Introduction
The World Bank sensed the possibility of integrating CBDCs with faster payment systems (FPS). A recent report by The World Bank Group, named “Interoperability between central bank digital currency (CBDC) systems and faster payment systems,” is now launching into the moderation phase with ITS Technology and Innovation Lab (ITSTI).
This programme is poised to change how the financial landscape operates by providing increased efficacy and security in digital transactions. Understanding how CBDCs interact with faster payment systems will be critical to building a future global payments landscape that keeps pace with the digital economy.
Background on CBDC and Faster Payment Systems
CBDCs are digital currency issued and backed by a country’s central bank to be used for transactions. There are two main types:
- Retail CBDC: Intended for the general public, on par with cash or bank deposits.
- Wholesale CBDC (wCBDC): Created for payments between financial institutions.
What are Faster Payment Systems?
Faster payment systems allow users to transfer funds between bank accounts almost instantaneously. These systems are designed to function 24/7, ensuring continuous availability and shortening the time it takes for funds to be transferred and cleared.
They involve two main steps:
- Payment by the End User: Streamlined transactions and reduced processing times.
- Settlement Between Banks: Improved mechanisms for fraud detection and prevention, leading to cost savings for both financial institutions and consumers.
Scenarios of Possible Implementation
The report considers several interoperability implementation scenarios, including:
- Retail Transactions: A scenario where one party is using a retail CBDC while another party is using a faster payment system.
- Interbank Settlements: Utilising a wholesale CBDC to conduct faster interbank settlement processes.
- Cross-Border Payments: Achieving interoperable systems that will improve efficiency in cross-border transactions.
Technical Approaches Explored by the World Bank
The focus of the World Bank’s report includes:
- Work on Integration Systems: Ensuring ease of communication between CBDC and faster payment systems platforms.
- Use of Bridge Providers: Entities that facilitate transactions between different systems.
- Role of Central Banks: Acting as trusted intermediaries to accomplish interoperability.
Technical Approach in World Bank Experiments
Various technical approaches were involved in the experiments carried out by the World Bank to attain interoperability. These included the integration of the CBDC platforms with faster payment systems and assessment of various ways through which both would communicate seamlessly.
Key technical solutions proposed by the report include the use of APIs and standardised protocols to make interoperability seamless, ensuring efficient and secure transactions between CBDCs and faster payment systems.
Example of Bond Issuance on SIX Digital Exchange
A notable case involved the treasury department of the World Bank in a wholesale CBDC transaction, issuing a bond on the SIX Digital Exchange (SDX). This transaction was settled against the Swiss National Bank’s (SNB) wCBDC as part of the pilot project conducted by the SNB.
Key Takeaways from the SNB’s wCBDC Pilot
The recently extended two-year wCBDC pilot by the Swiss National Bank provides several insights into the practical implementation of wCBDC. The World Bank’s involvement in this pilot underscores the potential of wCBDC to improve interbank settlement procedures.
Conclusion
The World Bank’s exploration of interoperability between CBDC and faster payment systems marks a significant step towards transforming the financial landscape. The potential benefits of enhanced efficiency, added security, and cost savings underline the importance of this initiative.
As technology and financial systems continue to evolve, the insights and findings from the World Bank’s report will be instrumental in shaping the future of global financial transactions.
Learning More About Blockchain and Digital Assets
For those interested in deepening their understanding of blockchain and digital assets, the Executive Certificate: Blockchain and Digital Assets for Financial Services offered by the Centre for Finance, Technology and Entrepreneurship (CFTE) and SMU Academy is an excellent resource.
This online programme provides comprehensive knowledge and skills to thrive in digital finance. Participants will learn about blockchain fundamentals, digital asset mechanisms, and real-world applications across various sectors, including finance, government, and healthcare.
