Ripple running out of time as BIS ‘conspires’ to end cryptos’ threat to financial system
This is a race for mass adoption and who gets there first wins.
The Bank for International Settlements Innovation Hub is developing a prototype of multiple Central Bank Digital Currencies (mCBDCs).
The project aims to prove the potential of using digital currencies and distributed ledger technology (DLT) for delivering real-time, cheaper, and safer cross-border payments and settlements.
The prototype is being worked out in partnership with four central banks: the Hong Kong Monetary Authority; the Bank of Thailand; the Digital Currency Institute of the People’s Bank of China; and the Central Bank of the United Arab Emirates.
This work is part of BIS’ efforts to go live with a functional CBDC product that is capable of putting an end to the rise of cryptocurrencies, stablecoins, and Big Tech’s move toward payment services.
Benoît Cœuré, Head of the BIS Innovation Hub, has recently stated that CBDCs risk being too late and urged central banks to pick up pace: “A CBDC’s goal is ultimately to preserve the best elements of our current systems while still allowing a safe space for tomorrow’s innovation. To do so, central banks have to act while the current system is still in place – and to act now.”
In July, BIS published a blueprint for the multilateral linking of domestic real-time payment systems across borders. Project Nexus and envisages the creation of ‘Nexus Gateways’ that serve to coordinate compliance, foreign exchange conversion, message translation, and the sequencing of payments among all participants.
“Project Nexus is trying to achieve the equivalent of internet protocols for payments systems. That means creating a model through which any country can join by adopting certain technical and governance requirements”, Benoît Cœuré commented at the time.
Nexus is a model for connecting multiple national payment systems into a cross-border platform that could enable international payments to happen as quickly as sending a text message.
mCBDCs to settle in seconds, 24/7, half the cost
Now, BIS is going forward with its prototype platform for mCBDC settlements in order to complete international transfers and foreign exchange operations in seconds, operating 24/7. The cost of such operations to users can also be reduced by up to half.
This would revolutionize the current system, which requires several days for any transaction to be completed using the existing network of commercial banks.
mCBDCs provide central banks with a “clean slate” start, not burdened by legacy arrangements or technologies, but the project is still exploring existing limitations of the current platform, related to privacy controls, liquidity management, scalability, and performance of DLT in handling large transaction volumes.
The project pipeline will incorporate policy requirements and measures to ensure compliance with jurisdiction-specific regulations, along with testing and investigating appropriate governance models.
Ripple et al. v. Status Quo
The financial system is headed toward major disruption. Commercial banks tend to fear CBDCs, but BIS and central banks have been trying to develop digital currencies in a way that doesn’t affect negatively the business of private banks while pointing the finger at digital assets and stablecoins as the real danger to them and the whole system.
Ripple, which remains in the middle of the ‘cryptocurrency lawsuit of the century‘, has been collecting support from top figures in the United States, most recently President Obama’s U.S. Treasurer Rosie Rios, who implicitly defended XRP’s utility and currency value against the ‘security’ label.
The blockchain firm has been marketing its XRP Private Ledger as product to help central banks design their digital currencies. Last week, Bhutan announced the development of its own CBDC using Ripple’s technology.
How will Ripple, and the digital asset space, be affected by the new mCBDC product from BIS is an unknown, especially since it’s still under development with a number of flaws in privacy controls, liquidity management, scalability, and handling large volumes.
BIS’ Cœuré may be right. This is a race for mass adoption and who gets there first wins. BIS and central banks have the network and legal advantages, but Ripple et al. have the technology ready.