Body reviews digital payment innovation

MANILA, Philippines – The Committee on Payments and Market Infrastructures (CPMI) has cautioned that innovations in the payments domain have important implications for the safety and efficiency of the financial system.

Thus the new payments domain is monitored by many central banks.

The CPMI is a global standard setter in the payment and clearing system. The Bank for International Settlements (BIS) plays host to the CPMI secretariat.

CPMI chairman Benoît Cœuré said that digital currencies and distributed ledgers are innovations that could have an impact on many areas, not only on payment systems and services.

Coeure added that even if today’s schemes do not endure in their present form, it is likely that other products, services and business models based on the same underlying technology will continue to emerge and develop.

“This might lead to changes in the way that FMIs and other market participants operate,” the chairman said.

The emergence of digital currencies was noted in previous reports by the CPMI on Innovations in retail payments (2012) and non-banks in retail payments (2014).

There are two key features of digital currencies.

The first is the assets themselves (such as bitcoins).

The committee said the assets could have some of the characteristics of a commodity and some of a currency.

“Currently, their monetary features (such as their use as a means of payment) are often more prominent, yet, these assets are not typically issued in or connected to a sovereign currency, are not a liability of any entity, are not backed by any authority and have no intrinsic value,” the CPMI head said.

The second feature is the technology used.

Particularly noteworthy is the use of distributed ledgers. Most financial transactions are made via a centralized infrastructure, where a trusted entity clears and settles transactions.

Distributed ledgers are innovative because they allow transactions in the absence of trust between the parties and without the need for intermediaries.

The development of digital currencies using distributed ledger technology is an innovation with potentially broad applications.

In the financial market infrastructures (FMIs) sector, wider use of distributed ledgers by new entrants or incumbents could have implications extending beyond payments, including their possible adoption by some FMIs and more broadly by other networks in the financial system.

The CPMI promotes the safety and efficiency of payment, clearing, settlement and related arrangements, thereby supporting financial stability and the wider economy.

It monitors and analyses developments in these arrangements, both within and across jurisdictions. It also serves as a forum for central bank cooperation in related oversight, policy and operational matters, including the provision of central bank services.