Why digitising financial pipelines is essential for global prosperity

Central bankers, regulators and entrepreneurs are on a fast track to transform global payment systems into digital expressways that will include tokens and e-currencies. The goal is to provide instantaneous and secure transactions worldwide at little expense while eradicating settlement uncertainties. Group of 20 nations have set an ambitious goal: three-quarters of cross-border payments will be made available to recipients within one hour in 2027. The vision is as revolutionary as that for artificial intelligence. Modernisation of the “back office” will drive global economic expansion by sweeping away difficulties that hamper every transaction from international trade to roadside purchases of handicrafts in remote villages. Technologies can already be used to transfer currency and assets from Hong Kong to Johannesburg, for example. But many obstacles stand in the way, the toughest related to liability, transparency, privacy, enforcement and dispute resolution. These issues pit the primacy of state sovereignty against following international rules. As researchers from Goethe University wrote in 2021, “Money is not simply data but a complex bundle of rights closely tied to the nation state”. Bankers wrestle with who will be in control. Governments are reluctant to cede authority. Progress can’t come fast enough. Agustin Carstens, general manager at the Bank for International Settlements (BIS), recently told a session at the annual meeting of the International Monetary Fund (IMF) and the World Bank that “cross-border payments are a significant choke point in the financial system”. There is no effectively working and frictionless global system that everyone can readily access. Solutions are key to strengthening financial stability by mitigating risk and enhancing liquidity in an ecosystem that handled 3.4 trillion transactions in 2023, accounting for US$1.8 quadrillion in value, according to McKinsey. The 2008 global financial crisis amplified how weaknesses in financial infrastructure compound stress and obstruct mitigation. Yet, the rise of digital transactions comes with new, unforeseen risks. Mobile banking could be a “game-changer” for bank runs, Jane Fraser, the head of Citigroup, has warned. Cross-border payments are expensive – the average cost is a 6.3 per cent fee – and slow, sometimes taking days to complete. Legacy systems prevent banks from interfacing with each another. Inadequate security measures increase the risks of fraud and cyberattacks. Few global standards exist for handling cross-country financial transactions and resolving disputes. Expertise and capacity are thin in all but the most advanced economies. Countries’ laws governing currency and capital flows limit transfers outside their borders. Some governments are planning initiatives to dethrone the US dollar as the world’s reserve currency. Ages-old barriers remain, from language and financial terminology to culture-embedded ideas about money and trust. Added to all these challenges are those posed by cryptocurrencies, tokenisation of assets – digital tokens representing assets that owners can hold electronically in their accounts or transfer to buyers – and central bank digital currencies, or money that central banks transfer electronically not physically. These financial instruments often use blockchain technology. Blockchain creates shared but decentralised electronic ledgers that record assets as blocks of data that verify an asset and facilitate its transfer by the owner while ensuring that the same asset isn’t used simultaneously in other transactions. In the meantime, scores of private payment systems have emerged worldwide. Each one has its own processes and costs, creating a tangled mess of complexities and difficulties. In China, the world’s largest cashless economy, the fintech apps Alipay and WeChat Pay use smartphones and QR codes to process more than 90 per cent of Chinese digital payments. More than 380 unicorns with a combined valuation of US$1 trillion have emerged, tantalised by lucrative opportunities. Additionally, 41 per cent of central banks worldwide are considering launching central bank digital currencies in the next five years, according to one study. While perhaps inevitable, the proliferation could divide the world into smaller, less interconnected economic blocs unless global standards are put into place and observed. Otherwise, inefficiencies will flourish, risk diversification will narrow, more frictions in transactions will arise and the digital divide will grow worse. We will confront a situation akin to our having multiple plugs to power our phones in different countries. The interoperability of new payment systems is a daunting challenge. The ISO 20022 platform of the International Organization for Standardisation has emerged as the leader for messaging financial transactions. The BIS, the IMF and others are right to focus on standardisation of computer codes and processes, using pilot programmes such as Singapore’s Project Nexus to refine and sharpen recommendations. Given the pace of change, ramping up these efforts is imperative. Deciding which laws and regulations prevail is an even greater challenge. The choice of law clause used in international contracts is one approach. To use payment systems and digital financial instruments, a party would agree that their transaction is governed by a specific country. Existing frameworks under the Basel Accords and various United Nations conventions offer a foundation for solutions, too. Given geopolitical tensions and priorities, there is little interest in establishing a global oversight body to detect fraud, safeguard banks, investors and payment processors and enforce standards. The IMF and the BIS were not established to play those roles, and there appears to be little motivation among their members to expand their missions. The difficulties facing the World Trade Organization attest to the lack of support for multinational bodies. The promise of a digital superhighway with tokens, currencies and payment by QR codes on smartphones will depend on the trust the pioneers earn. The progress so far is encouraging.

Why digitising financial pipelines is essential for global prosperity

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Improving digital payments, especially across borders, will make every aspect of global commerce easier and more accessible

Improving digital payments, especially across borders, will make every aspect of global commerce easier and more accessible