Will CBDCs Help Ease Cross-Border Payments?

Ruchika Bhagat Oct 22, 2021

Introduction

CBDCs- central bank digital currencies, proving to be an opportunity for the monetary system, as it can help to create an open, secure, and competitive system that fosters innovation and serves the economy. CBDCs are the central bank's direct liabilities and are in the form of digital money denominated in the national unit of account. Digital currencies are gaining popularity by the day, and nations such as Ecuador, Tunisia, Senegal, Sweden, Estonia, China, Russia, Japan, Venezuela, and Israel have created or plan to introduce digital currencies.

To comprehend the full potential of central bank digital currencies, institutions must go beyond domestic use and evaluate advantages of CBDCs in cross-border transactions. It is one of the major conclusions of recent study from the Bank for International Settlements (BIS), an association of the world's central banks, integration and synchronization across banks is prominent as they explore and use CBDCs.

Facts across the Globe

According to reports, 81 nations, accounting for more than 90% of global GDP, are considering CBDCs. 14 nations, including China and South Korea have tested pilots, 16 countries are developing such currencies, and 32 countries are doing their research. The Bank of England is also planning a bitcoin trial programme in the near future.

Research work-

Central Banks are expanding their research and study into central bank digital currencies (CBDCs), as the international component of CBDCs in facilitating cross-border payments will become gradually more important. While most CBDC programmes are focused on the local market, several central banks are working to explore the use of CBDC to ease cross-border payments.

The G20 has prioritised improving cross-border payments, with CBDC emerging as an area of emphasis. As India prepares to take over the G20 presidency in 2023, this might be an excellent opportunity for India to lead the global conversation on CBDC and cross-border payments. Central bank digital currencies (CBDCs) have the potential to increase the efficiency of cross-border payments as long as governments contribute it in together.

The Concept-

A report states how CBDCs may improve cross-border payments and how actual initiatives are moving these ideas forward. Facilitating international payments with CBDCs may be accomplished at many levels of integration and collaboration, ranging from simple compliance with common standards to the development of international payment infrastructures. The research emphasises the relevance of CBDC inter-operability as well as the necessity for global coordination on macro-financial implications.

To date, no large jurisdiction has established a CBDC, and numerous design and policy issues remain unsolved. Furthermore, most of the CBDC research work is conducted by central banks, this research is exploratory in nature, examining cross-border consequences with the premise that CBDCs will become extensively utilised. Further, study of design choices and their macro-financial consequences is required to realise the potential advantages for public welfare while maintaining financial stability.

Current Pain Points-

Present-day difficulties due to the participation of several middlemen, cross-border payments are time-consuming and costly. In the first quarter of 2021, the global average cost of sending remittances (of $200) was 6.38 %. Cross-border financial transfers sometimes include time delays, during which counterparties are subject to credit and settlement risk. A typical foreign exchange transaction takes more than 2 days to complete. The Financial Stability Board (FSB) cites many friction points in the present cross-border payments system, including fragmented and trimmed data formats, complicated compliance processes, limited working hours, and obsolete technological platforms.

CBDC – the roadmap-

To address above issues, the FSB, in collaboration with the Committee on Payments and Market Infrastructure (CPMI), has developed a roadmap to achieve the G20 vision for improving cross-border payment efficiency, which includes an analysis of the role of CBDC in such payments.

CBDCs can be used for cross-border payments in a variety of ways. Interoperability across CBDC systems, for example, may be explored to eliminate present frictions and allow cross-border and cross-currency payments. In general, such interoperability may be achieved by allowing various CBDC systems and arrangements to communicate with one another in a variety of ways.

Models Being Considered-

Furthermore, the Bank for International Settlements (BIS), highlights two possible models for achieving interoperability:

· connecting several CBDC systems (interlinked CBDC systems)

· combining numerous CBDCs in a single system

These multi-CBDC platforms would enable financial institutions to interact directly with one another in digital currencies issued by participating central banks, removing the need for middlemen and reducing transaction time and cost. We have also observed that Digital currencies offer all of the inherent benefits of fiat currency, such as durability, portability, fungibility, and divisibility. It will be easily verifiable, safe, and traceable because it is digital. As a result, the current advantages of paper currency would be boosted.

Concluding Note: In the area of cross-border payments, India may lead by utilising the digital rupee, particularly in countries like Bhutan, Saudi Arabia, and Singapore, where NPCI has established digital payment arrangements. Real-time cross-border payments and settlements are likely achievable for retail CBDCs.