Why Central Banks are Shifting to Instant Payment Systems Over CBDCs

It seems like central banks are increasingly leaning towards Instant Payment Systems (IPS) instead of Central Bank Digital Currencies (CBDCs) for cross-border transactions. The reasons? IPS are more scalable, cost-effective, and easier to integrate with existing systems. Let’s dig into what’s behind this trend and the hurdles CBDCs face in governance and implementation.

What are IPS and CBDCs?

IPS and CBDCs are two different takes on modernizing how we handle money. IPS, like RTGS and FPS, work by settling transactions in real-time or near real-time. They’re designed to be scalable and mesh well with what we already have in place.

CBDCs, on the other hand, are digital versions of fiat currency issued by the central bank. They’re supposed to offer a secure way to pay, and because they’re a direct liability of the central bank, they cut out credit risk. But they come with their own set of challenges—namely, high costs and governance issues.

Why Central Banks Prefer IPS

A recent study showed that 47% of central banks prefer IPS for cross-border payments. This is mainly because IPS are scalable and can easily fit into existing household systems. Projects in Southeast Asia, like Project Nexus, have shown how well IPS can handle efficient cross-border payments.

In stark contrast, only 13% of central banks think CBDCs are a good option for cross-border payments. The high cost of implementing CBDCs and the governance issues they raise have made IPS a much more practical choice.

The Challenges of CBDCs

Governance Issues

CBDCs face a significant governance problem. Their decentralized nature could be secure and private, but it’s also messy when it comes to regulation. Central banks have to find a way to keep control while still respecting user privacy.

High Costs

Let’s not forget, the price tag for CBDCs can be pretty steep. Setting up the tech and ensuring it complies with regulations takes money—something that smaller economies or those with fewer resources may not have. And then there’s cybersecurity. Protecting against attacks can cost a lot.

Decentralization Problems

CBDCs are often hailed for their decentralized nature, but that can complicate things. Without a central authority, resolving disputes and enforcing regulations can become tricky. Plus, privacy-enhancing tech that’s good for user privacy can sometimes block central banks from keeping tabs on transactions.

Why IPS are Better

Integration with Existing Systems

One of the strong points for IPS is how well they integrate with existing systems. This makes the transition easier and less disruptive. So, IPS will likely be adopted faster and with less chaos.

Speed and Efficiency

IPS can settle transactions in real-time or near real-time, cutting down the time for cross-border payments. This speed is a big plus for businesses and individuals who need quick transactions. The immediate finality of transactions also adds a layer of security.

Cost-Effectiveness

Finally, IPS usually cost less to implement and maintain compared to CBDCs. That’s a big plus for central banks, especially those with tighter budgets. Less need for regulatory compliance and cybersecurity also sweetens the deal.

Summary

In a nutshell, central banks are favoring IPS over CBDCs because they’re more scalable, practical, and cost-effective for cross-border payments. CBDCs have some serious hurdles to jump, mainly high costs and governance issues.

As the financial world changes, IPS will probably become more common, impacting the future of cross-border payments. For the cryptocurrency market, this presents both challenges and opportunities. While IPS might eat into their market share, innovation in blockchain tech will still be crucial for digital payments.