Over 100 central banks around the world are keen to explore central bank digital currencies (CBDCs). This is up from 35 in May of 2020. Analysts from the Bank of America are also bullish on this technology.
A new research said digital currencies are inevitable. It believes distributed ledgers and digital currencies, like CBDCs and stablecoins, are the natural evolution of today’s monetary and payment systems. The report was based on various analyzes of CBDCs’ potential benefits and risks in terms of issuance and non-issuance. There are numerous cases studies about CBDC development and challenges within specific economic blocs and nations.
Analysts have based their key observations around the current financial system’s antiquated infrastructure and numerous inefficiencies, as well as issues that properly developed CBDCs might solve instantly. It could bring about real-time settlement, complete transparency, and lower costs.
The report highlighted an estimated $4 trillion of capital that banks have to deposit in corresponding banks to remove settlement risk. It said this is an inefficient capital allocation that could otherwise be generating yield elsewhere. And the less capitalized banks and payment service providers cannot step into cross-border payments. This can be reasoned to pre-fund accounts at corresponding banks. The report said cross-border payments are routed through 2.6 different corresponding banks on average, increasing time to settlement. But it should be noted that 20% of euro-dominated cross-border payments require the involvement of 5+ correspondent banks. As such, cross-border payments cost 10 times more than domestic payments.