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Financial Players Should Consider Digital Yuan Impact Now, US Consulting Firm Says

Financial players need to sit up and take note of China’s digital yuan (e-CNY) as it stands to change the way money flows forever, a US-based international management consulting firm has pointed out over the likely roll out of the digital currency.

Oliver Wyman stresses the significance of the e-CNY roll out saying it will represent the “introduction of a large-scale instant payment infrastructure, sponsored by the Chinese gov’t rather than private sector, with the adoption by some of the largest companies in the world alongside with a huge population that is increasingly internationally connected.”

It notes that financial players need to consider the e-CNY impact now as its potential to move into cross-border transactions could see the yuan “become a true global trade that will bring savings and efficiency.” 

“e-CNY has the potential to massively level the playing field between banks and big tech, while further squeezing merchant acquiring businesses,” the firm’s new report states. “It also opens up opportunities for corporates looking to provide banking services to the end supply chain and end consumers, more commonly known as banking as a service working with licensed providers such as banks.”

In the event of an extension of the digital yuan into cross border transactions and supported by liberalization policy, the firm adds that it will accelerate the yuan “further as a true global trade current bringing both savings and efficiency to the cross-border flows.”

How to handle cross border transactions frequently feature in discussions about the growing embrace of central bank digital currencies (CBDCs) by more countries of the world. Among other things, this highlight has raised questions about what would be the likely role of the world’s leading provider of secure financial messaging services, SWIFT, which helps connect more than 11,000 banking and market entities to communicate securely and exchange standardised financial messages in a reliable way. 

Now, in its latest discussion paper published jointly with Accenture, SWIFT cites that CBDCs moving cross border is complex and would require an additional range of essential characteristics. These include the introduction of a scalable interchange mechanism with a strong governance model — the existence of some form of interchange mechanism with local currency – since the meaning and usage of a CBDC outside its native jurisdiction is unclear. Though a bilateral solution between two countries may work, it  is not scalable and quickly becomes unmanageable if applied globally, SWIFT notes. 

“What will be required is a multilateral interchange mechanism that enables payments to be made end to end in a frictionless form,” it adds, pointing out its plans to contribute extensively to this area. “As with domestic integration, it is not necessarily the case that the international exchange must always be CBDC to CBDC – it could also be CBDC to other local fiat currency, for example.”

There is the need for institutions that can provide interoperability cross-border either by acting in partnership like correspondent banks or as single institutions present in both systems, or create a new arrangement with a new platform entirely. Also, since CBDCs will not remove the need for foreign exchange, a foreign exchange mechanism has to be put in place as well as a financial crime compliance and compatible local infrastructure with overlapping operating hours (ideally 24/7 ) to avoid friction, the world’s leading provider of secure financial messaging services states. 

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