Are CBDCs the solution for cross-border payments?

by Phil Mochan
making a payment on phone

Share this post

Phil Mochan from Nomos Digital examines how cross-border payments is closely intertwined with cross-border liquidity and the challenges this poses for implementing CBDCs.

With over 100 central banks exploring the use of central bank digital currencies (CBDCs), there is considerable hope that this new form of money will resolve the issues of cross-border payments.

With the US dollar used in 42% of all cross-border payments, and the euro in 38%, it is clear that a digital version of these currencies are essential to making CBDCs meaningful in this space.

While the design of any potential digital dollar or pound are very much undecided, the vision for the digital euro, planned for 2026, is for a retail-only CBDC with a maximum balance of €3,000 and the account-user intended to be anonymous, just like when using dealing with physical cash.

However, details on how this might be implemented still needs to be worked out, such as:

  • The on-boarding of merchants;
  • The provisioning of merchant accounts;
  • The payment mechanism;
  • The payment scheme rules;
  • The merchant rulebook;
  • Consumer rights;
  • The interface to domestic payment systems; and
  • Dealing with non-domestic participants (or policing their exclusion).

If we optimistically assume that the major currencies will roll out digital versions by 2030, we might examine their impact on cross-border payments (XBPs), although we can note that these initial versions are all retail being only 4% of the XBP market.

According to , liquidity makes up 55-60% of the costs of XBPs because of the following:

  • Fragmentation of capital across hundreds of thousands of Nostros accounts;
  • Lack of competition in foreign exchange (FX) due to the fixed bilateral nature of correspondent banking networks; and
  • The cost of managing settlement risks in commercial bank money.

Although, CBDCs do resolve the settlement issue, it also increases the level of fragmentation. The FX liquidity issue will need a new competitive market infrastructure or somehow be interfaced into the existing fragmented and rather uncompetitive FX marketplace using correspondents. It will be interesting to see how this might be regulated and implemented given the entrenched interests of both national regulators and correspondent banks.

Connected with liquidity is the issue of bilateral settlement. The results of the current pilots suggest that bilateral settlement has operational, regulatory and legal challenges. From the CBDC teams trialling bilateral (or trilateral) settlement models the experience suggests that a multilateral settlement solution is required (which doesn’t exist).

The Bank for International Settlements (BIS) published a paper in January 2020 setting out the theoretical models for such a system ­– so we could see implementation in the early 2030s if there is agreement on who does it.

Currently about 50% of XBPs are delivered within one hour, according to Swift. Speeding things up is driven by factors such as the opening hours of central bank real-time gross settlement systems (RTGS).

Presumably CBDCs that are run by central banks will use the same operations teams as for the RTGS. If there is a shift in operations though to 24/7, 365 days a year, this will inevitably require change to the oversight model which works on the end of day reporting principle rather than continuous reporting.

Anti-money laundering and sanctions screening, constituting 20-25% of costs, is mandatory for all XBPs, but not for domestic payments. Given that CBDCs are created for domestic use (and the European Central Bank is even proposing anonymity for account holders) it is obvious that the data architectures are quite incompatible.

The Amplus paper from a team at Deutsche Bundesbank (DBB) sets out a potential solution, but it is likely to take at least a decade to be meaningfully implemented.

It is self-evident that the slow pace and limited scope of CBDC deployments in the major currencies, combined with the current absence of supporting global financial market infrastructures and the potential conflict with entrenched regulatory and correspondent bank interests, is likely to severely reduce the impact of CBDCs in resolving the issues of cross-border payments for at least a decade.

Even when implemented, it will only partially resolve the challenges around liquidity.

A resolution of XBP issues is likely to happen much faster than the timescales foreseen for CBDCs.   Stablecoins will compete with CBDCs, but the challenges for such digital private money, despite their early market entry, will remain similar to it – to make a meaningful impact it will require both adoption and new infrastructure.

True transformation of XBPs will likely come from using existing technology platforms with new workflows to minimise the transition costs and increase the adoption rate by banks. Solutions which conflict with the interests of the correspondent banks are highly unlikely to gain much traction.

The establishment of a cross-market liquidity platform with wholesale transaction capability that enhances the profitability of the incumbent correspondent banks is a more likely first step, and we might see the first live services from about 2024.

The future of cross-border payments and cross-border liquidity are closely intertwined so we should look to new private financial market infrastructures entering the market in the coming years that resolve these issues.

By the mid-2030s we might expect to see the emergence of a global ‘internet for banks’ that supports all forms of money including existing electronic money, the dominant private stablecoins and all forms of CBDCs. Aside from improving XBPs, this will undoubtedly transform the nature of bank liquidity from the ‘internal, follow-the-sun’ model to that of an ‘external 24/7 market’ model.

For the large banks this will be their opportunity to grow significantly in size (by more than 10 times potentially), adjusting their models to being macro-credit allocators, and thereby eliminating all but the most differentiated and focused niche banks.

In conclusion, CBDC’s are too immature to have an impact on cross border payments for the foreseeable future. Improvements in XBP’s and liquidity will arise from new financial market infrastructures that leverage existing tech and relationships. As in other sectors, digitalisation will lead to global supremacy of the few.

Phil Mochan is founder and CEO at Nomos Digital.

More To Explore


Are you a member of The Payments Association?

Member benefits include free tickets, discounts to more tickets, elevated brand visibility and more. Sign in to book tickets and find out more.


Log in to access complimentary passes or discounts and access exclusive content as part of your membership. An auto-login link will be sent directly to your email.

Having trouble signing?

We use an auto-login link to ensure optimum security for your members hub. Simply enter your professional work e-mail address into the input area and you’ll receive a link to directly access your account.

First things first

Have you set up your Member account yet? If not, click here to do so.

Still not receiving your auto-login link?

Instead of using passwords, we e-mail you a link to log in to the site. This allows us to automatically verify you and apply member benefits based on your e-mail domain name.

Please click the button below which relates to the issue you’re having.

I didn't receive an e-mail

Tip: Check your spam

Sometimes our e-mails end up in spam. Make sure to check your spam folder for e-mails from The Payments Association

Tip: Check “other” tabs

Most modern e-mail clients now separate e-mails into different tabs. For example, Outlook has an “Other” tab, and Gmail has tabs for different types of e-mails, such as promotional.

Tip: Click the link within 60 minutes

For security reasons the link will expire after 60 minutes. Try submitting the login form again and wait a few seconds for the e-mail to arrive.

Tip: Only click once

The link will only work one time – once it’s been clicked, the link won’t log you in again. Instead, you’ll need to go back to the login screen and generate a new link.

Tip: Delete old login e-mails

Make sure you’re clicking the link on the most recent e-mail that’s been sent to you. We recommend deleting the e-mail once you’ve clicked the link.

Tip: Check your security policies

Some security systems will automatically click on links in e-mails to check for phishing, malware, viruses and other malicious threats. If these have been clicked, it won’t work when you try to click on the link.

Need to change your e-mail address?

For security reasons, e-mail address changes can only be complete by your Member Engagement Manager. Please contact the team directly for further help.

Still got a question?