The world’s largest financial institutions, the World Bank, the International Monetary Fund (IMF), and the Bank of International Settlements (BIS), have raised a motion for the development of central bank digital currencies (CBDCs).
In a joint report, the institutions stated that the primary purpose of the G20 was to boost cross-border payments in a manner that would meet all the key challenges. As such, cross-border payments needed to be faster, cheaper, transparent, and more inclusive to all economies. To achieve such benefits, CBDCs needed to come into play to facilitate cross-border transactions.
CBDC Development is in Early Stages
In the report, the financial firms stated that no major jurisdiction has officially launched a CBDC. According to the financial firms, this delay resulted from unresolved matters in policy and design. Furthermore, most countries that have researched CBDCs have only considered domestic issuance and use cases.
The World Bank, IMF, and BIS believe that for central banks to achieve domestic issuance of CBDC, economic and practical observation will play a critical role. This will help to determine whether cross-border use will be achieved.
The report highlights some of the challenges that CBDCs will face in cross-border adoption. These challenges mainly include regulatory frameworks for cross-border payments, Anti-Money Laundering, and Combating Financing Terrorism (AML/CFT) adoption and payments systems.
How Major Challenges Could Be Tackled
The report also looks at practical cases in which CBDCs could be adopted for cross-border payments and how challenges that may hinder this adoption could be tackled. The first way to solve these challenges is to set up a practical infrastructure to boost the use of CBDCs. The other factor that needs to be assessed is how cross-border flows could be achieved and risks to financial stability, among others.
The banks also assess the practicality of a CBDC use case through different scenarios. The first scenario is if the CBDC is adopted for retail use within or outside a jurisdiction with coordination between central banks. If these central banks allow anonymous payment settlements, they could also permit CBDC access to foreign banks. However, most central banks do not allow anonymous transactions.
The cross-border use of CBDCs could be influenced by various factors such as the technology and regulatory design of CBDCs.
In the second scenario, the World Bank, IMF and BIS assume some degree of interoperability between central banks to facilitate cross-border payments. Such an arrangement would require several central banks to work together and achieve similar technological, market and legal frameworks. To achieve interoperability would mean that the central banks have to work together to develop one infrastructure.
The report also looks into several use cases for CBDCs. The first is retail use, where CBDCs could be used for payments in businesses and other daily transactions. The other is wholesale use, where CBDCs could be used in the same way as central bank reserve and settlement accounts.
CBDCs could also facilitate cross-border payments, but this use case depends on the designs on the CBDCs. Hence, facilitating cross-border use will require collaboration from different central banks to share similar sentiments on design and hence reduce capital flow volatility, substitution risk, and contagion risk.
The report also mentions that CBDCs are the key to boosting the efficiency of cross-border payments. It also mentions that the only way this will be achieved is if Central banks take the “Hippocratic Oath for CBDC Design” and ensure CBDC’s will “do no harm” as stipulated in the Group of Central Banks (2020).
If CBDCs achieve cross-border use, they will give financial institutions a chance to start with a “clean slate” and solve the current issue prohibiting cross-border payments. CBDCs will boost efficiency by making transactions cheaper, reducing the time used to process payments, and allowing transactions to be settled around the clock by eliminating a time mismatch.
When concluding the report, these institutions noted that more analysis and research into CBDC design needed to be done to achieve interoperability. Furthermore, CBDC adoption also depended on how they could be integrated into non-CBDC infrastructures.
cross-border payments could also further be assessed by looking into using a global stablecoin and the feasibility of multilateral infrastructures that will facilitate cross-border payments.