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Industry roundup: 23 March

Cross-border CBDC platform interoperability amongst multiple central banks

The Bank for International Settlements (BIS) Innovation Hub, Bank Negara Malaysia (BNM), along with three other central banks (Reserve Bank of Australia, Monetary Authority of Singapore and South African Reserve Bank) completed a prototype of a common platform that enables international payments using multiple central bank digital currencies (CBDCs).

Project Dunbar, led by the BIS Innovation Hub’s Singapore Centre, reported that financial institutions can trade directly with each other on a common platform using the CBDC issued by participating central banks and may help solve complex cross-border payment issues. BNM commented that the combined platform may reduce reliance on intermediaries and, as a result, reduce the cost and time required to settle cross-border transactions.

Andrew McCormack, head of the BIS Innovation Hub Centre in Singapore, stated that a common platform is the most efficient model for payment connectivity, but the most difficult to achieve. McCormack further added that Project Dunbar established the foundation for the development of future global and regional platforms, demonstrating that key concerns of trust and shared control can be addressed through governance mechanisms implemented by powerful technical means. BNM concurred that the project findings should be subject to governance deemed appropriate by central bank participants, including the ability to maintain control over the application of jurisdiction and currency-level rules.

The project specifications and finding can be found on this link: Project Dunbar - International settlements using multi-CBDCs (bis.org). The report stated that it supports the G20 Roadmap's efforts to improve cross-border payments, especially in exploring the international aspects of CBDC design.

RippleNet named as potential alternative to CBDC by the Arab Monetary Fund

The Arab Monetary Fund (AMF), a subordinate organization of the Arab League, recognized the RippleNet Global Payment Network as a potential alternative to CBDC. The issuance of a CBDC carries significant risks, including the potential for the local currency to eventually lose its fundamental usefulness, according to a new report from the AMF's Arab Regional FinTech Working Group. The report mentioned some of the risks associated with local CBDCs: “digital dollarization” risk, international spillover, and impact on the international role of currencies.

If the CBDC is successfully deployed outside its jurisdiction, the local currency may lose its function as a medium of exchange, unit of account, and storage of value, ultimately increasing the risk of financial instability, according to the report. Additionally, issuing CBDCs to non-residents could lead to increased exchange rate volatility and changes in cash flow dynamics as CBDC's have become attractive to investors as an alternative financial instrument.

The AMF stated a list of CBDC alternatives that can offer benefits similar to those of CBDCs but are less risky. Among them are the international SWIFT payment system, the banking app Revolut, London-based fintech company Wise, and Ripple Labs' real-time gross settlement system RippleNet. Most of these non-CBDC alternatives have substantial restrictions or drawbacks noted in previous reports. Consequently, many central banks continue to conduct CBDC proof-of-concept or pilot projects.

Mastercard connects banks to BNPL

Mastercard is preparing to begin Phase 1 of its Buy Now Pay Later (BNPL) product (initially announced 6 months ago and scheduled to launch in April 2022) by building a network of partners who can support card issuers to offer products primarily delivered through fintechs.

Some of the newest companies that support installment payments are Amount, a banking technology provider, Lithic, a virtual card issuer, i2c, a digital card technology provider, and Deserve, a digital first card issuer.

Mastercard stated it has almost completed production, while several other financial services giants are developing a wide range of platforms for BNPL lending. It was reported that Visa will soon deploy its own Visa Installments platform pilot to banks. Meanwhile, ACI Worldwide recently announced a platform that connects many merchants to at least 70 different lenders. These companies participate in fintechs such as Affirm and Klarna, which have the largest presence in BNPL lending.

Beginning next month, Mastercard publicized that “Mastercard Installments” (1st phase) should enable participating banks to offer consumers BNPL transactions managed by their mobile apps and digital wallets, such as Apple Pay and Google Pay. Loans would be extended via a virtual one-time Mastercard use.

The report indicated that the Consumer Finance Protection Bureau (CFPB) is currently investigating the operation of major BNPL fintechs as many consumers have filed complaints about BNPL loans, focusing on the turmoil in return fees. Richard Crone, Principal, Crone Consulting LLC, commented that the BNPL market is synonymous with impulse credit, and for Mastercard Installments to work, participants need to educate and motivate consumers to consider other financing options before making a purchase.

Biometric technology to aid in minimizing financial fraud

Cybercriminals continue to find innovative ways to gain access to bank accounts. Zelle, a US-based digital peer-to-peer (P2P) payment network used by many financial institutions to enable customers to send cash to friends and family rapidly, has shown a clear uptick pattern of fraud according to recent reports.

Many banks have stated that once a customer approves the transfer of funds from their account, not much can be done. One fraud example, described in the NYT, showed a stolen mobile phone and misuse of the digital wallet, charging the credit card and withdrawing cash from an ATM. Affected accounts were all refunded except for the Zelle transfers. Consumers continuously look for solutions to prevent theft via these financial apps.

According to Krebs security report, Zelle introduced out-of-band authentication with transaction details to combat such fraudulent tactics. An SMS is sent to the member containing the details of the initiated Zelle transaction. As a safeguard, members must reply to the text to approve the transaction.

As payment apps like Zelle continue to rise in popularity, there are increasing issues and vulnerabilities, as hacking into these types of apps have also become easier for cybercriminals. Jesse Franklin, SVP US & Canada Incode, Digital Journal, recommends steps financial institutions can take to protect their customers from fraudulent transactions. Franklin proposes measures that include the implementation of biometric technology across multiple points of interaction, including both senders and recipients of funds. Additionally, Franklin states that digital technology should serve as the key to compliance and essentially detect recurring malicious individuals and prevent attempts to fraudulently confiscate funds from consumer accounts.

Thailand bans the use of digital assets for payments beginning April 2022

Thailand has enacted rules banning the use of digital assets to pay for goods and services effective April 1, market regulators said on Wednesday. The decision to regulate such activities by digital asset operators was raised by consultations between the Securities and Exchange Commission (SEC) and the Bank of Thailand (BOT), where it was stated that digital asset payments could affect the country's financial stability and the economy as a whole.

The release stated that digital asset business operators providing these services must comply with the new rules within 30 days from the effective date (April 1, 2022). BOT has continually stated in previous reports that it does not support cryptocurrencies as a payment method. Indonesian regulators also warned financial companies to deter from offering and promoting the sale of cryptocurrencies amid a surge in its uses.

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