Will digital currencies destroy correspondent banking?
The likely use of central bank digital currency for payments, in addition to stablecoins and altcoins, would suggest that reports of the demise of the correspondent banking model may be premature.
The ability of digital currencies to transfer funds directly from one party to another on a peer-to-peer basis should remove the traditional role of the correspondent bank as both the provider of a service and an enabler of payments in the settlement process.
According to a BNY Mellon report ‘Innovation in payments – a spotlight on digital currencies’ published earlier this year, however, not every counterparty will be a direct participant of a P2P system, and the correspondent banking model is more likely to pivot to banks becoming a gateway to a P2P system.
The outlook is further muddied by the different models proposed by the Bank for International Settlements for setting up wholesale central bank digital currencies (CBDCs).
While the model known as the compatible CBDC system closely resembles today's cross-border payment procedure (whereby banks must agree on messaging standards, cryptographic techniques and data requirements, for example) the multi-CBDC system would essentially mean the creation of a new multilateral payment platform.