BIS Report: CBDCs Can Cut Cross-Border Payments’ Friction Points

For central bank digital currencies to reach their full potential, banks must look beyond domestic use — and examine CBDCs’ risks and rewards for cross-border transactions.

That is one of the primary findings contained in new research from the Bank for International Settlements (BIS), which acts as an organization of the world’s central banks, which said key focal points should include interoperability and coordination between banks as they explore and deploy CBDCs.

The BIS research, “Central Bank Digital Currencies for Cross Border Payments: Report to the G20,” was done in conjunction with the International Monetary Group and the World Bank and is aimed at smoothing the many complexities of multi-jurisdictional regulation.

But in a world where cross-border payments are currently expensive, fragmented and complex when performed on incumbent banking networks, “one key difference between CBDCs and the efforts of improving the existing payments infrastructure is the opportunity to start with a ‘clean slate’,”  the report said, noting the fact that cross-border payments are important contributors to economic development across the globe.

Such interoperability would be achieved through “consistent standards” and “coordination of CBDC designs” and would avoid many of the problems inherent in today’s legacy payment infrastructure systems.

For example, the paper noted that “the length of correspondent banking transaction chains can range from just over one intermediary on average for cross-border payments on SWIFT to five or more intermediary banks for 20 percent of euro-denominated cross-border payments.”

Other CBDC advantages the paper highlighted include the notion that they  “could be preferable to alternative proposals” that involve the creation of private sector global stablecoins (Libra’s Diem is mentioned) that would create new units of accounts.

But, according to the BIS, even though CBDCs can boost the efficiency of cross-border payments, the key is to follow  the “Hippocratic Oath for CBDC design” and the pledge to “do no harm.”

Some Risks

As for the risks: The paper stated that cheaper and faster cross-border transactions, holding all else equal, might increase risks for runs on both domestic banking sectors and currencies.

“Currency substitution, as in runs away from a currency, could be rapid. For many emerging markets and developing countries, even at present, a run on the banking system is often effectively a run on the national currency as funds leave the country,” said the BIS.

It’s been well-documented that a significant number of central banks are examining the implications of CBDC, and China remains in the lead on their development and use.  Smaller nations, such as the Bahamas, have launched digital currencies for domestic use.

The U.S., of course, is also mulling a CBDC.  In an interview with PYMNTS CEO Karen Webster, Jim Cunha, senior vice president of secure payments and FinTech at the Boston Fed, said that CBDCs can be used to help unbanked and underbanked individuals and families (33 million individuals in the U.S. presently fit into those populations, with 7 million classified as unbanked) gain access to traditional financial services.

The Models

The paper posits several models of how CBDCs might be harnessed to improve cross-border payments.

In one example, interoperability could be achieved through adherence to “common international standards” and would in this case resemble traditional cross-border payment setups. The standards would touch on message formats, data requirements and user interfaces.

“Aligned legal, regulatory and supervisory standards can simplify KYC and transaction monitoring processes,” according to the BIS.

In another example, there would be “additional interlinkages” effected through shared technical interfaces or common clearing mechanisms, bolstered by contractual agreements.

A third scenario, the BIS stated, would require “cooperation of a higher magnitude among central banks.”  In that case, a single CBDC would operate across jurisdictions. “The concept builds on having a single set of rules, a single technical system and a single set of participants. This deeper integration allows for potentially more operational functionality and efficiency, but increases the governance and control hurdles,” the paper stated.

“Cheaper and more accessible remittances will benefit senders and recipients, help to buffer economic shocks, and stimulate growth,” according to the BIS.