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CBDC oversight highlights role of compliance as technology scales

CBDC oversight highlights role of compliance as technology scales

 


The technology for central bank digital currencies (CBDCs) already exists.

And as dozens of countries around the world have demonstrated in less time than it took you to read this sentence, national bank-issued digital money can effectively settle payments in near real-time using distributed ledger technology (DLT). This fact alone could change a lot about commerce if it were allowed.

On Thursday (May 23), news broke that the U.S. House of Representatives had passed a bill to prohibit the issuance of U.S. CBDCs without the express authorization of Congress, potentially making the U.S. the first country in the world to ban CBDCs. Meanwhile, the previous week (May 17), the Hong Kong Monetary Authority (HKMA) announced it would partner with the People's Bank of China (PBoC) to expand the scope of its own CBDC pilot. In light of these new policies, getting a full grasp of what CBDCs mean for the future of finance has become a top priority for banks and businesses looking to innovate in money transfers.

Both the HKMA effort and the CBDC Surveillance Prevention National Bill (HR 5403) centre around a retail CBDC, which is essentially a digital version of a country's fiat currency designed for use by ordinary people for everyday transactions.

But retail CBDCs are not the only tokenized fiat currency that may exist in the future: wholesale CBDCs are also being piloted in countries across the four hemispheres.

A wholesale CBDC is a digital currency designed to be used by financial institutions to settle interbank transactions and streamline the broader financial infrastructure by providing a more efficient, transparent and secure payment process between banks and other financial institutions.

Wholesale CBDC is entirely different from retail CBDC. Its introduction will enable innovative financial products and services, such as atomic swaps and smart contracts, which can automate complex financial transactions and reduce reliance on intermediaries.

Still, whether CBDCs are designed for retail or wholesale use, ensuring these digital currencies are secure, transparent, and operate within a regulated environment through real-time compliance is a crucial next step.

Read more: BIS: CBDC needs risk management framework to combat operational risks

The Importance of Compliance in the Expansion of Financial Innovation

In the context of wholesale CBDC, compliance is essential to maintain the stability and security of financial markets. Compliance ensures that all transactions take place within existing regulatory frameworks, preventing market abuse and financial crime. Furthermore, real-time compliance improves risk management and enables regulators to respond quickly to emerging threats.

As experiments with digital currencies progress, the interplay between technology, regulation and innovation will shape the evolution of CBDCs and their impact on the global financial landscape.

It's time to make compliance a growth driver, Sovos CEO Kevin Akeroyd told PYMNTS.

Integrating wholesale CBDC capabilities into the existing financial system comes with its own challenges, including interoperability with current infrastructure, scalability concerns, and the need for a comprehensive regulatory framework to oversee DLT-based transactions.

To scale, existing regulated, central bank-guaranteed currencies need to be brought onto the blockchain, which hasn't happened yet, Mastercard Chief Digital Officer Jorn Lambert told PYMNTS last July, a comment that still rings true nearly a year later.

Read more: Major central banks approach key milestone in CBDC research

Still, the introduction of a wholesale CBDC has the potential to shorten interbank settlement times, lower transaction costs, and increase efficiencies in areas such as cross-border payments.

Using a shared ledger, financial institutions can achieve real-time gross settlement and minimize counterparty risk and operational inefficiencies associated with traditional banking systems. At the same time, leveraging DLT can improve transaction tracking and auditing, increasing transparency and integrity across the financial system.

If this all sounds great, that’s because innovations often are, at least until they run up against the realities of market implementation and scalability. Overcoming these obstacles will require collaboration between central banks, governments, financial institutions, technology providers and ordinary people.

“I think this is at least five years away from where we are today,” Catherine Gu, head of CBDC and protocols at Visa, told PYMNTS.

But it’s not technical feasibility that’s holding back CBDCs – rather, it’s behavioral conditions, interoperability needs, and other concerns, all of which are areas that can be mitigated by an effective compliance program.

Read more: CBDC, Central Bank Digital Currency, Compliance, Congress, Digital Assets, Digital Currency, Digital Transformation, Featured News, Financial Innovation, Financial Technology, Hong Kong, Innovation, Law, News, Payment Methods, Payments Innovation, Politics, PYMNTS News, Regulation, Retail CBDC, TechREG, Wholesale CBDC

Sources

1/ https://Google.com/

2/ https://www.pymnts.com/cbdc/2024/cbdc-scrutiny-underscores-role-of-compliance-in-scaling-digital-innovations/

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