BNY Mellon sees a global role for banks to manage digital dollars

As countries increasingly consider digital currencies, BNY Mellon sees an emerging use case for cross-border payments.

There are several dozen central bank digital currency projects in different stages of development, according to the Atlantic Council, a non-partisan international trade organization. The Bahamas and Brazil have launched their CBDCs and China is testing its digital yuan, but most major economies, including the U.S. and Europe, are still in the research stage. These projects are mostly independent of each other and will eventually require standards or arrangements on how one nation's digital currency will work in another's.

"The goal is that it's all interoperable, but there's some work that will have to be done between governments," said Michael Bellacosa, Head of Global Payments Product Management for BNY Mellon. "As the currencies get developed there will be a recognition among countries of a need and a coming together to collectively solve these challenges."

Thus far, CBDC projects have focused on domestic use cases. China's digital yuan, which has attracted U.S. chains such as Walmart and McDonald's to its pilot, could counter the influence of large technology companies that accumulate data — including American firms like Facebook and Amazon — but also limit Chinese giants like Ant and Tencent (China denies this is the project's goal).

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U.S. CBDC development is seen as a way to improve financial inclusion and to remove inefficiencies in government disbursement that became apparent when sending coronavirus relief payments.

There are a variety of models for CBDCs, with two main camps on the involvement of commercial banks. One model, generally favored by left-leaning political leaders, would create a direct relationship between consumers and the central bank. In the U.S. this has been called a "digital dollar" or a "public Venmo."

Centrist leaders prefer a role for banks and financial institutions to perform tasks such as authentication and processing. "You can see a spectrum of what this can be," Bellacosa said.

Some commercial bank involvement is likely, according to Bellacosa, who sees a role for BNY Mellon as that of a custodian for the CBDC accounts. "That model is close to what exists today but in digital form using different technology," Bellacosa said.

A group of central banks, mostly in Europe, have formed a coalition to share experiences and potential use cases for CBDCs in anticipation of interoperability requirements.

Writing for PaymentsSource, Matthieu Sant Olive, the strategic global CBDC advisor for ConsenSYS, advocates for open standards between central banks that would "simplify interoperability between central bank systems." Such openness would also cut expense and complexity for cross-border payments.

Among private sector firms, Visa, Mastercardand Bank of America have expressed interest in supporting CBDCs through a mix of public announcements and patent applications for blockchain connections.

"There's the ultimate phase in which all payments are digitized and you are replacing today's traditional currency to something issued by a central bank in some form," said Bellacosa. "But each is developing independently. That is the challenge that we're working to help address."

CBDCs are among several advancements designed to ease money movement by automating payment rails and reducing intermediaries required for transfers. Swift's Global Payments Initiative and transaction management platform underpin this goal, as well as advancements in blockchain and AI.

Swift's GPI is a cross-border payments rail that's attracted banks such as Lloyds. GPI improves tracking and front-loads identifying documentation. That has allowed BNY Mellon to address potential problems with cross-border payments, matching names on accounts before a transaction is sent, for example.

"It's efficient and can help reduce fraud. These are elements that we can embed and send back to clients," Bellacosa said. "There's an amazing amount of developments that are occurring in the payments world. Our focus is to get in front of as many of these changes as possible and make it as simple as it can be for clients."