As Congress debates the potential of a second coronavirus stimulus bill, 9 million Americans are still waiting for their first $ 1,200 payment check to arrive in the mail. The inability of our existing financial infrastructure to respond quickly and effectively to an emergency like COVID-19 has sparked a new debate about how innovations like digital currencies could help.
Given the pandemic, which is also promoting the use of contactless payments instead of cash, it’s no surprise that central banks around the world are battling for their position on central bank digital currencies (CBDCs) issuance. Governments that once viewed digital assets as a threat are now seeing companies like Ripple working closely with traditional financial institutions to develop efficient, innovative global payment solutions that benefit businesses and individuals directly.
The digital asset industry has finally matured to the point where CBDCs are now a matter of when, not of the case. While COVID-19 has created specific reasons for the increased mainstream adoption and understanding of the benefits of digital assets, the longer-term prospects for CBDCs offer broader economic benefits, including more efficient payment systems, greater financial inclusion, and greater scope for innovation.
Bridging the gaps between a range of solutions
Many of the world’s central banks have already started researching the feasibility and usefulness of digital currencies. China is expected to put its CBDC into production this year. Each country’s CBDC goals are determined by its specific market challenges and opportunities, making it inevitable that different solutions and technologies will emerge from each environment.
While it is understandable for individual countries to focus on domestic use cases, we live in an increasingly connected global economy. It will be important to fill the gaps between the various CBDC initiatives with existing payment systems and other digital currencies to ensure they are successful worldwide.
The key is that every system must contain core functions that allow it to work seamlessly with other payment systems. Ripple believes in using open protocols and standards developed in collaboration with private stakeholders such as payment service providers, financial institutions and fintech companies to achieve interoperability
Ripple’s global payments network, RippleNet, is based on open, interoperable protocols that enable value transfer across multiple networks by defining how simple functions provided by individual networks should work together. Ensuring this level of interoperability creates a network of networks that greatly increases the usefulness of any CBDC.
Crossing borders for global success
In a recent BIS survey, not surprisingly, central banks rated improvements in payment efficiency as the main motivation for issuing CBDCs. For many businesses and individuals – both domestically and around the world – the ability to make low-cost, real-time global payments is critical to the success of their business or the well-being of families back home.
Neutral bridge assets allow value to move smoothly between different CBDCs without each having to resolve the liquidity problems associated with cross-border transactions. Currently, financial institutions are required to park capital in multiple markets around the world as pre-financing or support the need for an immediate exchange, increasing the cost and risk of payments.
RippleNet’s on-demand liquidity service enables financial institutions to conduct real-time transactions across multiple global markets using XRP for digital assets. Such a solution can also support the direct exchange of CBDCs. XRP is faster, cheaper, and more scalable than any other digital asset. This makes it the ideal tool to quickly and efficiently link two different currencies.
Using a neutral and efficient digital asset like XRP also reduces the hegemonic influences of the most powerful nations and helps improve the playing field in the payment system of international trade.
Creating the Internet of Value
At Ripple, we’ve seen the real value of a truly connected global payments system. By changing the way money is moved, businesses and consumers will gain more access to and trust in the global financial system, making everyone’s life better.
We welcome the emergence of CBDCs as another driver for the adoption and development of digital currencies and payment systems that will benefit billions of people around the world. However, it is important that any new CBDC be designed with interoperability in mind and use the kind of open standards and protocols that have been so successful in globalizing information over the Internet.
We don’t believe there will be a digital asset that rules them all, nor do we believe that a dominant digital currency, whether decentralized or government-backed, is a good thing for the global economy. Instead, we will continue to work with central banks around the world to create an environment where CBDCs and independent digital assets coexist and complement each other to create an internet of value where money moves as freely as information does today.
If you are a bank or financial institution interested in learning more about CBDCs, we recommend requesting your invitation to Ripple Swell Global 2020 on October 14th and 15th and virtually taking part in the Central Bank’s panel discussion.