III Meeting of Heads of Financial Market Infrastructures

The Center for Latin American Monetary Studies (CEMLA) and the Bank of Spain held the III Meeting of Heads of Financial Market Infrastructures in digital format, from June 1 to 2, 2022. The objective of the meeting was to exchange experiences and discuss the most relevant developments for financial market infrastructures. On this occasion, the meeting included sessions on Central Bank Digital Currencies (CBDCs), cross-border payments, technological developments in payment systems, regulation and fast payment schemes; the meeting was aimed at managers and experts of payment systems or areas related to financial market infrastructures of the Central Banks Members of CEMLA.

The meeting was inaugurated by Dr. Juan Ayuso, General Director of Operations, Markets and Payment Systems at Banco de España, who highlighted the importance of the meeting for the digital transformation that is revolutionizing markets in general and in particular the world of payments.  Therefore, he commented that the agenda of the event is very stimulating and timely for the participants who are an integral part, involved and interested in extracting the lessons of the meeting.

Day 1

The keynote study of CBDC business and distribution models; CBDC studies are being conducted in many countries with various motivations, including financial inclusion, payment efficiency, monetary sovereignty, financial stability, among others. The establishment of objectives and principles for the design of a CBDC system: Uniformity of money, coexistence and complementarity of public and private money, interoperability, low cost to consumers, convenient and widely accepted, promotes innovation and efficiency, for a market designer, the above are constraints on the economy of the system. The CBDC system would be designed in such a way that balancesare always a direct liability of the central bank, widely accessible to individuals and companies, easily convertible at par with and into cash or bank deposits, without interest.

Analyzing relationships can be challenging because firms at each layer may have market power, contracting is imperfect, central banks may have a variety of tools to establish and manage the necessary vertical relationships such as: access restrictions, regulatory power, contracts, pricing schemes, etc., but the market presents limitations and challenges. Thedemand for CBDC will be endogenous to the choices of intermediaries, intermediaries have market power.

Electronic payment schemes are two-sided platforms with restrictions and challenges, the duality requires incentivizing the distribution/provision of services in two groups (households and merchants).  CBDCs will be a competitor to existing electronic means of payment, electronic payments have become a complex multi-sided market structure, and the current model of cash distribution might not be the right model for CBDC distribution because:  The CBDC system will have to maintain an electronic ledger, the central bank will have to make a decision on how the data is treated and how it interacts with the business models of intermediaries. Likewise, CDBCs can be a platform for cross-subsidies and applications, there are no electronic applications on top of the banknotes themselves. With cash, the price charged by the supplier (central bank) is the same for both sides and CBDC is likely to have significantly different fixed and variable costs.

Sesión 1: Central Bank Digital Currencies (CBDCs)

Session 1 commented that one of the key objectives of the Bank of Jamaica (BOJ) is to support digital transformation and facilitate every citizen's access to fast, secure and reliable digital retail payment mechanisms. Financial inclusion (access for all to financial services and products), is a critical factor in Jamaica's digital transformation. The BOJ contributes to this acting in its role as Technical Secretariat of the country's National Strategy for Financial Inclusion. The introduction of a CBDC also addresses other points of interest for the BOJ, including: greater efficiency for banks in relation to cash handling costs and courier cost for distribution; greaterefficiency in the BOJ's foreign exchange management process; providing a socially optimal mix of retail payment instruments and interoperability between existing retail electronic payment systems.

When issuing a CBDC, the BOJ sought to comply with its established security practices that include the generation, management, and use of cryptography as an essential component of CBDCs. The technology selected by the BOJ must fully comply with the Bank's requirements, including its ability to place the necessary cryptographic keys under the Bank's sphere of security control. That sphere of control extends to the entire lifecycle of digital currency in circulation, and it would also be necessary to maintain the issue of data privacy, as the solution should support the protection of personal identity through integrated encryption techniques, digital signatures, and multi-factor authentication.

Jamaica's CBDC solution uses traditional technology, not blockchain. BOJ took an agnostic and pragmatic approach to technology. This was evident from the combination of technology solutions including traditional, hybrid and blockchain technologies that were evaluated in the various phases of acquisition. Just because BOJ has chosen a non-blockchain solution doesn't mean we have any problems with blockchain technology, and there's a chance BOJ will use blockchain technology in other ways at some point in the future.

The Bank's system design avoids financial disintermediation as it employs a two-tier, tier 1 system that will "mint" and "issue" CBDCs to commercial banks just as we do now with cash, as well as with payment service providers and tier 2: Commercial banks and payment service providers, in turn, they will "distribute" CBDC to businesses or individuals through CBDC wallets. Individuals and businesses will "keep" their CBDC in a wallet offered by a wallet, vendor (DTI or authorized payment service providers providing an App Wallet) of their choice and "make purchases" or "receive payments" over the phone or through some other device such as a payment card.

The following group identified three types of "practical" applications observed at international level: (a) Wholesale payments (Europe, Singapore, Switzerland); (b) Instant payments (Bahamas, Jamaica, China, Sweden) and (c) Promotion of new business models (Brazil, Korea, Canada) with reduced transaction costs to: design, distribute, negotiate, and establish financial agreements with a degree of standardization and interoperability and tariffs of scalability and settlement.  The guidelines are:   the purchase of the Brazilian real, the BCB mission, the use and distribution through the payment system, the development of innovative models, programmable software, smart contracts, retail or n-line and, possibly, off-line, which does not accrue interest. This applies to the protection of legal certainty, data security and security, banking and the General Data Protection Law of Brazil, the prevention and fight against money laundering, the application of court orders to trace illicit transactions, interoperability and integration, cross-border transactions, and LTA Cyber resilience.

In another presentation, it was commented that innovations in payment methods for individuals and companies force Central Banks to adopt definitions such as the rapid advance of technologies in retail means of payment and international organizations to decide what role they will play in this area.  The decrease in the use of cash, the irruption of cryptocurrencies and the entry of BigTechs have marked a turning point, the non-exclusive ways to get involved are a) Regulate and b) Participate directly via CBDC issuance, and this last alternative presents important opportunities, risks and challenges.

CBDC is the digital form of fiat currency. CBDC is a digital version of the sovereign currency, created and issued (passively) by the country's monetary authority (WEF). CBDC is a term that is not yet well defined. It is used to refer to a number of concepts. However, most see it as a new form of central bank money (BIS, 2018).  The main non-cash payment methods are: Electronic Funds Transfers (EFT), Credit, Debit, Prepaid Cards and Checks. The National Survey on Cash Use (ENUPE) shows that Chile follows the global trend of declining use of cash for transactions. Cash usage drops from 90% to 60% between ENUPE 2015 and 2020. This trend has been exacerbated by the COVID-19 pandemic. In 2020, debit cards surpassed cash for the first time as the preferred means of payment by the population (65% ENUPE 2020).

The advance of the digitalization of transactions supported by the incorporation of new technologies and actors has been changing the way people pay. The issuance of a CBDC would help enhance the benefits of the aforementioned transformations, while mitigating the associated risks. In particular, a CBDC would contribute to achieving a competitive, innovative, integrated, inclusive and resilient payment system that protects people's information, although a CBDC is not intended to replace cash, it would provide a new payment method issued by the Central Bank. The issuance of a CBDC is a good alternative to face the challenges associated with the potential massification of so-called virtual currencies and in   terms of cross-border payments, a significant increase was observed in the last 10 years, consistent with the increase in migrants.

The path of exploration began with the observation of disruptive technologies that might require some form of monitoring.  The CBDC unit of account would be the Chilean peso and would have convertibility at par with coins and banknotes. The central bank would not have a direct relationship with users, it would use a two-tier structure; the Central Bank and the private sector perform the tasks they do best, a CBDC must coexist with current payment methods. It must be interoperable with service providers using CBDC and with traditional payment providers: in order to be adopted by users for their transactions, it must allow instant, firm, irrevocable and low-cost payments. Technological requirements cannot be a barrier to entry. CBDC should reduce the risks of disintermediation and financial stability, ensure the privacy of personal data, but allow the authority to track the transaction later. Similarly, itmust have a high level of cybersecurity and resilience to natural disasters.

Another panelist commented that financial inclusion is a key policy, and in some cases, financial inclusion is an explicit component of the central bank's mandate.  In other cases, this is an implicit objective, understood as part of the central bank's mandate to ensure efficient and secure payment systems and promote economic growth.  While access to payment services has grown in recent years in Latin America, the low-income population and those living in remote locations continue to face barriers to accessing and using digital retail payments, one of them being its cost. CBDC can secure the supply of public money to the population and ensure the adoption of digital payments, particularly when low profit potential limits the private sector, or when established oligopolies limit access.

In Peru, CBDC would not be the first experience with a payment instrument as a means of promoting financial inclusion. The private sector's development of electronic money was a first effort in this direction. In 2016, the fully interoperable platform of the Bim wallet, an application on the mobile, began operations, aplatform that connects the issuers of electronic money that entered this payment agreement as shareholders. However, there has been a very low participation in digital retail payments, being its main use for disbursements and collection of credits to groups of women in remote areas of cities.

The BCRP conducted a survey of electronic money issuers to identify the main barriers that are limiting the use of electronic money and thus seek solutions for its development.  The responses point to a lack of business model consolidation, lack of interoperability with issuers operating outside Bim and with deposit accounts, restrictions on cash-in and cash-out channels, lack of public awareness, and transactional costs for issuers whose customers use channels from other issuers. In contrast, bank-issued mobile wallets have been quickly successful in funneling low-value payments to bank customers and even attracting unbanked people with prepaid cards.

The Central Reserve Bank of Peru developed a Strategic Plan that presents a set of actions to overcome the main challenges for the Development of the National Payment System.   The above, mainly in two areas, with limited use and access to digital payments and restricted interoperability between the different payment systems that exist in the country.  The strategic plan considers as one of its actions to investigate the implementation of a CBDC as an instrument that could facilitate access to unbanked digital payments.  The Strategic Plan proposes actions on three fronts: strengthening regulation, modernization and development of new infrastructures and dissemination and coordination with the private sector to be all in line with the needs and possibilities of development of current infrastructures and regulation as well.  Likewise, technical assistance was carried out based on analyzing the different areas of work, such as the review of the problems of the National Payment System, consultations and interviews were carried out to know the different opinions of the payment system, its limitations and the payment practices of the people; possible payment governance structures were reviewed.  digital, CBDC emission experiences, among other topics.

Session 2

Session two analyzed the issue of perspectives on cross-border payments in Latin America, taking into account that the proper functioning of payments is key for any economy since the world order is increasingly globalized and digitized. Therefore, it is necessary that payments are efficient in terms of costand time.  Central banks play an important role in improving payments and there can be no talk of improving cross-border payments without the support that central banks have been developing since October 2020 in this area. TheG20 approved a roadmap to improve cross-border payments, developed by the FSB in coordination with the CPMI and other relevant international organizations and standard-setting bodies, and seeks to address challenges that are characteristic of cross-border payments: high costs, low speed, limited access and insufficient transparency. This roadmap comprises the elements of a globally coordinated response in the form of a set of 19 core components (BB), where greater public-private sector joint work could improve cross-border payments and supports a comprehensive approach to address the underlying frictions identified.

Public authorities have an important role to play, working with the private sector to seize opportunities and address challenges and frictions in cross-border payments to achieve together public policy objectives and measurable targets. CPMI's final report "Improving Access to Payment Systems for Cross-Border Payments: Best Practices for Self-Assessments" could benefit cross-border payments by addressing four key frictions: long transaction chains, high financing costs, weak competition, and legacy technology.  It may also entail risks that may adversely affect cross-border payments or the smooth functioning of national payment systems if not properly addressed.

The self-assessment framework for holistically assessing the benefits, risks and barriers of direct access expansion is defined in the following steps: identification of the main objectives and determination of the scope of the self-assessment; assessment of the benefits of extending direct access to payment systems; assessment of the potential barriers and risks of extending direct access to payment systems; and development of conclusions (what to do).

CPMI's final report "Extending and Adequating the Payment System Operating Hours for Cross-Border Payments" could benefit cross-border payments by addressing four key frictions: long transaction chains, high financing costs, weak competition, and legacy technology, but it may also entail risks that may adversely affect cross-border payments or the smooth functioning of domestic payment systems.  It could speed up cross-border payments, improve liquidity management, reduce settlement risk and improve the performance of complementary payment systems that can be used for cross-border payments.  However, it cannot alone address the speed or other challenges affecting cross-border payments, particularly given the diverse characteristics and needs of end-users.

The Bank of Spain, together with the ECB and the rest of the Eurosystem national central banks of the euro area, operate several regional financial market infrastructures that ensure the flow of payments, securities and collateral across Europe. TARGET services function as a regional system for PSPs and various infrastructures in different countries.

As operators of payment infrastructures, central banks have traditionally provided services designed primarily to settle transactions between national participants in their local currency. Central banks often evaluate how to modernize systems or improve payment processes.  Considerations are also needed on how to address the challenges associated with cross-border and cross-currency payments.

The next panelist commented that each country should conduct its own analysis on cross-border payments and its own application regarding such payments.  Cross-border payments are mainly channelled through correspondent banks, with high costs, low speed, limited access and insufficient transparency. Improving the efficiency of cross-border payments is an important goal for the region's economic agenda. By simplifying intermediation chains, LAC countries could improve remittance flows and e-commerce and promote capital market integration.

New specialist players have disrupted the cross-border payments landscape and increased competition. Some of the emerging models bring efficiencies to end users. However, they are not widely used, some require regulatory adjustments and development of local payment systems. The digital adoption, financial inclusion and mobile penetration brought by the pandemic will help accelerate this change.

Innovations in back-end cross-border payment arrangements could bring efficiency gains and reduce transaction costs. Building new payment systems or expanding access to existing ones can reduce transaction chains and preserve financial stability. Digital money, such as crypto assets and stablecoins, has promoted peer-to-peer transactions. In this model, CBDC could improve the efficiency of cross-border payments.

Inefficiencies in cross-border payment systems have led to the rapid development of the crypto-asset market globally. An unregulated development of such a market brings risks to the international financial system, including money laundering and illegal transactions. It also brings risks to end users, often with little awareness of the characteristics of these digital assets. A coordinated effort across countries should be implemented to design an adequate regulatory and supervisory framework to preserve the integrity of the system and avoid the risks associated with the illegal use of crypto.

Improving cross-border payments requires a high degree of coordination between actors and jurisdictions. Central banks have an important role to play in supporting the requirements of the cross-border payments market: improving existing payment infrastructures and arrangements and implementing new ones. New technologies and approaches can accelerate operational improvements to existing payment infrastructures to address current frictions in cross-border payments, to expand direct or indirect access of domestic and foreign players to RTGS systems, to the implementation and adequacy of the payment system's operating hours by: (i) gradually increasing operating hours; ii) include non-operational days or, iii) extension to full operation 24/7 and  conectar fast payment systems between countries, for which standards and protocols are key.

The integration of CBDC systems through international platforms could be a complement to achieve more efficient cross-border payments with access to 24/7 cross-border payments, as well as greater security.   Similarly, to settle transactions in central bank money to reduce settlement risk and gain fund efficiency, ensuring the availability of legal tender in each country in the transaction.

Central banks can solve coordination problems and work with the private sector to provide interoperability. However, a clear definition of CBDC policy objectives and a comparison with other solutions is required. The design options will depend on the needs of each country (wholesale vs. retail), challenges and design elements of CBDCs, in case part of the solution for cross-border payments can be achieved through CBDC agreements, design characteristics must be taken into account to achieve a good level of efficiency.

A third panelist focused his presentation on the role of central banks on the issue of cross-border payments. It is an issue to which a solution is still being sought and the purpose should be to lower the cost of such payments, whether retail or high value. In 2014, a group of central bankers developed guidelines for the successful integration of Regional Financial Infrastructures and tried to concentrate different experiences around the world to achieve a kind of guide for regions that want to interconnect their payment systems, for this, political agreements are required, and central banks have a lot to say about it.

An important point is the demand of consumers and the participants themselves and regional payments to make them cost-effective and thus, the growth or expansion of existing intra and extra-regional MFIs is required. The working scheme consists of national, regional and global payment systems and at the same time different lessons including market knowledge. As well as using existing payment systems supported by the same platform, incorporating new functionalities to make the interconnection of existing platforms. Another lesson are the standards where it is that all stakeholders are under the same regional treaty, then standards were defined on payment systems, standards on management and measurement of systemic risk, among others and thus, the system of interconnection of payment system arises.  Other lessons refer to planning consisting of a homogeneous legal base, a technological infrastructure for payments in the countries of the region, creating operational conditions and implementing cooperative surveillance for payment systems.  Finally, it is the people who include the project where the different players are included, another factor is the cultural issue because you have to talk to reach agreements. After lessons were indicated and by way of conclusion it was pointed out that it is the duty of central banks to create the regulatory and market infrastructure conditions to promote the efficiency and democratization of cross-border payments.

Session 3

Session 3 analyzed the regulatory implications of technological developments in payment systems in Latin America and the Caribbean.  With the rapid growth of payment fintechs, there are complementary payment service providers that are not regulated in several countries.  For the above, it was discussed how regulation should not slow down the technology applied to payment systems, but should contribute to maintaining stability in the payment system. The challenges of regulation, optimization of regulation and surveillance in the face of technological developments will be analyzed.

As the Central Bank continues to advance technological   developments in the payments landscape, the ultimate goals are to ensure financial inclusion for all residents, ensuring equal access to digital fiat currency and, by extension, access to payment services. Expedite payments quickly and securely with built-in consumer protection features, reduce overall costs, where possible, without competing directly with traditional banking institutions. Also, strengthen and promote collaboration between the public and private sectors for the overall improvement of payment services and develop the necessary regulations to support a secure payments infrastructure while helping to level the playing field for large, small and medium-sized enterprises when it comes to digital payments.

Technological developments and advancements are outpacing the ability to enact appropriate legislation to ensure maximum consumer protection.  Overtime, consumers and some businesses have created a pathway for the transfer of funds without the criteria and requirements set out in the financial framework.  While technological advances in the payments landscape provide greater service opportunities, this also exposes the consumer and merchants to slightly higher risks. The need for more effective due diligence in AML/CFT monitoring and transaction reporting is increasing and indeed requires a new skill set. The Central Bank and the government must work hand in hand in creating regulations and legislations that create a balanced operating environment for all institutions operating within this landscape.

Another panelist commented that there should be a level of conditions, a proportional prudential regulation, according to activities (i.e., same risks, same regulation); greater flexibility with payment institutions, including issuers of electronic money; peer-to-peer lending (SEP); and direct lending (SCD).  In the same way, more legal certainty for Payment Fintechs, promotes the entry of new players in the retail payments market, regulation, and supervision as a way to guarantee the security and adequacy of these services to end users.

Finally, it was commented that the Central Bank is obliged to supervise the operations of payment systems in general, Interbank Payment Systems in accordance with the Financial Institutions Law and the transfer of funds by electronic means, including the transmission of money or the remittance business.  It is also responsible for the general administration of laws, the supervision of concessionaires and the supervision of payment systems.  It establishes the specific categories of persons to apply to the Bank for registration as Issuers of electronic money.

Key regulatory challenges relate to the ability to monitor, useappropriate infrastructure, prevent the developmentof Assets and Terrorist Financing, Understanding technology and monitoring Consumer protection.

Addressing regulatory challenges requires: developing a modern, flexible and comprehensive, activity-based and risk-focused Payment Systems Bill, educating the public, connecting fintech to the regulated system, collaborating with regulators to reduce gaps, providinga robust technological and communication infrastructure,  robust, reliable and improved, promover the principles of security, efficiency and legal certainty to protect users / consumers (domestic), continuous moneroeo of technological developments, among others.

Session 4

Session 4 dealt with innovations in financial market infrastructures for the promotion of fast payments. In the development of the vision of the payment ecosystem in Mexico, it has been sought to know what are the bases that the ecosystem should consider in the future and using three fundamental elements.  The first is the settlement system for the convergence of participants and various systems in the financial ecosystem, it is also considered that an integrated payment and financial services structure should be generated to provide services to both participants and users of the financial system and the payment system must generate the basis for innovation. It considers that there must be an equitable regulatory framework, continuous services installed must be provided to meet the growing demand for countries and promote the implementation of standardized processes for both risk management and operation per se.

The vision of payments is that everyone can have access in an easy and secure way and that everyone can send and receive digital payments that must be immediate, at low cost and must have full availability always seeking to ensure security and transparency in each of the transactions and clear responsibilities must be defined for all participants. With this vision, the central bank has a very important role to promote the development of payments in the country. The central bank has the functions of maintaining the purchasing power of the currency, issuing banknotes and coins, ensuring the proper functioning of payment systems and ensuring the healthy development of the financial system.  Also, several principles are considered in the payments ecosystem, among them: the same regulation must be applied, interoperability and neutrality must be natural. If it considers a high operational continuity, adequate consumer protection must be provided, and adequate cybersecurity and cyber resilience management must be maintained.

The next panelist commented that payment systems have become one of the primary functions of central banks because of all the systemic importance they have in the case of fast payments in the topic of innovations in financial market infrastructures.  The Central Bank shall have as its main objective the normal functioning of internal and external payments and the   normal functioning of payment and securities settlement systems, especially those which are fundamental to the efficiency and stability of the financial system. Likewise, it will dictate the technical norms that will define the entry, participation, suspension and exclusion of the participants and administrators of the payment and securities settlement systems through treaties, regulations, and instructions.

The next panelist referred to recent innovations in his institution and commentedon how the central bank has contributed through the regulatory framework and the main challenges they have faced. By constitutional mandate there is the law of the Central Bank and the Law of Financial Services in which it is recognized that it is the one that regulates the System of National Pages and also the issue of surveillance so that the payment system is reliable and fluid that must be maintained so that it is guaranteed by the central bank.

The process in the construction of the payment infrastructure that has been on par with a development of the regulatory part ensuring that everyone has the connection to the payment system that has allowed more participants from banking entities as well as non-banks. In this way, the central bank ensures that payments are secure and reliable. In the second stage the interoperability of all instruments is considered, the incorporation of the mobile wallet itself has been developed, which has had very important results and has achieved that in places where there is no access to the issue of banking people can have this type of service.

In a third stage there is the integration of non-banking actors, there is great participation of savings and credit cooperatives, non-profit financial institutions. It has also been possible to articulate all kinds of services   with important developments in low-value payments and has allowed interoperating and connecting with the clearing house of banks. The private part and that has been made viable through the regulations and in this way an integration has been achieved for the benefit of the people. A fourth phase is the interoperability of all channels of immediate payments, private banking has developed this innovation and the central bank has promoted a legal framework with very important results, such as 24/7 transfers and various innovations with significant results.

Finally, the last panelist of the meeting highlighted the main trends worldwide and specifically for Latin America about payment methods. Globally, digital payments have increased significantly, in middle- and high-income countries by up to 158%, driven by pandemic issues. In the case of Latin America, digital payments have grown by 61%, from 37 billion to 59 billion.

Central banks must consider in their policy as managers and regulators of means of payment and even of the processors of it: 1) modernization of payment platforms in each country 2) to be able to interact with other payment systems worldwide under a single standard, 3) digital wallets that belong to the private initiative and that as a result of the pandemic have had a lot  growth and are associated with the issue of standardization and interoperability, these axes converge in one  that must have the monetary utility or the utility of each country from  the 4)  regulatory framework, must work on  a regulatory framework that promotes the use or implementation of means of payment according to the basis of technology,  to facilitate the implementation of payment methods without neglecting control and security schemes and on all customer or user protection schemes.  The tools currently available to facilitate payment systems are cell phones, mobile wallets, and ATMs.