Markets Wired

As Prepared for Delivery 

Thank you very much for the opportunity to be here today, and a particular thank you to our hosts, John Williams, Fabiola Ravazzolo, and their team at the Federal Reserve Bank of New York. This conference is a timely and welcome addition to the range of engagements the New York Fed hosts. Foreign exchange markets are critical to so much economic activity, from hedging to trade financing, and they are evolving rapidly. We have come a long way from the days when spot markets were dominant, and the New York Fed has been a positive force at every step along the way. 

Let me state at the outset that these are unusual circumstances in which to be giving a policy speech. I serve as Treasury’s Assistant Secretary for International Finance and was nominated for this role by President Biden. Given the results of the U.S. presidential election, I’ll be ending my service in just a couple of months’ time. But the U.S. cross-border payments agenda is an area where there is significant and broad-based agreement across the public and private sectors, and across both political parties. We need a modern system of payments, guided by strong U.S. international financial leadership. As such, the U.S. cross-border payments agenda has many elements where actions across administrations can build towards shared goals. 

One of these shared goals is to improve the efficiency and safety of the infrastructure that underlies international commerce. Another is to maintain and strengthen the conditions that lead to the important global roles of the U.S. financial sector and the U.S. dollar, with the resulting benefits these bring for governance, our national security, financial stability, and the global economy. We all also aim to have high standards with respect to privacy and the enforcement of anti-money laundering and countering the financing of terrorism (AML/CFT) requirements. 

We are pursuing these goals across three lines of effort. First, we are directly encouraging and participating in responsible payments innovation and experimentation. Second, we are coordinating with the private sector and foreign partners to better align legal, regulatory, and supervisory frameworks, which are the foundations of a more efficient and effective payments system. And third, we are supporting strong international standards and high-quality compliance regimes, which ensure the stability of payments and of the broader financial system.  I believe the United States must lead when it comes to cross-border payments to maximize the chances that any new systems with significant international usage reach the quality and standards we prefer when it comes to governance and support for financial stability. My comments today will review these efforts in turn, relate them to the role of the dollar, highlight some areas where we need to be cautious, and suggest some next steps for moving forward.

THE PROBLEM OF CROSS-BORDER PAYMENTS

Cross-border payments are essential to global business and finance. But in my experience as a policymaker, there is a widely held complaint that cross-border payments are slow, costly, unreliable, or unsafe. I have heard this from large multinational corporations and representatives of small business, in advanced economies, emerging markets, and low-income countries alike.

Wholesale payments are typically the fastest and least expensive mode of payment, and over 90% of wholesale payments utilizing the SWIFT system typically reach the beneficiary bank within an hour.  However, customers experience a high degree of variation across regions.  In Africa, more than 20 percent of even wholesale payments take more than a day to reach the account of the end customer. In Asia-Pacific and the Middle East, this figure is greater than 10 percent.[1] At the retail level, too, cross-border transfers remain slow and costly. The average cost of a $200 remittance in 2024 was 6.4 percent, including roughly 2 percent for foreign exchange conversion and roughly 4 percent for service fees. In many parts of the world, 40% of remittances take more than one day to reach the beneficiary.^[2]

Some of this cost and delay is deliberately built into the system as a feature, not a bug. For example, some is due to batching and delayed settlement in legacy payment arrangements, which may help mitigate credit, legal, and liquidity risk. And, separately, some delay may result from faithful compliance with AML/CFT requirements, which is of course critically important. 
But there’s clearly room to make cross-border payments faster, cheaper, more accessible, and more transparent, without exacerbating risk or neglecting compliance. And doing so would bring great benefits. It would improve the functioning and competitiveness of a broader set of trade corridors and, with key partner countries, reinforce diversification efforts like the “friendshoring” Secretary Yellen has prescribed. It would reduce barriers for retail transfers like remittances and cross-border payments to small businesses, enabling new business models and fostering entrepreneurship. And making the dollar-oriented system faster and more efficient would strengthen our hand in upholding U.S. values like privacy and in bolstering both our national security and that of our allies. 

PARTICIPATION IN RESPONSIBLE PAYMENTS INNOVATION AND EXPERIMENTATION

Let me start with our efforts to foster responsible innovation and experimentation in payments technology.  The landscape is evolving, in part, from the integration of well-known tools, like application programming interfaces (APIs) and quick response (QR) codes, into existing payments infrastructure. Some innovations build on more recent technologies, like distributed ledgers, that could bring fundamental change to payment, clearing, and settlement. 

Around the world, public authorities and private firms have started applying this range of innovations to their domestic payment systems. As of March 2024, 89 percent of Brazil’s population had initiated a payment through its Pix real-time payment system. Pix is free to individuals for most payments, and according to IMF data, the cost to merchants accepting a Pix payment is 85 percent less than accepting a credit card.^[3] Similarly, India’s Unified Payment Interface (UPI) is credited by the World Economic Forum with reducing payment fees to Indian consumers by more than $67 billion since its inception in 2016.^[4]In the United States, the private and public sectors have developed new solutions for domestic instant payments, some of which gave rise to new products that are able to reach households less likely to otherwise participate in the financial sector.^[5] 

U.S. policy seeks to maximize the chances that these kinds of technological innovations can also increase the safety and efficiency of cross-border payments. 

As one example, the United States is directly leading, participating in, or observing various experiments or new offerings of domestic and cross-border payment solutions. In 2023, following several years of exploration, the Federal Reserve launched FedNow, an instant payment infrastructure that allows businesses and individuals to send and receive domestic payments in real time through participating depository institutions. The Fed has also proposed extending operating hours for its other payment services, the Fedwire Funds Service and National Settlement Service. Together, and in combination with private-sector efforts like The Clearing House’s RTP Network among others, these developments bring the benefits of near round-the-clock payments and improved liquidity management for domestic payments.

Further, the Fed is contributing to international projects to improve cross-border payments. Together with six other central banks and over forty private sector firms, including several U.S. firms, the Fed is participating in Project Agorá, an initiative of the Bank for International Settlements to explore the integration of tokenized central bank and commercial bank money on the same platform. Last year, with the Monetary Authority of Singapore, the Fed concluded Project Cedar x Ubin+, an exploration of improvements to multi-currency wholesale cross-border payments on a bilateral and technology-neutral basis.

Finally, the Treasury and other agencies are exploring the possibility of enhancing bilateral payment system connectivity with select other jurisdictions. This might be achieved in multiple ways, including interconnecting fast payment systems or supporting the participation of foreign banks in domestic payment platforms. Improving connectivity in these ways requires the United States and its partners to develop a better understanding of each other’s payments technology and protocols, to formulate and agree on a governance system, and to take care to ensure that payments integrity programs and AML/CFT compliance controls in the partner countries meet international standards. 

Improvements in bilateral connectivity may not only offer economic benefits for American consumers and businesses, they may also offer the promise of greater adherence to global standards and shared national security gains. Enhancing connectivity with the U.S. system may offer significant commercial benefit for our partners, and that presents an opportunity for the United States to invite a deeper and more transparent commitment to shared policy goals, like combatting illicit finance.

Of course, even though I have only highlighted public sector activity so far, the United States government recognizes that the private sector has an essential role to play in improving cross-border payments. Regulated U.S. financial institutions are at the forefront of exploring global, “always on” real-time payments, clearing, and settlement, using a variety of technologies, and we wish to create a climate that ensures these institutions can remain at the frontier. Relatedly, we believe that policymakers should preserve optionality as to what form innovation takes. Governments should avoid picking winners and losers in payments technology.

Now, I should note, not all payments system experimentation is as responsible, cautious, and transparent as the efforts I just described. This is no small matter. If a poorly designed payments system were widely adopted, it would not only fail to resolve cross-border payments challenges, it could do significant harm to international financial stability and economic security. Policymakers and industry participants should take that risk seriously and be very skeptical of any project that seeks to wipe the slate clean, or avoid safeguards in the current system, or omit, elide, or avoid strong and transparent governance and oversight. One reason the United States must continue to lead on innovation and governance for cross-border payments is precisely to avoid the proliferation of opaque systems that may introduce unacceptable macro-financial, illicit finance, and operational risks into the global financial system.

IMPROVING LEGAL, REGULATORY, AND SUPERVISORY FRAMEWORKS

Next, I would like to share how the United States is engaging to improve legal, regulatory, and supervisory frameworks in support of responsible innovation, reduced frictions in payments, and greater competition and transparency. 

Internationally, one line of U.S. effort since 2020 has been to provide intensive support for the G20’s Roadmap to Enhance Cross-border Payments. As part of this Roadmap, Treasury has been encouraging legal and regulatory changes in foreign jurisdictions, including so that more financial data, not less, can move freely across borders. Localization and other restrictions on cross-border data sharing, if implemented beyond narrow national security considerations, can restrict firms from working with the best data or compliance service providers, if those providers happen to be in a foreign country. That harms U.S. business. And, such restrictions can also become major obstacles to the highest quality risk management and most efficient cross-border payment technologies. 

Domestically, Treasury and the Financial Stability Oversight Council have repeatedly recommended that Congress develop a clear regulatory framework for stablecoins, a technology often described as showing promise in facilitating cross-border transactions.^[6],^[7] But stablecoins are structurally vulnerable to runs, which can pose risks to consumers and investors, and to financial stability. Analogous to how, in pegged currency regimes, foreign reserves back the value of the exchange rate, most stablecoin issuers require dollar-denominated liquid assets to peg their stablecoin to the dollar. Doubts about the quality of those backing reserves, or about the redeemability of the stablecoin at par, can lead to runs on the issuer. This is not theoretical. In the last three years, we’ve seen prominent stablecoins break their peg during periods of market stress. And in 2022, we saw the complete collapse of the Terra/Luna arrangement, which had a totally inadequate mechanism for trying to stabilize the value of its token. 

Last year, the Financial Stability Board published high-level recommendations for the oversight, supervision, and regulation of broadly adopted stablecoins, consistent with the key features we have advocated in a U.S. stablecoins framework.^[8] Treasury has also advocated for common-sense reforms of its tools and authorities to address the increasing use of stablecoins by a variety of illicit actors, including to evade sanctions.

Finally, Treasury has also called, as Under Secretary Liang did in a speech last month, for a federal payments framework.^[9]The current framework for the regulation of non-bank and e-money payment service providers has requirements that vary from state to state. This raises risks for the integrity of payment systems and public trust in money. It also raises barriers to entry, limiting competition and innovation. A federal payments framework would help maintain the global leadership of U.S. financial firms. 

SUPPORTING STRONG INTERNATIONAL STANDARDS AND COMPLIANCE

Finally, we must navigate these technological innovations, and changing laws and regulations, without abandoning our commitment to strong international standards and compliance regimes. Standards and compliance regimes limit economic risk and help protect citizens around the world from fraud and other illicit finance threats.

I’ve used the phrase “standards” several times now. But in plain English, what do I mean? Standards can specify requirements for how payments technology must work, including elements related to the underlying programming code and messaging used to send and process payment requests. Standards can set the rules to determine who is allowed to participate in a payments system and when, and what users must do to manage risk and to make sure payments can continue to flow in the face of certain threats or disruptions. Operational standards might describe who has responsibility for oversight of various parts of the system and what pieces of information must be transparent and disclosed. Standards can define precisely what it means for a payment to be settled. 

Domestically, high quality, clear standards promote a safe and level playing field for firms, and invite stakeholder trust in their critical infrastructure. Internationally, standards can facilitate the spread of best practices and interoperability among systems—making it possible for the system in one country to “speak” to the system in another, both technically and legally.

One example of these standards is the Principles for Financial Market Infrastructures (PFMI), which provide guidance for managing the credit, collateral, and liquidity risks of payment system participants, as well as consideration of the operational risks than arise when system upgrades are rolled out.  Another example is Financial Action Task Force (FATF) standards, which specify steps that countries should implement in order to combat money laundering, terrorist financing, and proliferation financing. They are critical in our efforts to prevent or trace financial activity involving fraudsters, drug traffickers, terrorists, and other bad actors. Currently, the United States is actively involved in the revision of FATF Recommendation 16 on payment transparency to reflect evolutions in the payments landscape over the last two decades and ensure the standard remains technologically neutral. A final example is the standards Committee on Payments and Market Infrastructures (CPMI), which recently published a harmonized international Organization for Standardization (ISO) 20022 messaging standard to reduce complications in cross-border payments created when different countries use different messaging formats.

These payment system standards are typically technology neutral. They apply just as well to new systems as they do to old ones. As we enter a period when legacy and innovative payment solutions coexist, standards will facilitate interoperability, not only across jurisdictions but also between diverse technologies. And accordingly, we will continue to encourage the application of these existing standards to new systems. 

But we have to remain vigilant. Innovation can often give rise to new, implicit standards, long before the appropriate standard-setting organizations have reacted or caught up to the new technology. Therefore, the United States is and should continue to be an active and vocal participant in international standard-setting processes, ensuring that the responsible institutions keep pace with change. Public authorities, including Treasury and the Federal Reserve, represent the United States in groups like the FATF and CPMI.  But we also rely on private sector firms to develop and advance standards, including those that apply internationally. For example, the American National Standards Institute, which is the U.S. member of the ISO, convenes experts across the private and public sectors, including Treasury, as well as academia. These and similar bodies are setting standards for critical and emerging technologies, and U.S. engagement is essential.

Treasury also supports the good work of the IMF and World Bank to provide payment system technical assistance and capacity development. This work helps embed and put into practice high quality technical, legal, and regulatory standards around the world. In the process, it helps deliver real benefits for the functioning of many domestic and cross-border payment systems in emerging market and developing economies.

Conversely, we should be wary of innovations that fail to meet international standards for safety, and soundness. For example, the United States has pressed international organizations to end any involvement with payment initiatives that are specifically designed to undermine or skirt global AML/CFT rules, sanctions, and other illicit finance controls. And we will discourage participation in payment systems that are not subject to high-quality international standards and supervision.  

POSITIVE EXTERNALITIES, CURRENCY CHOICE, AND THE INTERNATIONAL ROLE OF THE DOLLAR

How does all of this relate to the role of the U.S. dollar? The fact that the dollar’s global usage far exceeds the U.S. share of global economic and financial activity reflects features that are mostly unrelated to payments. It more likely stems from the fact that the dollar is supported by a transparent and reliable legal system, an independent central bank, and a government committed to sound macroeconomic policies and a freely floating currency. Dollar dominance is also likely buoyed by the global importance of U.S. capital markets, which support open, deep, and liquid trades in dollar-denominated securities.^[10]

That said, we do not – and must not – take for granted the benefits of the dollar system.  And we should be appropriately humble with respect to our understanding of the demand for dollar use. After all, the fall of the pound and rise of the dollar roughly 100 years ago stands among the few observed shifts from one globally dominant currency to another. That’s not a lot of data points to use to test hypotheses.

So, while there is little evidence from recent history that payments technology is a driver of currency choice, we must still at least entertain the possibility that new, high-quality, and safe payments infrastructures that are based on, or compatible with, the U.S. dollar, would bolster the dollar’s important international role. 

To be clear, the United States has not sought to compel anyone to use the dollar in cross-border or foreign transactions. Rather, we believe that emerging cross-border payment arrangements should preserve currency choice, including the ability to use a vehicle currency in foreign exchange transactions. All else equal, this will help reduce the overall cost of cross-currency payments. And if we succeed in keeping the U.S. public and private sectors central to payments innovations, operating within a well-designed domestic and global legal and regulatory environment, and upholding high-quality global standards and compliance regimes, the continued dominant use of the dollar strikes me as both the likely outcome and one that is in the interests of Americans as well as our allies and partners around the world. 

To achieve that vision, the United States is seeking to advance payment rails innovation, implement sound regulatory frameworks internationally and at home, and promote international standards that improve safety and address illicit finance risks. We should step up our commitment to explore the potential benefits of tokenization solutions, pass strong and responsible domestic stablecoin legislation, and press international organizations to avoid supporting any payments innovations that could undermine existing, high-quality standards. And all together, these efforts can help maintain the continued primacy of the dollar and support the strength of the U.S. financial system, to the benefit of Americans and the world. 

The steps I’ve outlined above speak to core U.S. values and the need for sustained U.S. public and private sector engagement. The payments landscape is evolving in ways that have far reaching implications, from natural security to economic prosperity. The future of the financial system, global markets, and the U.S. and global economies demands our continued leadership. 

Thank you. 

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