Report suggests bright future for central bank digital currencies

Hello FintechFT readers,

I’ve just come off two weeks of holiday in the sunny Netherlands (with two days at the TNW’s conference and the FT Future of Finance) and then equally sunny Madeira, just in time for the crypto crash.

This week, Martin Arnold talks about central bank digital currencies; Imani, Joshua Oliver and I look at fintech’s funding woes and I speak to open banking infrastructure provider Yapily.

As ever, reach out to us with your thoughts (imani.moise@ft.com and sid.v@ft.com). Thanks, and happy reading.

PS join us July 7 in partnership with AlixPartners at Capitalising On Disruption To Create Business Opportunities, where we will discuss how successful leaders can thrive in an era of disruption. Register free today.

Central bank digital currency pilots gather speed

Nine out of ten of the world’s central banks are working to create a digital version of their currency. Some have already completed the task. The Bahamas has the Sand Dollar, Nigeria launched the eNaira last October and China is close to launching the digital renminbi, or e-CNY, after trialling it at February’s winter Olympics.

Alongside this innovation, some large central banks have also been working together to examine whether they can make cross-border payments using these new digital currencies faster, cheaper and more efficiently.

The cost and time involved in moving money around the world is staggering. The process often requires money to pass through a chain of correspondent banks, with each carrying out its own checks and charging its own fees before it reaches its final destination.

There were $23.5tn of cross-border corporate transactions in 2020, costing $120bn in fees and taking an average of two to three days to complete, according to a recent report by Oliver Wyman and JPMorgan.

The situation is equally frustrating for individuals sending money across borders. The cost of sending $200 to low- and middle-income countries added up to $12 on average in the fourth quarter of last year, according to the World Bank.

The G20 and Financial Stability Board have both made it a priority to tackle inefficiencies in cross-border payments.

The Bank for International Settlements, the central bank for central banks, thinks it has a solution. It published a report last week detailing the results from a number of experiments to transfer central bank digital currencies (CBDCs) across borders.

“The projects show that platforms with two or more CBDCs are technically feasible and offer a range of benefits that can lead to faster, cheaper and more transparent payments across borders,” the BIS said.

In one project, known as mBridge, the central banks of China, the United Arab Emirates, Hong Kong and Thailand created a system for turning their digital currencies into tokens that could be exchanged between commercial banks of the various countries.

The French and Swiss central banks teamed up with a private sector consortium in a similar project called Jura to swap euros and Swiss francs in the form of digital tokens between commercial banks.

In the Dunbar project, the Australian, Malaysian, Singaporean and South African central banks allowed commercial banks to have direct access to the digital currencies of each country and to transact with each other.

“These experiments worked,” said Hyun Song Shin, head of research at the BIS. “Now we need to make sure we can build it to scale and it can stand the test of real world use.”

Not everyone is convinced, however. Zennon Kapron, who runs an Asian fintech research company, said privacy concerns could be a big barrier — at least for consumers. “Would you use a CBDC wallet from a different country? It is meant to be private, but is it really?”

Besides, Kapron thinks the private sector is already making swift progress on improving the efficiency of cross-border payments, giving the example of Thai consumers using QR codes to make cheap, instant payments in Singapore.

On top of these concerns, the BIS said there are still a number of “policy, legal, governance and economic questions” over multi-CBDC systems.

The biggest is whether they could expose a “vulnerability of the broader financial system”, it said, adding: “For example, participants’ access to liquidity and credit in one currency (or lack of it) could spill over to other currencies or markets at significant speed.” (Martin Arnold)

Fintech Fascination

Tough times for fintechs as easy cash dries up Over the past half a decade, fintechs boomed as successive founding rounds fuelled ever-higher valuations. But as Imani, Joshua Oliver and I report, tightening belts mean that companies looking to raise cash are needing to show paths to profitability.

Wise chief faces tax default investigation The Financial Conduct Authority has launched an investigation into Kristo Käärmann, the co-founder and chief executive of payments app Wise, over deliberately defaulting on tax payments, Emma Dunkley reports.

SumUp’s valuation falls to less than half its previous value London-based payments start-up SumUp epitomises the struggles facing the sector, Stephen Morris and Emma Dunkley report. The London-based start-up has just raised funds giving it a valuation of €8bn (£6.9bn), but this is less than half the €20bn target suggested in January.

Quick-fire Q&A

I recently spoke with Stefano Vaccino, chief executive and founder of Yapily, which provides infrastructure for open banking — a secure way for consumers to share information with financial providers for services such as investing and lending. Founded in 2017, it has raised $69.4mn to date, with investors including Sapphire Ventures, Lakestar, HV Capital and Latitude, with around 250 employees across the UK and Europe.

What are the some of the use cases for open banking?
Open banking is going to have social impacts for different reasons in different countries. In some markets, the key will be to making faster payments or reducing the cost of payments compared to card scheme, which is especially important in the cost of living crisis.

In countries like India and Brazil there is also huge potential for micro-lending to businesses. You have people who are taking loans for $5 to buy supplies and having to pay back $6 at the end of the day — open finance can allow lenders to make decisions within a few hundred milliseconds but also to reduce interest for good creditors.

How successful has open banking been so far?
Four years on from its inception, only 5 per cent of the UK population had ever made a contactless payment. By comparison, the Open Banking Implementation Entity [the body set up to implement open banking standards] estimates that 10 per cent of the UK’s digitally-enabled population are already actively using open banking four years after the launch of open banking. Over the past 12 months, in the UK alone we’ve seen open banking payments go from 1.5mn to 5.2mn a month.

I think that part of the problem is that the expectations about what open banking would do have been huge. But there are a number of steps to getting there — first of all, banks have had to offer interfaces, then developers have to build products and finally you need to see behavioural changes among users.

If you look at contactless [payments], the inflection point was when Transport for London started allowing consumers to use it for the Tube. I expect a TfL moment for open banking in the next 12 months, especially as Big Tech companies take a growing interest in the area.

What is Yapily’s unique proposition for open banking?
There’s a lot of people who mention that they do something in open banking; it’s like crypto was five years ago. But when you dig deeper, they do a lot of different things in the value chain. Most of them are producing applications for the end user, but our focus has been on providing a platform to power this.

What do you make of the current state of the fintech market?
In the early 2000s, and again in 2008 to 2010, we saw this kind of situation [where start-ups faced difficulty acquiring easy cash]; I think these conditions will bring more discipline to the market. We are seeing a desire for growth, but with a focus on sustainability and the ability to reach profit at some point, not just to have millions of users but lose money. I expect there to be mergers and acquisitions and consolidation, but those companies which survive will be the future of the Faangs.