Bank of Japan at FIN/SUM 2024: Future Vision of Wholesale Payments

On March 6, 2024, the Bank of Japan held a planning session titled “Future Vision of Wholesale Payments powered by the Bank of Japan” at FIN/SUM 2024 sponsored by Nihon Keizai Shimbun and the Financial Services Agency. The Bank of Japan has published a summary of the discussion (in Japanese) last week.

Session 1: Past, Present, and Future of Wholesale Payments

In Session 1 “Past, Present, and Future of Wholesale Payments”, we first explained an overview of wholesale payments and the mechanism of large-value funds transfers using bank deposits. We then introduced how Japan’s fund settlement systems have evolved by adapting to technological advancements and expanding user needs. However, we pointed out various challenges in current payment systems, such as high costs and slow speeds for cross-border payments, and inefficiencies with paper-based operations in trade finance settlements.

Amidst this, we introduced the recent progress in exploring new forms of private money like stablecoins and tokenized deposits to address challenges in current payment systems, leveraging technological advancements like cloud and distributed ledger technology (DLT). We also covered the discussion on enhancing central bank money to correspond with these developments, with actual examples.

Specifically, we covered private sector initiatives on utilizing tokenized deposits, enhancements to central bank money like wholesale CBDCs and using new technologies in the RTGS (real-time gross settlement) systems for central bank reserves, and international discussions (like the BIS’s proposed “Unified Ledger”) on holding and settling tokenized deposits and central bank money on a common platform.

We also explained the differences between stablecoins, which are pre-funded and backed by specific assets, and tokenized deposits, which allow credit creation and are backed by a bank’s overall balance sheet.

Session 2: Current Challenges in Wholesale Payments

In Session 2 “Current Challenges in Wholesale Payments”, practitioners discussed the current operational challenges in wholesale payments, efforts to address them, and remaining issues to tackle as these efforts progress. In particular, they exchanged views on using new technologies like DLT to resolve challenges, possibilities of new payment means/platforms, and the importance of addressing issues spanning adjacent areas like trade operations.

Specifically, it was noted that paper-based trade finance operations remain inefficient, and solutions like using DLT-based trade platforms integrating information flows, along with DVP settlement linking funds legs, were introduced. The need for digital currencies backed by central banks or private banks was also highlighted.

For cross-border payments, it was pointed out that ancillary compliance processes like KYC and regulatory reporting using the current correspondent banking model impose heavy operational burdens beyond just funds transfers, leading to delays and high costs. The potential for streamlining these processes, standardizing messaging formats (migration to ISO 20022), and industry-wide improvements or new practices were emphasized.

From a bank’s perspective, while reasonable practices have formed within the current wholesale payment systems and operational frameworks, various challenges exist. It was suggested that leveraging new technologies to change data processing flows around transactions could transform the nature of transactions and payments.

The importance of ideas like the BIS’s Unified Ledger — utilizing DLT for a new common platform integrating wholesale CBDCs and tokenized deposits within existing regulatory frameworks and a two-tier money structure — was highlighted, enabling various instant payment and programmability use cases.

From a technology perspective, DLT was seen as having significant potential beyond just ledgers to enhance transparency, address information asymmetry in cross-border payments, etc. However, deploying DLT alone won’t resolve operational challenges — close collaboration between technologists and business to ensure technology adoption aligns with financial institutions’ practices is critical. The importance of governance for public blockchains and trust anchors was also discussed.

Session 3: A Vision for Wholesale Payments

In Session 3 “A Vision for Wholesale Payments”, discussions covered a holistic view of the future of wholesale payments from both practitioner and academic perspectives. Specifically, given technological changes and evolving external environments, the session explored what improvements should be pursued within existing wholesale payment infrastructures versus introducing new technology-driven infrastructures and their envisioned system architectures.

It was suggested that deposit money systems with credit creation remain highly efficient core infrastructures for wholesale payments. However, concerns were raised that new payment means like stablecoins could diminish banks’ visibility into payment flows, impacting their lending capabilities.

Amidst this, the exploration of new payment means and infrastructures leveraging new technologies within the deposit money realm was expected. For example, the BIS’s Unified Ledger concept of maintaining a two-tier structure with wholesale CBDCs and tokenized deposits on a common platform for efficient cross-border payments was highlighted as a potential long-term model.

From a broader “enhancing wholesale payments” perspective, tokenization of securities and physical assets to reduce settlement risks and improve efficiency was noted. Building on this, ideas like hosting tokenized securities on common payment platforms enabling efficient DVP, or ensuring interoperability by interconnecting separate ledgers for funds versus securities were introduced. Resolving compliance burdens in ancillary areas like AML/CFT and KYC was also deemed important.

Lastly, on public-private roles, it was suggested that irrespective of technological progress, the importance of central bank money would remain unchanged, with wholesale CBDCs expected to ensure interoperability and serve as value anchors. As before, introducing convenient and secure payment means would largely remain the private sector’s role, while public involvement may be needed in areas like ensuring network resilience and trust.

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