The year ahead promises continued acceleration in crypto innovation. Within this, the evolution of Central Bank Digital Currencies (CBDC) will play an important role in transforming payments globally and preserving the overall positive trajectory of the sector.
Key to this will be how Central Banks approach interoperability and regulations for these CBDCs. A network of diverse, yet interoperable digital fiat currencies will help surmount the current system of today’s country-specific walled financial gardens that impede cross-border payments, global ecommerce and financial inclusion efforts.
Existing conversations about CBDCs have taken on even greater urgency this past year for a number of reasons, including pandemic-related declines in cash usage, the need for more effective ways to distribute government aid to unbanked citizens, and the impending launch of China’s digital yuan. These considerations have the potential to drive a faster and more dramatic transformation than might have been possible before.
Released today, a new Ripple report explores the challenges and potential for CBDCs against this backdrop and makes a number of key recommendations.
Much like common standards allowed the internet to become a global tool for the exchange of information, the paper argues for CBDCs as a means to create open payments protocols and facilitate the frictionless exchange of value across borders.
In turn, this will create faster, cheaper, and more efficient payment infrastructures with lower failure rates; greater competition and access to global markets; increased access to financial services for unbanked populations; and government sovereignty over monetary policy.
To realize this full potential, the 80% of Central Banks currently exploring CDBCs must embrace interoperability. This universal interoperability hinges on the use of open standards and neutral bridge assets optimized for speed, scalability, and cost to free up capital and enable the unrestricted movement of value between CBDCs.
Neutral bridge assets will allow for frictionless value movement between various CBDCs without requiring each one to solve the liquidity challenges inherent in cross-border transactions.
RippleNet’s On-Demand Liquidity service allows financial institutions to transact in real-time across multiple global markets, using the digital asset XRP as a bridge currency.
XRP is faster, less costly and more scalable than any other digital asset, making it the ideal instrument in bridging two different currencies quickly and efficiently. This solution can also support the direct exchange of CBDCs.
Importantly, Central Banks cannot create these systems in isolation or they risk rebuilding the silos that already exist today and which impair the flow of value around the world. Instead, the paper argues for partnership with private entities and networks that are currently developing these tools.
In short, Ripple envisions CBDCs as the future of fiat. Created and implemented holistically they can ensure both domestic and global success for participating countries. Ripple is working closely with regulators and Central Banks around the world to develop the protocols and infrastructure that can be used to launch these CBDCs.
