The Bank for International Settlements (BIS) will test the use of central bank digital currencies with Australia, Malaysia, Singapore and South Africa in an experiment that could lead to a more efficient global payments platform.
Codenamed “Project Dunbar,” the study aims to develop prototypes for a common platform that will enable international settlement in digital fiat currencies issued by central banks, BIS said in a release Thursday. The system would allow direct transactions in central bank digital currencies, or CBDCs, between institutions, while reducing time and cost, according to BIS.
Globally, central banks are trying to come to terms with emerging payment technologies pioneered by tech firms including China’s Ant Group Co. Additionally, Facebook Inc.’s Diem project, formerly known as Libra, is building out a global payments network that could service its own stablecoin or central bank digital currencies.
The rapid growth of cryptocurrencies — which are distinct from digital currencies issued by central banks — is posing a potential threat to existing monetary regimes and adding urgency to debates on handling cross-border money transfers.
“We are confident that our work on multi-CBDCs for international settlements will break new ground in this next stage of CBDC experimentation and lay the foundation for global payments connectivity,” said Andrew McCormack, head of the BIS Innovation Hub Singapore Centre.
Results of the study are likely to be published early next year, BIS said.
News of Project Dunbar comes after the South African Reserve Bank (SARB) confirmed at the end of July that it has embarked on a feasibility study of CBDCs.
“The objective of the study is to investigate if it would be feasible, appropriate and desirable for the SARB to issue a CBDC to be used for retail purposes, complementary to cash, in South Africa,” said SARB governor Lesetja Kganyago at the bank’s AGM.
While CBDCs is a hot topic among central banks worldwide, South Africa has been experimenting with the concept since 2019.
In a tender notice published in May 2019, the Reserve Bank said that the main points of a South African CBDC include:
- The e-rand be issued as legal tender by the SARB only.
- It must be complementary to cash and is not intended to replace cash.
- It must be unique in its design, and its SARB ownership must be evident.
- Must be issued at one-to-one parity with the rand.
- Must be ubiquitous and accepted as a means of payment by all sizes of business and by the government.
- It must not introduce the risk of destabilising the financial sector.
- Mechanisms must be incorporated to give effect to policy decisions regarding its supply and movement.
- Consumers must be able to own and transact in the e-rand without the need for a bank account.
- Consumers and businesses must be provided with the channels to obtain or return e-rand in exchange for cash and commercial bank money.
- It must enable the immediate person-to-person transfer of value without clearing and settlement in today’s terms.
- The e-rand must be traceable.
- The e-rand must be auditable in terms of proof of issuance and ownership.
Stablecoins vs CBDCs
China, Brazil, and Russia are among the countries that have announced plans to launch digital versions of their currencies.
China aims to have a digital version of the renminbi in time for the 2022 Winter Olympics.
Russia aims to have an e-ruble prototype ready in 2021 and launch trials in 2022.
The United States, the UK, and the European Union are also investigating the feasibility of CBDCs.
In addition to greater interest and higher activity levels in CBDC development among central bankers, cryptocurrency stablecoins have received increased scrutiny from regulators.
Stablecoins are blockchain-based cryptocurrencies that are pegged to a fiat currency.
The chair of the US Federal Reserve, Jerome Powell, has regarded CBDCs and blockchain-based stablecoins as competing technologies.
A notable example of a stablecoin is Tether (USDT), which is pegged to the US dollar. Tether has been accused of manipulating the Bitcoin price and Bloomberg reported that Tether executives face a criminal investigation for bank fraud.
USDC is an example of a stablecoin pegged to the dollar which runs on the Ethereum blockchain. Another example is UST, which runs on Terra.
ZARP bills itself as the only bank-approved, fully backed, transparent, and audited stablecoin for the South African Rand.
Cryptocurrencies are also under increased scrutiny in South Africa.
The financial surveillance department of the Reserve Bank (FinSurv) cracked down on international credit card purchases of cryptocurrency.
FinSurv also recently published documents stating that it is a criminal offence — and always was a criminal offence — to transfer cryptocurrency out of South Africa.
It remains legal to buy cryptocurrency from local providers like Luno, VALR, and AltCoinTrader.
It is also still legal to transfer rands to overseas brokers and purchase cryptocurrency that way.
Reporting with Bloomberg.