No bank charges, please: the central bank’s digital currency will make payments like emails

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Cross-border payments are inefficient, often slow, opaque and expensive. Businesses around the world made $ 23.5 trillion in cross-border transactions in 2020, equivalent to 25% of global GDP. Companies also paid bank charges of $ 120 billion (excluding currency conversion fees), which is equivalent to one-third of Singapore’s GDP, according to a recent analysis by JP Morgan.

These are business-to-business payments. In person-to-person transactions, migrant workers sent $ 551 billion in home remittances in 2019. Intermediate bank charges for these payments averaged 6.8%, or $ 37.5 billion. dollars, a March 2021 report from the Bank for International Settlements (BIS) revealed. citing the International Monitory Fund and the World Bank.

In response, the BIS manages the central bank’s digital currency (CBDC) based on distributed ledger technology to reduce the costs of cross-border remittances. And JP Morgan’s report says businesses could save 80% of annual interim costs ($ 100 billion) if the CBDC is applied to cross-border payments.

CBDC is a highly secure digital version of a country’s official currency. By bypassing the commercial banking system, citizens will have individual accounts directly with central banks. And they will use “retail CBDC”, instead of paper money, for all payments. The digital mobile wallet will be their tool for such transactions.

Correspondent central banks set mutually acceptable conversion standards of the respective CBDCs and bypass intermediary banks for cross-border transactions. The time to settle business and migrant worker payments would be as instant as the exchange of emails, as the CBDC-based payment systems operate 24 hours a day and year round.

The 63-member BIS sets out the common fundamental principles and core characteristics of the CBDC. Its main mission is to contain the anarchic rise of blockchain-based cryptocurrencies. A 2021 BIS survey found that 86% of central banks are actively pursuing the potential of CBDCs while 60% are experimenting with the technology and 14% are rolling out pilot projects. But the tangible result of the CBDC initiative led by Western central banks actually comes from modest communist China.

The People’s Bank of China (PBOC), the country’s central bank, launched the CBDC as a digital yuan (e-CNY) in April 2020. More than 20 million e-CNY wallets have been created and 5.4 billion of dollars or 35.5 billion yuan has been settled in China. CBDC, according to the PBOC report from July 2021.

Beijing has already asked McDonald’s to adopt the e-CNY payment system at all outlets across the country ahead of the Winter Olympics in February 2022. Authorities have also asked Visa, one of the major sponsors of the Olympics, and Nike, a sponsor of the US team, to follow the burger chain and integrate e-CNY into their payment systems.

Four BIS-led projects exploring CBDCs for cross-border payments are also underway. They assess whether the CBDC allows transaction settlement “more cheaply and more easily”. The central banks of Australia, Canada, China, Hong Kong, Malaysia, Singapore, South Africa, Thailand and the United Arab Emirates are involved in these four groups. Unfortunately, no South Asian central bank is visible in this mission.

Nonetheless, data from the Bangladesh Bank (BB) shows a sharp 36% increase in inbound remittances in fiscal year 2020-21. The average cost of sending US $ 200 was 4.9%, while remittances from Singapore and Gulf Cooperation Council (GCC) countries cost less than 3%, according to the World Bank .

But those costs far exceed 10% when remittances are routed through the more expensive banking corridors.

The BB received over $ 24 billion in remittances in 2020-2021 and 57% ($ 14.3 billion) came from Singapore and GCC countries. But the remaining 43 percent ($ 10.6 billion) went through the more expensive corridors, resulting in more than 10 percent in intermediary bank fees. And that’s more than a billion dollars in collective loss for Bangladeshi migrant workers and the country’s reserve.

Remittances through formal channels increased 11% at the start of the coronavirus pandemic in fiscal year 2019-2020. But it jumped 36% in the next fiscal year, as the pandemic incapacitated informal smugglers. The government has also encouraged remittances through formal channels.

As a result, the annual growth in inflows has shifted from the main sources of remittances to Bangladesh in 2020-2021. Some $ 3.5 billion came from the United States (44% growth), while Malaysia and the United Kingdom posted growth of 63 and 48% respectively, each pumping out $ 2 billion. Australia’s $ 142 million (141% growth), Japan’s $ 80 million (61% growth) and Italy’s $ 810 million (16% growth) contributed to the increased revenue.

Leading mobile financial service bKash disbursed $ 134 million in remittances in 2020 and it plans to show 87% growth this year by pumping out $ 250 million. MFS outlets widely distributed across the country, like those at bKash, paved the way for national and cross-border CBDC in Bangladesh.

The market is directing technology towards unintended consequences. GSM technology was developed as a pan-European mobile telecommunications standard. But it has become the lifeline of the developing world for universal access to telecommunications. The subsequent introduction of the mobile financial service has become the unintentional revolutionary crucible of universal access to banking services. The fusion of the Internet and the smartphone has made chatting, texting and video conferencing absolutely free.

Likewise, the mission of the world’s major governments to eclipse cryptocurrencies with CBDC is poised to pollinate itself with unimaginable unintended consequences of instantaneous settlements within and across political borders.

The Bangladesh Bank should actively engage with the BIS to execute the CBDC following the steps of its Asian peers. The goal should be to fix billions of dollars in leaks in inbound remittance pipelines. Stopping the bleeding of billions of additional dollars from import-export agreements will strengthen the country’s financial health. And the CBDC will simultaneously liberate migrant workers and businesses from the failures of the conventional banking market for good.

The author is Senior Policy Researcher at LIRNEasia.


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