The Payment Association’s Project Cross-border hosted a forum in partnership with EPA Asia and IIF to explore the challenges a CBDC could pose and what technology could do to disrupt international transactions.

Last week, the Bank of England governor, Andrew Bailey, casted doubt over the need for a digital pound at a Treasury Select Committee hearing on financial stability.

Baily questioned whether a “wholesale digital central bank currency (CBDC) is needed because we’ve got a wholesale central bank money settlement system”.

According to market research led by Kevin McAdam, leader of The Payment Association’s Project Cross Border team, international transactions need to be cheaper, faster, more transparent and inclusive. But there also needs to be more regulatory harmonisation across jurisdictions.

Could the implementation of CBDCs solve this issue? CBDCs will have a bigger role in wholesale banks’ cross-border payments over the next decade, though challenges remain in its adoption across jurisdictions.

That’s the broad message from a panel of experts who debated the issue at the 10th Global Payments Forum in October last year.

Key cross-border challenges cited in the study, presented at the 10th Global Payments Forum:

• National restrictions and competitive advantages for domestic players are an obstacle in cross-border payments.
• There is friction in processes, and transaction costs are high.
• Rules vary across jurisdictions, and compliance can be complex, with differing anti-money laundering requirements.
• There should be greater collaboration with international standards organisations.

They described a CBDC as digital money that is a liability of the central bank. It differs from commercial bank money, which is a liability of the bank of account. It is also real money, uses technology and can mirror the economic plans of a country.

The panel moderator, Shirish Wadivkar, MD, global head at Wholesale Payments and Trade Strategy, noted a surge of interest in CBDCs, with web searches on the topic in October 2022 doubling compared to January 2022. Meanwhile, cryptocurrency searches have dropped to a quarter of the mark reached at the start of the year, according to Google Trends.

Some panel members noted that CBDCs have the potential to boost efficiency and transparency, while reducing costs and risk, with faster settlements of transactions. CBDCs could help connect real-time payments across different jurisdictions, one panellist said. A situation where several countries operate CBDCs and have a shared ledger, or shared platform, was seen as particularly beneficial.

“In terms of CBDC, there is more focus on wholesale. We see an opportunity for cross-border payments, where we see a huge amount of inefficiency,” explains Joshua Daniel, global R&D lead at Coin Systems ONYX by JPMorgan, one of the panellist.

Chance to leapfrog?

The technology could be especially useful for developing countries, which might not have the speedy-payment infrastructure of some other nations. Investment in CBDCs could enable systems to be created that can be used for the next 40 years, according to Anthony Ralphs, lead product manager at Ripple, another panellist.

“The technology is less centralised and more distributed. And that opens up a huge opportunity because it means new participants can come in at a lower cost and start participating,” says Ralphs.

“The UK has pretty good infrastructure, fairly robust electricity, telecoms etc., but some of the countries around the world that we’re talking to don’t have that, or they have remote villages or locations where the cost of participation in the ecosystem is prohibitive, so they don’t participate. CBDCs provide a leapfrog opportunity.”

CBDCs could also benefit groups of countries within a trading corridor that have an interest in improving cross-border payments, it was said.

The panel highlighted that many functions and benefits of CBDCs in commercial transactions can be achieved without its use in developed economies that already operate real-time settlements.
As a result, it is likely there will be more jurisdiction issues on CBDC and lot of the drivers behind that are political rather than a business need.

Still, developed countries with slow legacy technology or infrastructure could benefit from the digital currency. All in all, CBDCs are likely to be adopted at a different pace in countries around the world, according to the panel.

Retail needs

However, one of the biggest challenges CBDCs face is so-called interoperability, or the ease of working with systems in other countries or jurisdictions. For this to happen, there needs to be a harmonisation of compliance rules, policies and procedures to prevent friction and delays with transactions, the panel said.

Retail cross-border payments, specifically, face issues around identity, transparency and availability, one panellist noted.

To encourage CBDC adoption, central banks would have to make it easy and consistent to use, like physical cash or credit and debit cards. And it would also require people to have the technology to access it.

So the question remains, are CBDC the way forward for cross-border payments? Or is Bailey right to cast doubt on this?