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The use of digital currencies backed by central banks would significantly reduce time and costs associated with making cross-border payments, according to a report by the Bank for International Settlements.
The findings come from a pilot program that’s testing digital fiat currencies. A prototype of a digital currencies platform showed transfer speeds of cross-border payments were cut down to seconds from days, demonstrating that transactions could quickly work around extensive networks and arrangements built by banks, the BIS said in its report published Tuesday.
There is currently a delay between three and five days between payment and settlement for a typical cross-border transaction processed through correspondent banking. The prototype showed the potential to slash transactions times to between two and 10 seconds.
Meanwhile, the prototype may reduce the costs of cross-border payments by up to 50%, said the BIS report, citing an estimate from accounting and business consultancy PwC which is working on the project. Costs associated with such transactions include those for treasury operations and foreign exchange.
CBDCs would aid jurisdictions that lack a correspondent banking network, the report said.
The next phase of the pilot project, called mCBDC Bridge, will test business-use cases in international trade, among other things.
An earlier 2021 study by the BIS said 86% of central banks are studying the benefits or conducting work on digital fiat currencies. The Federal Reserve has been studying issuing a digital currency and is due to publish a paper on it soon.
On Tuesday, Chairman Jerome Powell told the Senate Banking Committee that the Fed should work on developing a digital dollar with congressional approval, according to The Block.
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