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BIS calls for legal framework changes to support CBDCs - Industry roundup: 29 September

BIS calls for legal framework changes to support CBDCs

In a speech at the BIS Innovation Hub-Financial Stability Institute conference on legal aspects of central bank digital currencies, Agustín Carstens, General Manager of the BIS has urged countries to upgrade their current legal frameworks to help support the adoption of central bank digital currencies (CBDCs). 

Carstens made the case for CBDCs in his speech, noting that “the current monetary system, based on cash and commercial bank money, continues to serve society well. But it needs to evolve.”

Having set out where CBDCs could make a difference to society and the approaches central banks are taking towards retail and wholesale CBDCs, Carstens commented that while “much of the discussion around CBDCs focuses on technology,” this is only part of the challenge. “Legal frameworks must also advance if we want CBDC to deliver on its potential,” he stated.

The challenge that Carstens spoke about is highlighted in a paper from the International Monetary Fund, which found that almost 80% of central banks are either not allowed to issue a digital currency under their existing laws or the legal framework is unclear. “It is simply unacceptable that unclear or outdated legal frameworks could hinder [CBDC] deployment,” argued Carstens. “The work to address these issues needs to begin in earnest. And it needs to proceed at pace.”

Of course, different legal systems approach questions of privacy, integrity of the financial system, and payment choice in different ways. Carstens accepted that each jurisdiction must decide whether to issue CBDC and how to balance the rights and obligations of its users at a national level. “The answer to these questions will often depend on the local legal framework, as well as on culture and traditions,” he reflected. “Many countries are happily going cashless. For others, cash is still king.”

At the same time, international coordination and cooperation is critical. “It would be unfortunate if we ended up with a fragmented system and legal framework in which different digital currencies don't interoperate,” Carstens commented. 


US Q2 GDP posts 2.1%

Real GDP in the US increased at an annual rate of 2.1% in the second quarter of 2023, according to the third estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP was revised up to 2.2%.

The third GDP estimate is based on more complete source data than was available for the second estimate issued last month. In the second estimate, the increase in GDP was also 2.1%. 

The update to the Q1 GDP figure primarily reflected a downward revision to consumer spending that was partly offset by upward revisions to non-residential fixed investment, exports, and inventory investment. 

The increase in real GDP in Q2 reflected increases in non-residential fixed investment, consumer spending, and state and local government spending that were partly offset by a decrease in exports. Imports also decreased. 

Commenting on the data release, Ryan Brandham, Head of Global Capital Markets, North America at Validus Risk Management noted: “The US GDP figure is slightly weaker than anticipated. During the most recent FOMC press conference, Powell mentioned that while the Fed doesn’t target levels of real GDP, it evaluates whether it poses a risk to achieving the 2% inflation target. From this perspective, the current GDP figure is not seen as a significant threat and may provide some comfort in an otherwise concerning inflationary environment.”


Global financial crime compliance costs for FIs above US$206bn

The worldwide financial cost of compliance for financial institutions hit a total cost of US$206.1bn, according to the latest True Cost of Financial Crime Compliance Report from LexisNexis Risk Solutions. This cost is comparable to more than 12% of global research and development (R&D) expenditure and equates to US$3.33 per month for each working-age individual on Earth.

While specific industries are still determining how AI and machine learning (ML) will bring about an influence, 71% of professionals in financial crime compliance indicate that their organisations are already enhancing data utilisation through advanced analytics. Additionally, 72% confirm that they employ analytics and AI to enhance compliance procedures.

However, similar to changes in ways of working, problems with data quality, data silos, outdated legacy systems and a lack of collaboration internally can create avoidable compliance activity and expenditure. 

The study also reveals that EMEA financial institutions and their customers continue to incur a more substantial expense for financial crime compliance than other regions. The overall cost of financial crime compliance in EMEA surpasses that of the US/Canada by 39.8%. This difference is partly indicative of the escalating intricacy of compliance requirements.

Globally, 78% of organisations and specifically 80% in EMEA indicate that the intricate network of regulations and sanctions acts as a constraint on their business operations. In contrast, APAC and LATAM are comparatively more cost-effective regions, despite significant compliance expenditure. The financial compliance expenses in APAC amount to 74.5% of those in the U.S./Canada, while LATAM's costs are 24.7% in comparison.

CEOs, vice presidents and directors in financial institutions globally are not complacent. Many new initiatives add to their ongoing complexity in meeting financial crime compliance requirements. However, 85% of financial institutions place enhancing customer experience at the top of their priority list. This reaffirms a commitment towards fostering trust and delivering satisfaction, even in the face of increasing financial threats. A substantial emphasis of these efforts revolves around optimising the efficiency and efficacy of financial crime compliance concerning payments. Globally, 74% of institutions emphasise that this is a critical or high-priority endeavour.


FedNow Service industry work group issues market practices for request for payment

The Federal Reserve has released market practices (Off-site) to advance standardised implementation of the request for payment (RFP) feature of instant payments. It noted that RFP has the potential to be a powerful tool that financial institutions and service providers can use to build instant bill pay services to help their customers better manage cash flow.

The RFP market practices were developed by an industry work group convened by the Federal Reserve with diverse industry representation. The recommendations are intended as market practices that foster standard and effective RFP implementation across the industry and promote a strong and consistent customer experience.

The work group’s market practices focus on a single, significant RFP use case: consumer-to-business (C2B) bill payments, though some practices developed for this use case may also apply to other RFP use cases.

“We believe that this collective effort is going to benefit the entire payments ecosystem,” said Nick Stanescu, FedNow Service business executive and senior vice president of Federal Reserve Financial Services. “More than 90 organisations, from fintechs to banks to merchants, took part in the work group, reflecting the widespread commitment to address common challenges with an agreed-upon approach to execution.”

As a result of industry feedback, the Federal Reserve also updated the FedNow Service Operating Procedures to provide context related to RFP warranties. The updates include the meaning of legitimate purpose concerning RFPs, guidance on the scope of the warranty provided when a financial institution sends an RFP, financial institution obligations for monitoring customer RFP use and investigating anomalous activity, and procedures for initiating claims related to alleged breaches of RFP warranties.


Visa and Lloyds Bank to launch virtual card solution

Visa has partnered with Lloyds Bank to launch a virtual card solution for businesses of all sizes. Available now to Lloyds Bank customers, Visa Commercial Pay is designed to address businesses’ payments and purchasing administration challenges, such as controlling spend, simplifying processes, reconciling invoices, and reporting on expenditure.

The solution aims to enable efficient online purchasing by instantly issuing virtual cards. Employees can request a virtual card for their business-related purchases, whether contracted or ad-hoc spending, subscription payments or business travel.

The virtual cards – which can be single or multi-use – adopt existing approval workflows and include the business’s unique reference fields. They can be issued individually or by batch and offer real-time control, allowing business administrators and managers to manage spending within their teams closely. Controls can be applied to enable where, when, what and who can be paid.

“Lloyds Bank’s VCP solution enables us to make transactions, with the necessary approvals by budget holders, quickly and securely, and simplifies reconciliation as we can code them accurately and attach evidence too,” commented Jon Helyer, Director of Financial Control, Smart DCC. “The system, which was configured by the Lloyds Bank Commercial Cards team, is very simple to use and full training was provided before we went live. The enhanced security of virtual cards also means there is no need for additional one time passcodes and so online transactions are easier to process.”


J.P. Morgan to provide account validation services to the U.S. Government

J.P. Morgan has announced that it has been designated by the United States Treasury Department under a financial agency agreement to provide account validation services for federal government agencies. The programme was awarded to J.P. Morgan after a competitive selection process and will extend for at least five years.  

J.P. Morgan says the agreement reflects the critical role of account validation in Treasury’s commitment to payment integrity and the reduction of improper payments. In fiscal year 2022, Fiscal Service disbursed nearly 1.4 billion payments for federal agencies, totalling US$5.27 trillion, including Social Security and Medicare payments, unemployment insurance, and tax refunds.

Improper payments due to fraud or clerical errors can delay the delivery of critical funds to rightful recipients, lead to financial losses, and erode public trust in government services. The federal government reported an estimated US$247bn in improper payments during the 2022 fiscal year, according to the US Government Accountability Office. This includes overpayments, underpayments and payments that should not have been made. 

In its new role, the bank will verify critical payment information for the federal government before payments are issued. The bank’s technology will verify payment details using its extensive network of secure customer information and industry data that the bank regularly accesses for payment processing. 


LEIs integrated into beneficial ownership data-sets 

A collaboration between GLEIF and Open Ownership has resulted in legal entity identifiers (LEIs) being integrated into datasets produced in line with the beneficial ownership data standard for the first time. The collaboration aims to promote greater transparency in corporate ownership and control in support of safer, faster, and more efficient payment activities globally and a more secure financial landscape. It does this by enhancing the usability of beneficial ownership data by allowing Open Ownership's database to be mapped more easily to other datasets globally through the use of the LEI, in addition to open corporate IDs and national business identifiers already contained within the database. 

Including a standardised universal identifier within beneficial ownership datasets for companies and other corporate vehicles is crucial for accurately connecting them with other information, such as company filings, licensing information, procurement disclosures, revenue reports, and sanction, watch and politically exposed persons (PEP) lists. This offers significant potential to enhance screening processes and support for anti-money laundering (AML), counter-terrorist financing (CTF), customer due diligence and sanctions enforcement efforts globally. 

To achieve the new integration, Open Ownership leveraged an existing mapping partnership between the GLEIF and OpenCorporates databases to extend LEI mapping to its datasets. LEIs are now embedded into Open Ownership data records where entities have both an OpenCorporates ID and an LEI. 

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