in cross-border payments:
- International trade has grown strongly in the last 10 years, while the internationalization of production has led supply chains to become increasingly global.
- Cross-border e-commerce activity has contributed to the growth of person-to-business cross-border retail payments and is expected to grow substantially in the future, while 15%-20% of e-commerce transaction value is already international.
- The volume and value of global cross-border payments sent using the SWIFT payment messaging system has risen in recent years, but the number of correspondent banking relationships has fallen globally by 20% from 2011 to 2018, with the decline affecting almost all regions and countries.
- The growing international travel and migration are creating a growing demand for cross-border payments; also, as many international migrants send funds to their family and friends, annual remittance flows grew 50% from 2010 to reach USD 707 billion, of which USD 529 billion were to low- and middle-income countries.
- Inflows of remittances (a critical source of financing for people in most developing countries) have increased by 64% in the last 10 years, from USD 432 billion in 2009 to c. USD 707 billion in 2019, with remittances sent from G20 countries accounting for more than 50% of the global total.
- The cost of sending remittances has declined over the last 10 years, but the rate of reduction has slowed in recent years and the global average cost of sending USD 200, at 6.82% in Q4 2019, remains well above the G20 commitment in 2011 to reduce the cost to 5% and the UN Sustainable Development Goal target of 3% by 2030, concludes FSB.