Push towards modernising money

We have gold coins, the Mosi-oa-Tunya gold coin, a very innovative intervention by the Reserve Bank of Zimbabwe (RBZ) that has been widely accepted by capital market players which include Bard Santner Markets Inc that recently introduced the Gold Coin Unit Trust. 

At the same time, the RBZ has stepped up plans to create Zimbabwe’s own central bank digital currency (CBDC) on a phased approach, a move I believe will be supported by capital market players.

It is true that central banks, the RBZ included, have settled on what is called a CBDC. A CBDC is an electronic form of central bank money that citizens can utilise to make digital payments and store value. Today, the Bank of England and UK Treasury, just like other central banks, have just fired the starting gun for a British CBDC. The ambition to develop a digital currency that would sit in our wallets on smartphones and could be used for shopping much like notes and coins puts central banks at a better footing to counter the manoeuvres made by cryptocurrencies.

So far, most of the innovation in CBDCs is anchored in the retail space. CBDCs are still a long way from being used in the wholesale processes that would have a lasting impact like correspondent banking and cross-border payments, forex or large-value transactions between corporates and their suppliers.

But the potential for CBDCs to transform capital markets and payment systems is growing increasingly apparent all the while capital markets and payments systems grow more comfortable with the associated technology like platforms based on distributed ledgers to record ownership.

There is nothing for capital market players to do now; the government needs to decide how to roll out CBDCs and build new regulatory regimes first. However, excitement about the prospect of another revolution in payments is growing, with the prospects of having a lasting impact on cross-border payments and modernisation of treasury management.  CBDCs are merely the next step in this digital transformation journey. This will absolutely happen and money is being modernised.

Perhaps the most significant opportunity inherent in CBDCs lies in cross-border payments. Built on multiple correspondent banking arrangements, cross-border payments are slow, opaque and incur transaction costs and risks that corporates know all too well.

In a brave new world of CBDCs, a multi-CBDC platform could process international payments, bypass SWIFT, a vast and secure messaging system that allows banks and other financial institutions from all around the world to send and receive encrypted information, namely cross-border money transfer instructions and the corresponding banking network, speeding up cross-border transfers from days to seconds. Countries like Zimbabwe that have suffered huge losses in terms of correspondent banking relationships would benefit from CBDCs.  There is clear evidence we are starting to gain real traction around potential solutions. The benefits of moving away from the SWIFT network model to simplified architecture based on distributed ledger technology underpinned by interoperable CBDCs are easy to see.

Linked to this is the potential for CBDCs to transform corporate liquidity. If payments and receivables are all tokenised and settled in real time, it will change the amount of liquidity a corporate needs to keep in the system because of unknowns around clearing or settlement times thereby transforming capital markets. Given our move towards promoting Victoria Falls as a financial services hub, such technology-driven innovations anchored on gold coins may have a lasting impact.

CBDCs’ programmability could also rewrite strategy, offering compelling solutions and innovative new approaches. For example, a company with US$/gold coin-denominated CBDCs could programme the allocation to respond to a change in interest rates, either automatically paying down loans, hedging foreign currency risk, or consolidating back to the central treasury. CBDCs will change what a company can do operationally. It opens the door to new strategies and corporates and banks that CBDCs could optimise yields. Other examples include the potential to automatically initiate payments on completion of a given scenario, like the receipt of goods or even the automatic processing of a tax payment at the point of sale.

Other commonly touted benefits include a new flexibility in the currencies corporates use to trade, leading towards more diversified international payments and reducing the reliance on today’s narrow set of national currencies. It is a compelling value proposition that could replace the primacy of the US dollar, the reference currency for the bulk of global trade. If trade between, say, a Zimbabwean and Chinese company could be in e-ZW$ or e-Mosi-oa-Tunya gold coin and e-CNY, that has strong ramifications. Dealing in the US dollar is costly and requires bank regulation that is passed onto businesses and their customers.

Amid all the talk of transformation, proponents also inject a dose of reality. SWIFT will not disappear anytime soon, and third parties and the private sector will play an essential role enabling CBDC rollout and operability. It would be a massive undertaking for the central bank to employ the staff to build and manage the hardware and software of a new payments system. The central bank will not onboard clients or carry out anti-money laundering due diligence, for example. The fact SWIFT is already evolving its business model to support CBDCs suggests the global network will continue to play an important role.

SWIFT’s current role as a trustworthy, independent third party in the correspondent banking network where it sits in the middle of the different segments and providers in the payments market is much more likely to evolve than diminish. SWIFT has never been the problem in correspondent banking, however the fees correspondent banks charge are the problem.

Regulators such as the RBZ must take care to avoid CBDCs triggering unintended consequences. In an ideal scenario, global trade would be conducted in the largest and most liquid CBDCs. But one concern is that it will result in the digital currencies from powerful economies such as the digital US dollar crowding out local CBDCs in jurisdictions outside the US raising concerns about sovereignty. Digital dollars issued by the Federal Reserve and held in other markets such as Zimbabwe in tokenised form would not be visible to the local regulators, since they are unable to see wallets outside their own jurisdiction.

How then do we solve the issue that no companies or individuals, except banks, have direct accounts with the central bank. Remember, CBDCs are a digital form of central bank money, issued by a central bank it constitutes a direct claim on the central bank. Today, central bank money exists either in physical cash or in electronic form as reserves held by a few eligible banks in reserve accounts at the central bank. So when the central bank issue CBDC, there should be consensus not for offering direct CBDC accounts to consumers, but rather to distribute CBDCs via the existing banking system.

Is that possible, how can that be implemented, given technological resistance? To be continued in the next issue.

About the writer: Kaduwo is a researcher and economist. Contact: [email protected], WhatsApp +263773376128