TWN Info Service on WTO and Trade Issues (Aug22/02)
9 August 2022
Third World Network

United Nations: Public payment systems in the digital era
Published in SUNS #9632 dated 9 August 2022

Geneva, 8 Aug (Kanaga Raja) -- To mitigate the financial stability and security-related risks of cryptocurrencies, monetary authorities should provide digital payment options, to ensure that national payment systems function as a public good in the digital era, according to the UN Conference on Trade and Development (UNCTAD).

In its Policy Brief (No. 101), UNCTAD said that the digital era is leading to many changes in the payment system landscape, some of which threaten monetary stability and security in developing countries.

It said to ensure that payment systems function as a public good, monetary authorities should carefully consider the implementation of a central bank digital currency.

"Depending on national capabilities and needs, and the challenges of creating such a currency, authorities could alternatively create a fast retail payment system," it added.

According to the Policy Brief, during the COVID-19 pandemic, and with the growing use of digital rather than cash-based payments, the use of cryptocurrencies has increased globally, particularly in developing countries.

UNCTAD said that this raises issues about financial consumer protection and, moreover, the market turbulence with regard to cryptocurrencies in 2022 indicates that, if left unchecked, such private digital currencies can have broader implications and jeopardize the stability and security of monetary systems, shrink policy space and even harm macroeconomic stability.

However, UNCTAD said that curbing the spread of cryptocurrencies is not an easy task.

According to the Policy Brief, besides implementing comprehensive financial regulations targeted directly at cryptocurrencies and crypto-exchanges and restricting advertising related to cryptocurrencies, as recommended by UNCTAD, policymakers need to ensure that the domestic payment system in the digital era serves as a public good.

The best national payment systems provide stability, safety, efficiency, affordability and integrity; and protect privacy, it said.

To harness the opportunities and minimize the risks of digitalization in developing countries, authorities need to consider creating a digital version of a national payment system in the light of social and economic realities, it added.

In this context, UNCTAD addressed two options that it said could help developing countries achieve this goal, namely, central bank digital currencies and fast retail payment systems.

CENTRAL BANK DIGITAL CURRENCY

According to the Policy Brief, a central bank digital currency is a digital representation of a sovereign currency, which is backed, issued and controlled by a national monetary authority.

Until recently, there was no direct connection between monetary authorities and citizens. Access to payment options relied on intermediaries, such as commercial banks.

UNCTAD said through the use of a central bank digital currency, citizens can have direct access to a currency and related payment options backed by a central bank.

The technological advantages of a central bank digital currency include a high processing speed, lower costs and the potential for financial inclusion. The latter is also associated with private digital currencies.

To a great extent, UNCTAD said, the use of a central bank digital currency has been a response to risks related to cryptocurrencies, including following the digital currency proposal of a major digital platform and the increasing importance of private payment providers in some countries.

For example, in China, Alipay and Wechat Pay make up 90 per cent of the mobile payment sector and, in Kenya, M-Pesa makes up 98.9 per cent.

As at December 2021, three projects with regard to such currencies had been launched by Bahamas, Nigeria and the Eastern Caribbean Central Bank, the monetary authority for Antigua and Barbuda, Dominica, Grenada, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Anguilla and Montserrat.

Worldwide, UNCTAD said that economies are in the pilot stage of issuing a central bank digital currency and 67 economies are exploring the benefits and drawbacks of issuing such a currency.

It said that the risk of data breaches or abuse by public authorities requires a careful approach and much depends on the design, yet the use of a central bank digital currency can help avoid the risk of the monetary exploitation of personal data by private digital payment providers.

"Moreover, for consumers, the use of such a currency should be costless, as the monetary authority bears the costs of launch and operation, as with the use of cash at present."

Several design alternatives are under discussion, including on whether the underlying technology of a central bank digital currency should be distributed ledger technology, UNCTAD noted.

It said consensus regarding the superiority of the latter in supporting a central bank digital currency has not yet been reached, for example, because, as noted in some studies, its use can compromise the speed of payments.

The Bank for International Settlements has highlighted the risks of financial dis-intermediation and a flight to safety from commercial bank deposits to central bank digital currencies since, during times of financial turmoil, people may perceive central bank digital currencies as safer than commercial bank deposits and prefer to hold balances in the former.

However, UNCTAD said as commercial banks have access to central bank liquidity, such risks are relatively low, and can be managed.

Moreover, authorities could set a cap on central bank digital currency accounts and refrain from paying interest on them, to further mitigate such risks, it added.

Despite the advantages of a central bank digital currency in maintaining financial stability and security, launching such a currency is not a simple task, said the Policy Brief.

"A lack of human and financial resources is one of the most significant barriers. Moreover, in some cases, a central bank digital currency would require a revised legal framework."

Given such challenges, monetary authorities must carefully weigh the pros and cons of implementing a central bank digital currency. A fast retail payment system might be a practical alternative, said UNCTAD.

FAST RETAIL PAYMENT SYSTEM

A fast retail payment system is an electronic payment scheme that allows for the processing of small-value (retail) transactions in real time.

The Policy Brief said that such a system was first introduced in the Republic of Korea in 2001. Since then, over 60 jurisdictions have launched or are planning to implement a similar system.

There are different frameworks in place but, in most cases, central banks have taken on three crucial roles, namely, as designers, overseers and operators.

If well designed, overseen and operated by a central bank, a fast retail payment system can meet the requirements of a digital payment system, but may fall short in terms of financial inclusion, as it requires intermediaries to offer accounts to users, said UNCTAD.

The advantage of a fast retail payment system, compared with other payment streams, is that it may be provided at no cost or a low cost, it added.

The use of an alias (taxpayer identification number, telephone number or email address) can be used to identify the payee instead of a bank account number.

This makes access to fast payments easier and reinforces the safety and integrity of the system, as it helps to reduce fraudulent activity and payment to an incorrect payee.

Yet a fast retail payment system operated by a profit-seeking private institution carries considerable risk unless it is strictly supervised, said the Policy Brief.

Moreover, UNCTAD said to ensure liquidity, the monetary authority will need to implement special arrangements that enable participants to access central bank liquidity when necessary.

In choosing between a central bank digital currency and a fast retail payment system to address risks related to cryptocurrencies, policymakers need to consider the structural features of the domestic financial system, it added.

"In countries in which financial inclusion levels are already high, or in which financial institutions can successfully extend transaction accounts to the population, a fast retail payment system can serve as a system that has some of the advantages of a central bank digital currency."

A country may opt to launch a fast retail payment system and then develop a central bank digital currency, yet it should be noted that a successfully implemented fast retail payment system reduces the necessity of developing the latter, said the Policy Brief.

UNCTAD said that one way to contain the expansion of cryptocurrencies in developing countries is through the provision of a domestic digital payment system operated by the monetary authority.

It said that technological capacity, human and financial resources, structural features of domestic financial systems (i.e. whether there is a public commercial bank) and levels of financial inclusion and access to communications technology are all important factors in selecting a digital payment system.

Moreover, while there are pressures on countries to initiate a digital payment system as soon as possible, doing so requires a strategic approach that takes into account the digital divide, it added.

In developing countries, two significant barriers related to the creation of a central bank digital currency or a fast retail payment system are linked to the digital divide, said the Policy Brief.

"First, in poorer countries, a lack of personal identification documentation excludes people, particularly women, rural populations and migrants, from owning a bank account."

For this reason, UNCTAD said that public authorities should coordinate efforts to make identification documents universally accessible.

Second, it said low-income households, compared with other income groups, have lower levels of access to mobile telephones and the Internet.

In this context, public authorities should maintain the issuance and distribution of cash, as phasing out its use will accentuate the digital divide, the Policy Brief concluded. +