Central banks must make critical choices on the access of non-residents and foreign financial institutions to central bank digital currencies (CBDCs), as well as ensuring multinational interoperability, to fully harness the potential for CBDCs to enhance cross-border payments, according to a new report.
In October 2020, the G20 endorsed a roadmap to improve cross-border payments, which suffer from a lack of speed, transparency and access, as well as high costs. As part of this initiative, the Bank for International Settlements' Committee on Payments and Market Infrastructures (CPMI), the BIS Innovation Hub, the IMF and the World Bank today published Options for access to and interoperability of CBDCs for cross-border payments, which highlights that CBDCs currently have a key benefit in being able to consider cross-border functionality already during the initial development phase.
However, this "clean slate" advantage has an expiry date. International cooperation and coordination are needed in the early stages of CBDC design. In addition, any system must be built with the flexibility to adapt both to a changing world and the different CBDC designs likely to be chosen by central banks.
"By the end of 2021, more than a quarter of central banks were developing or running CBDC pilots. To make sure that cross-border functionalities are considered in time, central banks across the globe must collaborate at an early stage. Only then can CBDCs have a significant impact on the costs, speed, access and transparency of cross-border payments," said Cecilia Skingsley, chair of the CPMI Future of Payments Working Group and First Deputy Governor of Sveriges Riksbank.
As central banks have varying motivations for exploring or developing CBDCs, they are likely to adopt different CBDC designs and cross-border arrangements. In this light, the report identifies and analyses different options for access to CBDCs and their interoperability that could improve cross-border payments, including how they can interconnect with non-CBDC payment arrangements.
The report assesses these options based on five criteria: do no harm, enhancing efficiency, increasing resilience, assuring coexistence and interoperability with non-CBDC systems, and enhancing financial inclusion.
There is no "one size fits all" model for access to and interoperability of CBDCs. Accordingly, the report serves as a tool for central banks to assess how to best leverage CBDCs to enhance cross-border payments in the context of their own objectives. Even jurisdictions not planning to issue a CBDC ought to be involved in this work as they will still be part of this new potential cross-border payments landscape.
Re-disseminated by The Asian Banker