TOKYO -- Setting up a cross-border payments network for central bank digital currencies can save companies nearly $100 billion a year in transaction costs, according to a report that J.P. Morgan and Oliver Wyman released on Wednesday.
The report highlights the potential positive impact of central bank digital currencies as central banks around the world explore their feasibility.
Currently, banks rely on correspondent banks and other intermediaries to process international money transfers. This leads to hefty transaction fees and is often time-consuming as banks process the payments across time zones
One of the biggest beneficiaries of a cross-border CBDC network could be the Association of Southeast Asian Nations, where companies operate across 10 currencies and face high transaction costs.
The report notes that the region accounts for 7% of global trade and "is home to thousands of European, Asian, and North American [multinational companies]." A 100,000 Thai baht ($2,950) transfer from a company in Thailand to one in Indonesia can move through six banks and rack up transaction fees of $40, excluding foreign exchange costs, according to the report.
A CBDC network would save the customer up to $35 of the $40, according to the authors.
Globally, the authors estimate companies are losing $120 billion in transaction costs a year on $23.5 trillion in cross-border money transfers.
An alternative scheme is a payments network using CBDCs, which are backed by their countries' national currencies. China is testing a digital yuan and hopes to start officially issuing it before the Beijing Olympics in February. The Bank of Japan began testing its own CBDC in spring to investigate technical concerns.
The report says setting up a "corridor network" that facilitates transactions across multiple CBDCs can eliminate some steps, such as having to convert currencies to the U.S. dollar, at intermediary banks. For example, a commercial bank in Thailand can correspond with the central bank to exchange Thai baht with the digital equivalent, not with the dollar, before converting to a digital version of the Indonesia rupiah through a commercial bank providing foreign exchange.
Versions of this scheme, based on what is being dubbed a multicurrency central bank digital currency, or mCBDC, are already being tested in some countries. The central banks of Australia, Singapore, Malaysia and South Africa are testing cross-border payments using different central bank digital currencies. China, Hong Kong, Thailand and the United Arab Emirates are conducting a separate project. Bilateral trials are also being held.
Naveen Mallela, Global Head of Coin Systems at Onyx, a unit of J.P. Morgan, told Nikkei Asia that Asia may lead the way in making CBDC systems interoperable. "Asia is where there is a particular pain point given the different currencies and different cross-border payments," he said. "So it is very likely that mCBDC networks will start springing up in Asia first."
He added that the windfall for ASEAN -- where cross-border transactions heavily rely on the U.S. dollar due to a lack of liquidity between local currencies -- could be especially large.
Mallela, however, said coordination among central banks on governance-related issues, such as managing access to the network and solving transaction disputes, as well as on regulatory frameworks, is a major obstacle to implementing such a network.
"Having interoperability between CBDCs is key," he said. "Otherwise you will experience the same challenges you have today where individual markets have their own domestic payment infrastructure and relying on correspondent banking for cross-border payments."