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Payments Trends 2021 - A new roadmap for cross-border payments

Part one of our five part 2021 themes series

11 February 2021

There has been a renewed focus on the payments sector and its regulation. COVID-19 and its impact on spending habits and the Wirecard scandal are two of the contributing factors. But what’s next? We explore five themes likely to drive regulatory change for payments, as well as shape the enforcement policies of global regulators over the next 12 months. In part one we look at cross boarder payments.

A new roadmap for cross-border payments

2021 will bring renewed international efforts to address challenges and frictions in cross-border payments, which are still significantly slower, more expensive and less transparent than domestic payments. Correspondent banking (a key channel for cross-border payments) continues to decline, limiting access to cross-border payments despite the Financial Stability Board’s (FSB) work since 2015 to address this issue.

Frictions and challenges facing cross-border payments include:

  • fragmented data standards and lack of interoperability between jurisdictions;
  • practical challenges in meeting global anti money laundering/ counter terrorist financing and other regulatory requirements;
  • high transaction costs; and
  • different operating hours across time zones.

While improved efficiency of existing systems can reduce some of these frictions, the focus is increasingly shifting towards how new infrastructures such as global stablecoins and central bank digital currencies (CBDCs) could offer more radical solutions to these deep-seated issues. Both public and private sector innovation and cooperation, based on internationally agreed standards, will be key to success.

Recent international publications on cross-border payments, global stablecoins and CBDCs indicate how policy makers intend to address these challenges, both through short-term  steps to improve efficiency and in the longer term through considering the role global stablecoins and CBDCs could play in cross-border payments.

The FSB published its Stage 3 Roadmap for cross-border payments in October 2020, building on a CPMI Report to the G20 on the building blocks of a global roadmap for enhancing cross-border payments from July 2020. Alongside the Roadmap, the FSB also published high-level recommendations for regulation, supervision and oversight of “global stablecoin” arrangements in October 2020.

Also in October 2020, BIS and a group of several central banks published their Report on foundational principles and core features of CBDCs. As envisioned by the FSB Roadmap, we expect work on these issues to continue during 2021.

At a domestic level, we will see more economies experimenting with, and getting ever closer to wide-scale issuance of, CBDCs. In January 2021, it has already been confirmed that the People’s Bank of China’s pilot programme to test and promote its CBDC (the digital Renminbi) has been extended to Beijing and other cities, following large-scale trials in Shenzhen and Suzhou. While China has prohibited private crypto issuance and trading onshore, legislators are amending the law to establish digital Renminbi as legal tender, treading a cautious but steady path to country-wide adoption. In the US, a private organisation, named the Digital Dollar Project, published a whitepaper in May 2020 making a case for US lawmakers and public officials to support a US CBDC. The US Federal Reserve later acknowledged that it is actively investigating distributed ledger technologies and how they might be used to digitise the dollar. The Dubai Government is also exploring its first approved blockchain-based digital currency, EmCash, which is intended to be pegged to the value of the UAE dirham.

Diem, or the Facebook-associated stablecoin formerly known as Libra, is also anticipated to launch in 2021 once it has received Swiss regulatory approval. With several changes since its original June 2019 multicurrency-backed incarnation, it is expected initially to launch a single dollar-backed coin alongside other compliance enhancements made to satisfy regulatory concerns.

Diem would enter the market at a time when US banking regulators appear to be warming to stablecoins. The US Office of the Comptroller of the Currency “(OCC)” issued a 2020 interpretive letter affirming that OCC-regulated banks can provide digital asset custody services to customers, and a 2021 interpretive letter explicitly allowing the use of stablecoins to engage in and facilitate payment activities. The OCC also recently announced its first conditional granting of a national trust bank charter to the well-known digital asset custodian, Anchorage Trust Company. The national bank charter will make it easier for Anchorage to partner with banks and other financial institutions that want to provide customers with stablecoin custody services.

Legislative regimes for stablecoins and other cryptoassets are also being developed internationally, including in the UK, as outlined under an HM Treasury consultation published in January 2021 and in Hong Kong, as outlined in a consultation launched in November 2020.

In September 2020, the European Commission published its Digital Finance Package, which builds on its EU Fintech Action Plan published in 2018. The Digital Finance Package introduced the EU’s Digital Finance Strategy and a renewed strategy for modern and safe retail payments. Crucially, it also introduced legislative proposals for:

  • a Markets in Cryptoassets Regulation, to facilitate their use while mitigating risks for investors and financial stability (MiCA - see our take here); and
  • a regulatory framework on digital operational resilience (DORA) (see our take here).

There have also been some significant recent developments in relation to crypto regulation across the Middle East. In the United Arab Emirates (UAE), the Securities and Commodities Authority has recently published new cryptoasset regulations (which Clifford Chance are pleased to have assisted in the drafting of), setting out the onshore licensing regime for offering cryptoassets, including participating in initial coin and security token offerings and providing custody services and other financial activities in relation to cryptoassets. The regime covers stored value stablecoins and other digital tokens across the payments and investment space.

The UAE’s financial free zones, the Abu Dhabi Global Market and Dubai International Financial Centre, have also issued comprehensive updated regulatory frameworks governing money services businesses which will also pick up Financial Action Task Force or FATF standards for virtual currency providers and regulate stablecoins and other digital assets relating to payments.