(Kitco News) - In the International Monetary Fund’s (IMF) latest quarterly journal, Tobias Adrain, director of the Monetary and Capital Markets Department, and Tommaso Mancini-Griffoli, division chief in the IMF’s Monetary and Capital Markets Department, explored the organization's reasoning behind the creation of a Central Bank Digital Currency (CBDC) settlement platform.
According to Adrian and Mancini-Griffoli, the original idea was the creation of “platforms offering a marketplace where digital money can be exchanged and sent internationally,” which ultimately means that they will need to support CBDC clearing and settlement transactions between multiple countries.
The post goes on to explain the rationale behind creating a CBDC settlement platform, noting that “across borders, bridges between trust networks are much harder to establish” due to the lack of a “commonly trusted asset or network to settle transactions.”
As global economic conditions worsen, banks are not as willing to trust other organizations as easily as they used to due to the “risks inherent in extending bilateral credit to another bank.” This has resulted in a small group of very large institutions with established bilateral relationships being able to control the banking market.
“It’s no surprise our payments are costly, slow, and opaque,” Adrian and Mancini-Griffoli said.
The solution to this problem is the tokenization of money, according to the paper. This would make money “accessible to anyone with the right private key and transferable to anyone with access to the same network.”
“Tokenized money introduces a radical transformation that breaks down the need for two-way trusted relationships. Anyone can hold a token, even without having a direct relationship with the issuer,” the authors elaborated.
Examples of tokenized money cited in the paper include stablecoins like USD Coin (USDC) and CBDCs like those launched in The Bahamas and Nigeria.
The overall purpose of the settlement platform is to help coordinate transactions between individuals, businesses and countries, providing settlement services on a global scale to ensure payments are made in a timely manner.
“In essence, the platform would bring each participating institution’s money onto a single ledger. Think of that as taking in different monies, putting them in a basket everyone recognizes, and seamlessly exchanging those baskets between participants and across borders.”
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There is also the possibility of utilizing the platform’s ledger to write smart contracts, “which are essentially programmable transactions” that help simplify international transactions further. For example, a firm could program a smart contract to “automatically hedge foreign exchange risks of transactions or pledge a future incoming payment in a financial contract.”
Adrian and Mancini-Griffoli suggested that the platform would also help simplify things for the private sector by creating “a common settlement platform and a common programming language to write smart contracts that are compatible with one another.” This could lead to the platform becoming a “tight public-private partnership.”
The next step in the process will be the publication of two papers that “will lay out an initial blueprint for such platforms in the hope of stimulating further discussion on these important topics, which are likely to shape the future of cross-border payments.”
According to data provided by the Atlantic Council, there are currently 105 countries exploring the implementation of CBDCs.
