Central bank digital currencies will lower remittance costs, Moody's says

Tumbling value of cryptocurrencies has strengthened arguments in favour of more stable digital assets, according to the rating agency

The Bitcoin logo in a shopping centre. CBDCs are expected to provide some middle ground for the highly volatile cryptocurrency market. Bloomberg

Central bank digital currencies (CBDCs) will likely lower costs for individuals sending remittances and reduce settlement and counterparty risks for banks in cross-border transactions, a report by Moody’s Investors Service has said.

The unravelling of the crypto market and the tumbling value of cryptocurrencies has strengthened arguments in favour of more stable digital assets, such as CBDCs, the rating agency said.

CBDCs are the digital form of a country’s money issued by its central bank.

They are similar to cryptocurrencies, except that their value is fixed by the monetary authority and equal to the country’s fiat currency.

CBDCs are expected to provide some middle ground for the highly volatile cryptocurrency market. They reduce the risks associated with using cryptocurrency and provide a stable means of exchanging digital assets.

“Interoperable CBDCs would likely lower costs for individuals sending remittances abroad, as well as for merchants, especially importers and exporters,” Moody's said.

“The capacity of CBDCs to reduce the costs, wait times and settlement risk associated with international payments would be particularly beneficial to small businesses and start-ups, but also to established corporates.

“To unlock their full advantages, CBDCs will need to operate interchangeably with other payment systems and enable instantaneous cross-border transactions,” Moody’s said.

This week, the UAE Central Bank said it had started implementing its digital currency strategy, Digital Dirham, as it prepares the country’s infrastructure for the future of finance.

It signed an agreement with Abu Dhabi’s G42 Cloud and digital finance services provider R3 to be the infrastructure and technology providers, respectively, for the implementation of its CBDC, the regulator said on Thursday.

Almost all central banks around the world are exploring the feasibility of a national digital currency, while some, like China, are already in pilot phase, Moody’s said.

Bahamas, Nigeria and Jamaica launched their own central bank digital currencies in 2020, 2021 and 2022, respectively.

“Concerns that the emergence of privately owned digital cryptocurrencies and stablecoins could eventually displace official currencies have pushed central banks around the globe to consider issuing their own national currencies in digital form,” the rating agency said.

“Such CBDCs could be retail or wholesale. A retail CBDC would allow individuals to transact in central bank money digitally, which is currently not an option.”

Retail CBDCs would have a critical advantage over privately-owned digital currencies in that they would provide the same rapid and convenient means of payment and the formal backing of the central bank would remove any credit risk.

A widely accessible, reliable retail CBDC would support economic growth by speeding payment transaction times, reducing transaction costs and fostering financial inclusion.

Direct and immediate exchange of retail CDBCs in different currencies could also be achieved by individuals in different parts of the globe, leaving banks and other financial intermediaries completely or partly out of the process, it said.

“Interoperable CBDCs could transform global payments. They would allow instant payments across different currencies, eliminating the settlement risk banks currently face.

“Banks would be able to make, clear and settle cross-border payments at low cost and in seconds without needing to sign up to multiple payment systems or rely on correspondent banks in other countries.”

However, Moody’s said that if the CBDC payment system is widely adopted, it would reduce banks’ profits from payments, correspondent services and likely also from foreign-exchange transactions.

Although banks would benefit from the elimination of settlement risk from payments and from developing more efficient digital systems, they would likely lose part of their revenues from cross-border payments, especially if governments insist that efficiency gains are passed on to customers, the agency said.

Global correspondent banks will lose out the most as their roles diminish.

“The assurance that CBDCs could be used in all countries will play a vital role in ensuring global adoption of a national CBDC in each jurisdiction,” the report said.

“Interoperability will need to be incorporated into the infrastructure from the beginning. If not, central banks run the risk of creating a CBDC that cannot be smoothly converted into other digital assets, such as deposits, stablecoins, a foreign CBDC, or cash.”

This would increase the risk of a globally fragmented CBDC system as nations group into independent cliques — so-called “digital islands” — missing the opportunity to create a more interoperable global system, Moody’s added.