Deacons
  May 26, 2021 - China

Interoperating Central Bank Digital Currencies – An Alternative to Cryptocurrencies as the Future of Cross-Border Payments?
  by James Tong

The Bank for International Settlements (BIS) recently discussed possible approaches to establishing an interoperating central bank digital currencies (CBDC) arrangement as the future of cross-border payments. Although not an “official” definition, CBDC generally refers to a new form of digital currency issued by a central bank, denominated in an existing unit of account operating as a store of value and a medium of exchange.

Given the inefficiencies, opacity and high costs involved in existing correspondent banking arrangements for settling cross-border payments and the rapid development of cryptocurrencies, central banks globally are moving towards adopting CBDCs that incorporate cross-border and cross-currency interoperability. The BIS elaborated on three possible CBDC system models, namely (i) compatible CBDC systems, (ii) interlinked CBDC systems and (iii) a single system for multi-CBDCs (m-CBDC). Despite the distinctions between how some of the systems are structured, an interoperating CBDC arrangement could lower operational costs for end users (such as costs incurred to sustain cross-border banking relations and compliance costs), promote efficiency by eliminating mismatch of opening times across time zones for cross-border clearing and settlement, and enhance transactional transparency in terms of FX rates, incoming fees and status of payment.

The development of a CBDC system that could work for cross-border transactions for tourism, e-commerce and remittances will, however, depend on international coordination between central banks and, where private distribution is involved, engagement of key private sector stakeholders. In particular, some proposed CBDC models may involve disintermediation which, if not carefully assessed, may affect the overall stability of the financial system and lead to financial uncertainty. Further, international coordination will be challenging in an era that seems to feature fragmentalism.

Notwithstanding the obstacles, progress is being made. For instance, the Central Bank of the Bahamas has already issued its own CBDC; and the BIS has been exploring m-CBDC systems through the m-CBDC Bridge initiative with the central banks of the People’s Republic of China (PRC), Hong Kong, Thailand and United Arab Emirates. Readers will of course also be aware that the People’s Bank of China has already commenced a number of CBDC pilot projects (officially called the “digital currency electronic payment”) across the country including in Shenzhen, Suzhou and Beijing.

 
 



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