CBDC and Cross Border Payments, More Opportunities than Threats?

cross border payments

The international dimension of CBDCs in facilitating cross border payments will be significant, as central banks intensify their research on digital currencies.

In October 2020, the G20 endorsed an ambitious 'Roadmap' to enhance cross-border payments around the world and last year in November the G20 made cross-border payments a priority but, as many experts pointed out, most CBDC projects still have a domestic focus.

That said, exciting developments are on the horizon.

As underlined by Shehnaz Ahmed, Senior Resident Fellow and Lead at Vidhi*, “CBDCs could be used for cross border payments in different ways. For instance, interoperability between CBDC systems may be examined to reduce existing frictions to facilitate crossborder and cross currency payments”.

Broadly, such interoperability may be achieved through several ways for different CBDC systems and arrangements to interact with one another.

So, will CBDCs help to ease cross border payments? The answer is yes. That said, exciting developments are on the horizon. 

Models Being Looked At: The Project Dumbar and Project mBridge

At a basic technical level, interoperability between separate CBDC systems may be possible through adherence to commonly agreed international standards on different aspects of cross border payments.

The Bank of England, for example, in its discussion paper for retail CBDCs, has unveiled the possibility of central banks working together to link domestic CBDCs to ensure fast and efficient cross-border payments.

This model figures inter-linking CBDC systems through either a common technical interface or a common clearing mechanism.

A case study is how the Monetary Authority of Singapore and the Bank of Canada, under the Project Jasper-Ubin, successfully linked up their experimental wholesale CBDC networks by synchronizing payment actions without the need for a trusted third party or a common platform.

However, the Bank for International Settlements (BIS) pointed out two other possible models for achieving interoperability: linking multiple CBDC systems (interlinked CBDC systems) and integrating multiple CBDCs in a single system.

Speaking about moving beyond interlinked CBDC systems, the BIS is also examining the possibility of multi currency crossborder payment system involving CBDCs. This will involve creation of new multilateral payment platforms based on a “single set of rules, a single technical system, and a single set of participants”, said BIS.

This is the case of Project Dunbar. Under this project the BIS Innovation Hub, central banks of Australia, Malaysia, Singapore and South Africa are collaborating to develop prototype shared platforms for cross-border transactions using multiple CBDCs.

“These multi-CBDC platforms will allow financial institutions to transact directly with each other in the digital currencies issued by participating central banks, eliminating the need for intermediaries and cutting the time and cost of transactions.” 

Project mBridge Involves Private Sector Too

Last year Beijing joined Hong Kong, Thailand and the United Arab Emirates (UAE), along with the Bank of International Settlements (BIS), to explore cross-border payments for digital currencies.

The network called Multiple Central Bank Digital Currency Bridge, also referred as MBridge, is a cross-border payments project launched by the Hong Kong Monetary Authority and Bank of Thailand in 2019. 

As Project Dunbar, mBridge broadens the geographic and diversity of currencies and use cases, with the goal to build a multi CBDC platform for international payments.

According to BIS, The platform was able to complete international transfers and foreign exchange operations in seconds, as opposed to the several days normally required for any transaction to be completed using the existing network of commercial banks and operate in a 24/7 basis. The cost of such operations to users can also be reduced by up to half.

Moreover, to continue building and testing the trial platform, the project team has collaborated extensively with the private sector - like financial institutions as Goldman Sachs, HSBC, Société Générale and China’s six biggest state-owned banks - to identify business use cases. 

Risks Involved and Future Challenges 

The design and regulations of CBDC will have to ensure that such new cross-border payment solutions cannot circumvent capital flow controls.

Designing CBDCs to deal with existing frictions in the cross-border payments space will require international collaboration at a large scale, but “achieving such interoperability is easier said than done”, said Shehnaz Ahmed. “Different legal and regulatory frameworks across different jurisdictions present a significant obstacle to central banks to facilitate cross-border payments”, she added.

Plus, CBDC is still in its infancy, and there are still open issues as well as commonly identified obstacles. While central banks continue to explore opportunities presented by digital currencies for enhancing efficiency of cross-border payments, “it is also important to remain cautious of the risks of such transactions, especially its impact on monetary policy, financial stability and existing banking channels”, concluded Shehnaz.

As underlined by Alexander Bechtel, Head of Digital Assets and Currencies Strategy, Deutsche Bank, “if you can use CBDCs only in one country or only in a particular region (for example the EU), it may solve certain issues, but it probably won’t solve real cross-border payments needs”.

In short words, without a concrete cross border dialogue among institutions, a real cross border payment system will just be partially useful, and it all depends on collaboration between the central banks, a goal that is traditionally hard to achieve.

So where does this leave the industry? Basically, at the beginning of a long journey, but one that promises more opportunities than threats.