If money makes the world go around, it hasn’t been doing a very good job lately. Beyond developed nations — in eastern Europe, Latin America and Africa — people and businesses are increasingly finding themselves cut off from global payments. An unintended consequence of necessary measures to enforce sanctions and thwart criminals, the trend is doing significant damage to trade and economic growth.
Believe it or not, crypto could help. Far from the hype surrounding the likes of Bitcoin, officials at multinational financial authorities are adapting the technology to design a payment system that could better connect the world. They deserve their governments’ full support.
Since the terrorist attacks of Sept. 11, 2001, global financial authorities have imposed stringent verification requirements on banks that process international payments. In response, these correspondent banks have retreated from areas they deem too risky, particularly in lower-income countries. The diminished access has had real consequences: By one estimate, affected exporters in emerging Europe have reduced employment by more than 10% on average.
This trend reinforces long-running flaws in the cross-border payment system. Suppose Alice in the US wants to pay Baris in Turkey. If their banks don’t have a direct link, the transfer must pass through a chain of institutions, all of which have their own ledgers, compliance rules, databases and operating hours that might conflict with one another. The currency conversion might also require lira to be delivered before dollars are received — settlement risk that, on any given day, can amount to more than $2 trillion globally. As a result, transactions can be slow and expensive. Migrants sending money home to low- and middle-income countries often pay fees exceeding 6%, adding up to tens of billions of dollars a year.
Enter crypto technology. Cash and other financial assets, even in electronic form, remain dumb objects that require much human intervention to get from point A to point B. This changes if they take the form of digital tokens, traveling on a unified platform where intermediaries such as banks share data, maintain a common ledger and (ideally) have access to digital currencies issued by central banks. It’s as if money becomes self-driving: Alice’s dollar could be programmed to automatically become a lira in Baris’ account once the required verifications and currency conversion were complete — eliminating many delays, risks and costs.
Far-fetched as such a platform might seem, policymakers are already working to build it. Economists at the International Monetary Fund have published a detailed concept, and the Bank for International Settlements has run experiments. Most recently, seven central banks (including the Federal Reserve, the Bank of England and the Bank of Japan) and more than 40 financial institutions (including Deutsche Bank and JPMorgan Chase) have joined a BIS effort to test a working model.
Granted, there’s a long way to go. Countries and financial institutions must determine how to govern any platform, who will have access, what assets will be traded and how to resolve conflicts. Market participants might not gravitate toward the best possible design or technology, particularly if it could disrupt incumbents in businesses such as escrow, foreign exchange and remittances. It’s thus crucial that central bankers and other top officials stay involved and be prepared to nudge developments toward the collective best interest. Ultimately, the plumbing of money is a public good. Making it work better could make billions better off.
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