The promise of crypto cross-border payments

One of the most compelling applications for Central Bank Digital Currencies (CBDCs) is their potential to simplify cross-border payments. In this blog we explore the limitations of the current cross-border payments model, and how CBDCs could radically simplify the global payment landscape.

The current financial model for cross-border currency payments is complex and expensive because each central bank runs its monetary system as a separate entity, like an island or a silo.  

All local commercial banks are connected to this island. They use it for carrying out clearing operations with each other and for trading assets on their behalf and for their customers.

Globally, there are about as many of these banking islands as there are currencies. If a bank wants to purchase another currency and does not have a subsidiary in the country, normally it uses an intermediary in that jurisdiction, known as a correspondent bank. This complexity adds more stages to the process, raises risks and potential settlement problems, and of course increases fees. According to the World Bank, the global average cost of sending $200 was 6.8% in the first quarter of 2020.

An international system for transferring CBDCs could simplify this system at one stroke. It would establish a common exchange ground, where local regulators would allow their banks and end-users to exchange assets directly, 24/7 and in real-time. This common ground would act as an agreed place where parties who want to transact can connect and carry out their business, subject to all the usual screening processes such as Anti-Money Laundering, Know Your Customer and other compliance requirements.

In the not-too-distant future central banks could cooperate so that CBDCs provide a rapid and secure system for cross-border payment, where common standards ensure its speed and efficacy.

And this new system could iron out inefficiencies in the current cross-currency payment set up. For example, when it comes to remittance transfers, consumers and businesses might benefit from improved interoperability among payments systems dealing in different currencies.

Of course, these are very early days and many issues need to be explored. In particular, policymakers are concerned by the potential implications for financial stability and monetary policy. 

For example, the creation of stablecoin tokens on the common exchange ground would not lead to additional money creation on the home “island”. However what impact would the use of a digital currency by non-residents of that currency area have on capital flows, exchange rates and on the monetary sovereignty of their home country?

These are all key questions that will have to be addressed in the design of an international settlement system for CBDCs. The political momentum for finding answers to these questions is building. The G20 has recognised CBDCs with an international dimension as a key building block for improving the cross-border payment system.

The technology is ready for prime time. The political will is there. It may only be a matter of time before the start of a cross-border payments revolution.

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Central Bank Digital Currency (CBDC): The Future of Money