The Bank for International Settlements (BIS) has weighed in on the various disruptive forces shaping the future of payments.

The central bankers association’s latest quarterly report was dedicated to the issue, with economic adviser and head of research Hyun Song Shin commenting “The pace of change and potential for disruption have propelled payment systems to the top of policymakers' agenda – indeed, the G20 made improving cross-border payments one of its priorities in 2020.”

BIS general manager Agustín Carstens argued that central banks need to step up and play a more significant role in improving the safety and efficiency of payment systems.

He explained that the BIS Committee on Payments and Market Infrastructures is working with other relevant international bodies to develop a roadmap to enhance cross-border payments, while the BIS has established an Innovation Hub to foster international collaboration on innovative financial technology within the central banking community.

“The Hub aims to catalyse collaborative efforts among central banks, and cooperate, where appropriate, with academia, financial service providers and the broader private sector to develop public goods for the benefit of the global financial system,” Carstens added.

Researchers Morten Bech and Jenny Hancock stated that payment systems suffer from shortcomings in access and cross-border payments. “Large numbers of people have limited, if any, access to a bank or other type of account for making payments, especially in emerging market and developing economies,” they suggested, adding that cross-border payments remain slow, expensive and cumbersome.

Another paper analysed how tokenisation - the process of converting assets into digital representations not recorded in accounts - could transform the clearing and settlement of securities.

It concluded that tokenisation might reduce costs and complexity, but does not eliminate the risks associated with one party failing to settle transactions.

“Market participants might not want to move to shorter settlement cycles, as this could increase liquidity requirements and give market-makers less time to source the cash or securities needed for settlement,” the report stated.

The Basel-based institution’s team found several short-term problems that need resolution before any meaningful distributed ledger-based securities system is implemented, like ongoing legal questions over security tokens. Even then, operational risks remain, as smart contracts are “yet to be proven” in the world of clearing and settlement.

The BIS’ researchers also tackled central banks issuing their own digital currencies (CBDCs) and the crucial technological design choices inherent in such projects. Raphael Auer and Rainer Böhme looked at whether central bank should issue digital currencies directly or through delegation; whether settlement follows decentralised consensus or takes place on a centralised ledger; and whether the CBDC is account-based or token-based.

“The challenge is to design a digital currency that balances the credibility of direct claims on the central bank with the convenience of using payment intermediaries,” they noted.

The paper clarified that there would be no point developing digital money which lacks advantages over the existing payment systems - for instance in terms of convenience or the ability to meet peak demand - the latter being an area it suggested CBDCs may falter. Consensus mechanisms often slow down transaction throughput, which could cause problems for a retail-facing system that must be capable of processing millions of payments a day.

The researchers also pointed out that while decentralisation eliminates the risk of a central point of failure, it raises the possibility of new vulnerabilities.

“The key vulnerability of a conventional architecture is the failure of the top node, for example via a targeted hacking attack,” the report read. “The key vulnerability of DLT is the consensus mechanism, which may be put under pressure, for example, by a denial-of-service type of attack.”

Early trials of CBDCs have “not always been encouraging”, with some central banks stating a variety of existing limitations.

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