ISO 20022 – FOUNDATIONS, COMMERCIALISATION, AND THE PATH TO GLOBAL PAYMENTS INTEROPERABILITY
In the first of our series, we look at the continued importance of the ISO 20022 standard in enhancing cross-border payments.
In the third of our series exploring four key themes to emerge at Sibos 2022, we look at tokenization, central bank digital currencies and crypto
The goal of instant and frictionless cross-border payments remains out of reach due to low speed, limited transparency, lack of access and high costs. Equally, there remains a clear ambition to achieve greater payments interoperability, at a lower price, across borders. With a view to delivering this global vision, various initiatives and products – both private and public – are currently in play, albeit at varying levels of maturity.
Time for tokenisation?
Players in the public (central bank) and private (financial institutions and fintechs) sectors are presently evaluating how the tokenisation of currencies and payments might be used to enhance interoperability across different national, regional, and global systems.
Within the private sector, various institutions now exist offering payment service’s underpinned by digital ledger technology (DLT), such as Fnality who are building networks of peer-to-peer wholesale payment systems) with a view to making financial markets faster, cheaper and safer by enabling near-instant gross settlement in a digital asset fully backed 1-to-1 by central bank money. Their goal is ultimately to mitigate the frictions that characterise wholesale cross-border payments while still ensuring funds are securely backed.
Central banks step up
In the public sphere, it is estimated that 80% of central banks around the world are exploring the concept of central bank digital currencies (CBDCs). While there is momentum building, design choices around infrastructures and features remain ill-defined across jurisdictions. The Bank of International Settlements has noted that “domestic interoperability would be key to ensuring a CBDC system coexists with other national payment systems and contributes to broader accessibility, resilience and diversity” .
AS BIS notes, when designing a CBDC it will be important to build upon – rather than override – what is in place and already working. CBDCs should build upon the earlier interoperability initiatives currently under way such as established messaging standards through implementation of ISO 20022 as well as new technical interfaces built to communicate with other systems. Banks should be cognisant as thinking and discussions develop in this space and begin discussions with their regulators about the potential impact a CBDC could have on their business.
It is also worth highlighting that the BIS study also notes that “the central banks contributing to this report envisage CBDC ecosystems based on a broad public-private collaboration, i.e. a ‘tiered’ system where some roles would be carried out by the public sector and others by private entities”.
Crypto – battered if as yet unbowed
Speculation and volatility still cast a long shadow over cryptocurrencies themselves., with fear-greed market cycles engendering an unstable ecosystem that lacks fundamental value markers and viable use cases. These and other characteristics undermine crypto’s usefulness as payment mechanism.
Nonetheless, cryptocurrencies remain an area of interest to the payments industry and its technological innovations cannot be entirely disregarded. Governments and crypto hedge funds are now pushing forward regulations to alleviate counterparty-related risks and build controllable bridges between traditional and crypto-based financial systems. Whether increased regulation, a maturation of the market, or some other force will bring stability to the crypto ecosystem remains to be seen, but the wider industry should be tuned in as this trend develops.
The use-cases for digital assets within payments are clear – along with the underlying distributed ledger technology and tokenisation, they enable payment transactions to take place at a fraction of the time and cost of traditional payments.
The missing piece of the jigsaw remains regulation, specifically in respect of consumer protection. The market capitalisation of cryptoassets has shrunk by 60% from a high of over $2trn earlier in 2022. The price volatility of these assets, and the resulting losses, has been catalysed by significant market players facing liquidity and insolvency throughout 2022. There has, so far, been little contagion effect to the traditional financial system due to a lack of direct exposure to these kinds of assets by banks.
The story is bleaker for retail investors, who have shouldered a disproportionate burden of these losses. A BIS study found that 73-81% of retail investors lost money on their initial Bitcoin investment, the largest cryptoasset by market share. The FCA has not (yet) been given regulatory oversight over direct investments in cryptoassets and NFTs; and there are no consumer protections for those who buy any cryptoassets and NFTs, and they are not FSCS protected.
In the UK, the issuance of a CBDC, or a stablecoin issued by a UK regulated entity, along with an enhanced regulatory framework and consumer protections, represent one of a number of possible scenarios that may play out over the course of the next three to five years. Retail banks may need to consider their approach to digital asset custody as demand grows among retail consumers to buy, sell, and hold a range of assets in the same way that multi-currency digital wallets are commonplace today.
Capco provide strategic advisory services to help firms understand the regulatory development agenda and the impact on a firm’s operating model when providing exposure to digital assets to their customers and clients. We have a multi-geography team of digital asset experts who can help firms answer key questions from strategic positioning to transaction monitoring and scaled KYC processes. We are able to support the vendor selection process to support the integration of key technology components and custody solutions.