The financial landscape is undergoing a transformative evolution, with technology, governance mechanisms, economic forces, and policy actions shaping the trajectory of money. From metal coins to fiat currencies, and paper letters of credit to account-based systems, the history of money has witnessed significant changes. As cash usage declines globally, digital innovation is taking center stage, offering new opportunities for the evolution of money.
In the current era, technological advancements such as cryptography, tokenization, and programmability are paving the way for the next phase of financial innovation. Banks are exploring deposit tokenization, central banks are experimenting with digital currencies, and fintech companies are innovating across various dimensions of money and payments.
This shift is not confined to domestic realms; it extends to cross-border payments, a foundational aspect of the global financial system. Challenges persist in the form of limited infrastructure, sporadic governance, expensive recourse, and risky settlement assets. However, the international community is actively seeking solutions.
The IMF unveiled a paper building on last year's XC (Cross-Border Payment and Contracting) platform proposal, introducing a visionary concept that could reshape cross-border payments on a global scale. This proposal envisions a trusted ledger, akin to a "digital town square," where digital versions of central bank reserves can be efficiently traded among participants.
Exploring Cross-Border Payment and Contracting Platforms: A Vision for the Future
In this landscape, a novel class of platforms, according to the IMF, termed XC platforms, emerges as a potential game-changer. These digital town squares operate under local rules and laws, offering a trusted single ledger for efficient exchange of digital representations of central bank reserves in any currency. The platforms are designed to replicate basic financial contracts in a privacy-preserving manner, fostering collaboration among public and private sector participants under robust governance, standards, and rules.
XC platforms bring scalability, safety through central bank reserves, interoperability among national currencies, increased competition, efficiency in financial contract trading, and innovation through programming. Importantly, they rest on transparent and rule-based governance, supporting the stability of the international monetary system.
XC Platform: An Evolution of Wholesale CBDCs
The XC platform goes beyond a mere settlement asset; it serves as a comprehensive infrastructure, providing a centralized ledger for cross-border payments. It eliminates the need for multiple wholesale central bank digital currency (CBDC) projects, allowing commercial banks, payment providers, and central banks to collaborate seamlessly. While a distributed ledger (DLT) is a possibility, the report highlights that a centralized database could also power this transformative platform.
XC Operation: Tokenizing Existing Central Bank Money
Crucially, the XC platform doesn't introduce a new settlement asset or currency. Instead, it relies on tokenizing existing central bank money through 'representations.' Central banks provide tokenized escrow certificates, similar to CBDCs but limited to the XC platform. These certificates, representing property rights, significantly reduce counterparty risk, enhancing the safety and efficiency of cross-border transactions.
Three Layers of XC Platforms:
The proposal outlines three essential layers of the XC platform:
- Settlement Layer (the Ledger): This layer serves as the foundation, providing a secure and efficient ledger for cross-border transactions.
- Programming Layer for Smart Contracts: Enabling conditional payments and programmability, this layer ensures flexibility without compromising the base ledger, aligning with the preferences of many central banks.
- Information Layer: Safeguarding personal information, this layer facilitates compliance and currency controls without granting central banks access to sensitive data.
Advantages and Shortcomings of XC Platforms
XC platforms offer several advantages, including low technological barriers for central banks, compatibility with legacy systems, and reduced counterparty risk. However, the proposal acknowledges challenges, particularly regarding foreign entities trading tokenized domestic central bank reserves without direct supervision by the domestic central bank. The concept of escrow certificates aims to address this challenge.
Macro-Economic Benefits and Future Prospects
The macro-economic benefits of improved cross-border payments are noteworthy. Lower transaction costs for small and medium businesses, reduced remittance costs for poorer households, enhanced liquidity in certain exchange rate corridors, and improved monitoring of capital flows are among the potential advantages. Additionally, greater payment integration and transparent governance can counter fragmentation pressures.
As countries contemplate these XC platforms, flexibility is paramount. The platforms can apply to low-value retail payments, remittances, or any payment flow, with gains increasing as the number of participating countries grows. While XC platforms leverage novel technologies, they are designed to be compatible with existing payment systems and arrangements, offering a multicurrency system without imposing a single settlement asset.
In conclusion, the blueprint for XC platforms presents a vision aligned with domestic and international policy goals, offering a potential solution to the challenges faced by cross-border payments. The debate around this blueprint is crucial for refining the idea and providing a roadmap for countries to explore, collaborate, and innovate in the ever-evolving landscape of finance.
