As cross-border payments become a crucial part of global business operations, compliance measures are in focus for companies and governments alike. However, as compliance frameworks vary greatly across countries, it’s highly difficult for financial institutions to navigate multiple sets of rules.
Central banks and regulators worldwide acknowledge the necessity of addressing this challenge and increasingly turn to blockchain technology in search of answers. The Bank for International Settlements (BIS), in particular, has recently launched Project Mandala in collaboration with central banks and regulators of ASEAN countries. The project is meant to streamline and automate compliance processes to turn cross-border payments into a smoother experience.
This is not the first initiative that BIS has introduced to address existing issues with international settlements. But here’s the big question: can projects like these really make a tangible difference for businesses? Let’s take a look.
Using CBDCs to Cross the Gap Between Economies: Project mBridge
Project mBridge is the initiative by BIS that received arguably the biggest amount of attention. Launched in 2021, the project seeks to use central bank digital currencies (CBDC) to support cross-border transactions in real time. The arrangement is meant to directly connect digital currencies of different jurisdictions within a unified technical infrastructure to allow international payments to be immediate, low-cost, safer and universally accessible.
This idea does offer several advantages in cross-border payments for the B2B sector compared to centralized payment systems. If central banks across different countries can successfully establish a jointly operated payment system, it would allow different CBDCs to be freely traded between banks and financial institutions. In other words, cross-border payments could be settled while bypassing the bureaucracy involved in moving funds across multiple banking systems.
It’s understandable why the promise can seem alluring to many, but, personally, I can’t help but feel like the progress made by BIS in this matter is on the slow side. The greatest tangible measure of success that mBridge has demonstrated to back itself up so far is a trial run that was conducted a year ago. In August through September 2022, $22 million worth of transactions were conducted between participating banks via the mBridge blockchain.
Since then, the project has once again become relatively silent on its progress, only occasionally making statements about onboarding new participants. It is still up in the air when full-scale deployment can take place.
Streamlining Regulatory Compliance: Project Mandala
Project Mandala is the most recent Proof-of-Concept launched by BIS to ease the process of regulatory compliance. The goal is to create a common protocol to streamline cross-border use cases, automate compliance procedures, as well as provide real-time transaction monitoring and greater transparency between different jurisdictions.
Considering that it only just launched, there’s not much known for certain about how Mandala is going to operate or what kind of impact it’s going to have on fintech companies specializing in cross-border payments. In the long run, developing and adopting standardized compliance protocols could foster collaboration and interoperability between fintech companies and traditional financial institutions.
In the nearest perspective, however, it will not change much for how businesses conduct their cross-border payments.
Alternative Solution: Employing Services of Fintech Companies to Facilitate Global Money Movement
To reiterate, the inconsistency in compliance methodologies across jurisdictions results in a complex patchwork of rules that increases the cost, time, and effort it takes for businesses to open accounts and conduct cross-border payments. And while the BIS and other parties across the world are working towards the development of better infrastructure and tools that can be used to address this challenge, it will be some time yet before any significant progress on this front can take place.
Meanwhile, the cross-border payments market continues to be dominated by correspondent banks connected via SWIFT, a system that often comes with high fees and sluggish settlement times of at least 5-10 days. Businesses across the world are in sore need of payment solutions that can improve B2B liquidity management and enable them to keep pace with the increasing transactional demands.
The way I see it, right now, they are better off relying on other options, such as fintech companies that can facilitate cross-border transactions on their behalf while employing alternative interfaces and rails. A more direct interaction between companies that sidesteps the involvement of third parties would allow for reduced transfer times and immediate availability of funds.
And if the chosen payment provider company has a robust KYC/KYB and compliance framework, conducting transactions through it would also serve the additional purpose of enhancing trust, which is a fundamental factor in international trade. Companies would no longer have to worry so much about inadvertently becoming part of illicit activities, such as fraud or money laundering schemes.
Following this path ensures that B2B operations can take place quickly as companies do not have to directly engage in lengthy and confusing bureaucratic processes centered around banks and crossing different jurisdictions. The fintech company is the one that shoulders handling these aspects in this case, which allows businesses to focus on conducting their operations in a seamless manner and without taking on greater risks.