The International Monetary Fund recently held a groundbreaking conference on cross-border payments. The impressive list of the first session's panelists included Ahmed Abdulkarim Alkholifey, Governor of the Saudi Arabian Monetary Authority; Agustín Carstens, General Manager of the Bank for International Settlements; Jerome Powell, Chair of the U.S. Federal Reserve; and Nor Shamsiah Mohd Yunus, Governor of the Central Bank of Malaysia. The moderator was none other than Kristalina Georgieva herself, the IMF's Managing Director.
The heads of the central banks discussed the future of cross-border payments with a special focus on central bank digital currency (CBDC). According to Georgieva, improving cross-border payments can bring huge benefits "for many of the world's poorest people." The head of the IMF said that in spite of accelerating technological changes, cross-border payments "remain slow opaque, costly, and inaccessible to part of the 1.7 billion people worldwide who are unbanked."
Georgieva said remittances cost 7% on average, "more than twice the target set by the UN's sustainable development goals." She emphasized that if we want our economies to recover in a post-pandemic world, a global, coordinated effort will be needed.
It was interesting to attend this conference on the heels of the PayID event sponsored by Ripple, where the consensus was that the days of central banking authorities' control are over and where panelists referred to fiat currencies and traditional banks as "legacy" systems. Georgieva clearly sees things in a very different light. "Widespread use of new forms of digital money," she warned, "could make it harder for country authorities to run independent monetary policy and control domestic financial conditions."
For the IMF, it is important to integrate new technologies, but "we must also contain risks, and that can only be done through international cooperation to help us all understand the macro financial effects of using digital money across borders."
The role of the IMF in terms of facilitating cross-border payments will involve fostering cooperation and bringing together "the future of cross-border payment systems," according to Georgieva. This vision is aligned with the contents of the recent CBDC report from the central banks of the U.S., Europe, England, Japan, Switzerland, Canada, and Sweden, plus the Bank for International Settlements.
The document, titled "Central bank digital currencies: Foundational principles and core features," highlighted the role the World Bank and the IMF must play in the coming era of cross-border payments. It concluded that "any approach to issuing a CBDC will naturally be cautious, incremental, and collaborative." This statement is clearly a far cry from the crypto industry's thirst for disruption.
Cautious is a fitting word to describe the attitude of the Chair of the Federal Reserve. For Jerome Powell, it is more important to get it right than to be the first to launch a CBDC. After offering details about the U.S. government’s research and proposed public consultations, he clarified that there is no definite plan to implement a CBDC in the near future.
Powell said the dollar is strong because our economy is reliable, our institutions are transparent, and our democracy is stable, and "a healthy and efficient payment system demands these features, which reach far beyond the merely technological."
Powell acknowledged that a CBDC could be beneficial, but also mentioned potential risks including, "the need to protect a CBDC from cyber attacks counterfeiting and fraud, the question of how a [it] would affect monetary policy and financial stability, and also how could a CBDC prevent illicit activity while also preserving user privacy and security."
For the head of Malaysia’s Central Bank, a CBDC, either foreign or national, will not solve the problems of payment systems in emerging markets. He emphasized the need for international collaboration to enable emerging economies to benefit from the implementation of government-issued digital currencies.
Meanwhile, the General Manager of BIS discussed the potential of modern currency controls to minimize the risks of implementing CBDCs. Agustín Carstens agreed with the head of the Federal Reserve about the need to proceed with caution. He referred to BIS' recently created Innovation Hub as "an expression of central banks' conviction that they need to be in the lead in these topics."
Under Carstens’ leadership, BIS plans to "identify which technological developments will be of importance for central banks... to fulfill the roles of central banks in terms of payments, financial stability, and so on... and to create a network of experts to keep central banks in the lead in these aspects." Carstens sees the role of BIS in this context as a catalyzer for action and "a nucleus for cooperation and collaboration."
The Governor of the Saudi Arabian Monetary Authority, on the other hand, highlighted the importance of seamless cross-border payments to promote financial inclusion in his region. Ahmed Abdulkarim Alkholifey said the "key hurdle" to achieve greater inclusion is the lack of a reliable identity system "whose information can be trusted in other jurisdictions." A system of this kind, he said, "is clearly linked to streamlining the KYC and the customer due diligence processes on a domestic level" and will require not only coordination among government agencies and local banks, but also support from the likes of the IMF.
"The financial costs of developing a national digital ID and building shared KYC and digital ID infrastructure may also be significant," Alkholifey added, "and this will prove a challenge for emerging market economies to fund, particularly in the current economic environment."
Carstens believes both the IMF and BIS can play a crucial role in ensuring the international operability of CBDCs. But like all the other panelists, he believes in transitioning slowly to avoid mistakes.
Commenting on the Saudi G20 presidency, Alkholifey said his country wanted to go beyond pushing reform. "We wanted to do more," he said, "we wanted the major economies to agree upon a roadmap."
During the G20's October meeting, all members endorsed the proposed roadmap to enhance cross-border payments, the Saudi official recalled, adding that "a range of [relevant] international institutions and bodies will be invited to report periodically to the G20."
Government decisions usually lag behind technological advances. This IMF panel is a clear indication that some of the top financial institutions and multilateral bodies in the world are trying to change that.
Georgieva concluded the meeting by assuring the audience that the IMF would do its part to improve cross-border payments and enhance financial inclusion. "We are in front of an open window of opportunity," she said. "We will partner with BIS, with FSB, and of course with all our members, so we can make a progress mindful of the complexities that were just mentioned."