The race to integrate crypto into global banking is real
- 17 January, 2020 10:10
Central banks in Asia and Europe are in the final stages of launching digital currencies for future payment systems and cross-border transactions, according to a new report from accounting firm KPMG.
And governments around the world see the launch of these blockchain-based central bank digital currencies (CBDC) as something that could one day give them a competitive advantage in global trade.
“In 2020, we at KPMG expect to assist regional and central banks in the development of well-defined technology frameworks that can anchor private-sector initiatives,” Arun Ghosh, U.S. Blockchain Leader at KPMG, said in a blog post.
Among other banking entities, the International Monetary Fund (IMF) has shown support for fiat-backed cryptocurrencies, saying they can reduce the reliance on government-issued money, "and unlike bank transfers, crypto asset transactions can be cleared and settled quickly without an intermediary,” Dong He, deputy director of the IMF’s Monetary and Capital Markets Department, wrote in a post for the IMF.
“The advantages are especially apparent in cross-border payments, which are costly, cumbersome, and opaque," he said.
"New services using distributed ledger technology and crypto assets have slashed the time it takes for cross-border payments to reach their destination from days to seconds by bypassing correspondent banking networks.”
In a blog post, the IMF said today’s fiat currencies are in flux “and innovation will transform the landscape of banking and money.”
Other countries are already looking to innovate in ways that given them an advantage.
China is reportedly close to releasing a national cryptocurrency that, because of greater efficiencies, could challenge the U.S. dollar as the de facto currency for international trade. Other smaller countries such as Sweden are planning their own state-sponsored cryptocurrency. Sweden’s would be called the e-Krona.
And the Bank of England has been researching cryptocurrency since 2015. Even though it does not currently plan to issue a cryptocurrency linked to Pound sterling, it has published extensive research on the monetary policy and financial system implications of issuing CDBCs.
“If a central bank issued a digital currency, then everyone (including businesses, households and financial institutions other than banks) could store value and make payments in electronic central bank money,” the Bank of England said in a research paper.
“While this may seem like a small change, it could have wide-ranging implications for monetary policy and financial stability.”
Regardless of any movement by central banks, Ghosh said, fiat-based ‘stablecoins’ are already being issued by the private sector to support enhanced value exchange and settlement within organisations and across banking networks.
For example, JP Morgan Chase announced last year it had developed what was seen at the time as the first cryptocurrency backed by a major bank – a move that could legitimise blockchain as a vehicle for fiat cryptocurrencies. JPM Coin, as the bank calls its new digital money, is considered fiat currency because it's backed by U.S. dollars in accounts designated at JPMorgan Chase N.A.
Each JPM Coin is equal in value to one U.S. dollar.
Wells Fargo has also announced it will pilot its own cryptocurrency to enable near real-time money movement and cut out settlement middlemen, thus reducing fees.
And the Reserve Bank of Australia has conducted pilots with Ethereum-based cryptocurrency in the hope it could be used by third parties for cross-border payments. So far, the bank has not found a significant case for its use in light of Australia’s relatively stable banking system, according to a Senate inquiry into the matter last month.
“The upside for businesses and consumers will trickle down through adoption..., Ghosh said, nothing that the new systems could result in "near instantaneous value settlement" with "enhanced cash flow realisation and/or liquidity of certain positions."
Blockchain is being piloted by financial services institutions in five primary areas: for clearance and settlement, trade finance, cross-border payments, insurance claims processing and anti-money laundering (AML) and know your customer (KYC) efforts.
For cross-border transactions, stablecoin could cut settlement times from days to minutes by eliminating the need for private organisations such as Depository Trust and Clearance Corp. (DTCC) in the U.S. and Euroclear in the European Union. The DTCC and Euroclear now handle securities settlements.
Blockchain-based systems could also streamline the process of buying and selling stocks and bonds. Those transactions can take up to three days, with longer delays of up to 10 days not uncommon, according to Bruce Fenton, founder and managing director of Atlantic Financial and a board member of the Bitcoin Foundation.
"The challenge with securities now is you need a trusted third party to say what's true," Fenton said.
"It's not your broker. It's not Merrill Lynch or Fidelity and it's not the issuer either; Apple has no clue who their shareholders are, either. The function is performed by these large centralised groups because the brokers don't necessarily trust each other; they're dealing with their competitors."
The problem with relying on central settlement organisations is that transactions can get bottlenecked through the use of a single ledger, such as VisaNet or SWIFT, he said. With blockchain, trust becomes moot since digital tokens representing securities or money are inextricably linked to the funds or securities – and transfers can be done in hours, Fenton said.
Given those efficiencies, more than a half dozen universities are already working on developing a payment system to rival today’s conventional clearance and settlement networks.
In addition to the scaled adoption of cryptoassets now being driven by the public sector, Ghosh sees four other crypto trends likely to emerge over the next year or so as business executives apply “an unprecedented level of innovation ... driving new revenue models by leveraging blockchain and tokenised assets.”
Those trends include:
- Advances in cryptoasset custody technology, or how digital assets are owned, stored, secured, transferred and accessed in a decentralised environment.
- A shift from private-permissioned to interoperable blockchain implementations. With many private blockchain implementations coming to fruition, the next step is interoperability.
- More success when scaling the technology with a converged artificial intelligence (AI) framework – and better results when initialising their AI investments.
- The convergence of AI, blockchain and the Internet of Things (IoT) to help manage climate change.
About that last prediction, Ghosh said: “Decentralised, transparent data models enabled by blockchain, which houses data transferred via IoT that is measurable using advanced analytic techniques, can be visible to a vast number of countries and regulators that are jointly monitoring and reporting on carbon emissions, rising sea levels and the remediation of toxic waste, among other applications."