Central banks should try out new ideas for global payments Apextalk

Nexus or Icebreaker? Two competing ideas are jostling for attention, each promising to reshape inefficient systems of moving money from one country to another. Instead of trying to choose between them, central banks should give both a shot. The European payment system recently did a trial linkup with Malaysia and Singapore under the Bank for International Settlements’ Nexus protocol, designed to transfer funds between bank accounts in different countries under 60 seconds. Meanwhile, the monetary authorities of Israel, Norway and Sweden have tested a separate BIS-backed initiative that achieves the same goal of fast cross-border retail payments. Project Icebreaker uses central bank digital currencies, or CBDCs, instead of bank accounts.

No prizes for guessing which of the two will get going first. Five countries in Southeast Asia, with a combined population of 490 million and GDP of $2.6 trillion, have decided to connect their domestic instant payment systems. Nexus is the obvious blueprint. Besides, CBDCs are mostly still undergoing pilot runs, or being evaluated for speed, scalability and privacy. Icebreaker can’t take off before tokenized versions of currencies become widely available.

Still, those paying an average 6.3% on a $200 transfer will welcome alternatives. Payment instructions sent via Swift can take several minutes to more than two days. The late 18th-century system of correspondent banking that uses such messages is clearly anachronistic. In 64 countries, individuals are whipping out their smartphones to pay from bank accounts in real time. According to a Fidelity report, payments from one bank account to another will account of 24% of India’s e-commerce, 28% of Peru’s, 35% of Brazil’s and as much as 45% of Thailand’s by 2026. These transactions, however, will occur in domestic settings. International borders complicate matters with exchange rates, sanction lists and money-laundering safeguards, among other hurdles. Still, retail users are tired of paying through their nose for money transfers, as are nations that rely on remittances sent to families back home by their overseas diaspora. Cutting prices by 5 percentage points can save $16 billion a year, according to the World Bank.

Nexus seeks to do just that. It won’t be an app, but a common protocol to eliminate barriers between national payment systems. If I give someone in another country my phone number, e-mail or virtual ID on which I receive domestic money transfers, Nexus will look me up and display my full or partially masked name on the sender’s app to confirm the identity of who is being paid. Banks will only show their own currency conversion quotes to customers. Nexus will source buy/sell offers from multiple providers. Fees will be disclosed upfront. In this, Icebreaker will be similar to Nexus, though it won’t work by debiting and crediting deposits. When a transfer is done, the payer will be left with fewer digital tokens in her CBDC wallet; the recipient will have more. It will be analogous to a cross-border cash transaction, except that the Icebreaker hub will do the routing instead of the secretive hawala operators who have offered such a service in West Asia and the Indian subcontinent since medieval times.

The cryptographic technique of hashed time-locked contracts, which effectively sets up a digital escrow account, will ensure that the payer’s money either reaches the payee or doesn’t leave the wallet at all. Funds won’t get stuck somewhere for a silly spelling mistake. Icebreaker will need more work to allay national authorities’ fear of money-laundering and to make the system easy-to-use for legitimate users. As the project’s researchers have noted: “How does someone in one country get the wallet address of someone in another?” IBAN is an international standard for bank account numbers. It’ll be a big help to have something similar for digital wallets.

Icebreaker’s advantage is that countries exploring CBDCs for domestic use won’t have to worry if their choice of distributed ledger technology will come in the way of cross-border payments. Mutually incompatible systems can still participate in an exchange of value, so long as each can individually connect to the Icebreaker hub.

When it comes to money crossing borders, roughly $1 trillion every year is on account of individuals paying one another and businesses. Financial institutions charge them between 140 to 380 basis points, according to McKinsey. Small businesses aren’t as badly fleeced as retail clients, though they still end up paying a steep 35 basis points on their $6 trillion. Only large corporations, which account for $90 trillion in annual flows, are able to flex muscle and keep bank margins to 5 basis points.

Technology can level the playing field. Whether it’s Nexus, Icebreaker or something else, the world needs cheap transfers done easily on handsets. 

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia.

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