Tuesday, 3 October 2023

Central banks work to link multiple CBDCs across borders

5 min read

By Foo Boon Ping

Several central banks are in different stages of implementing fiat digital currencies. Beyond domestic and retail applications, national central bank digital currencies (CBDC) can also be linked to facilitate cross-border and wholesale payments, potentially transforming the international payments and financial landscape.

Central bank digital currency (CBDC) is already a reality. The Central Bank of the Bahamas has the distinction of launching the world’s first CBDC, the Sand Dollar, in October 2020. China is perhaps most advanced in the preparation for the retail application of its CBDC, the digital RMB.

In a five-month trial from April to August 2020, the People’s Bank of China deposited $1.6 million (RMB 10 million) into 113,300 consumer digital wallets and 8,859 corporate digital wallets for residents and businesses in Shenzhen, Suzhou, and Xiong’an. These processed a total of $162 million (RMB 1.1 billion) through 3.1 million transactions during the period. In addition, the central bank distributed $6.2 million (RMB 40 million) of digital RMB red packets over the Lunar New Year holiday period in February 2021. It has further plans to trial the digital RMB at the 2022 Beijing WinterOlympic Games where foreign athletes and visitors will have a chance to use it.

In Europe, Sweden’s “e-krona” pilot appears to be most advanced. The country has arguably the lowest cash usage in the world. In 2020, it registered under 10% of cash payments. The central bank, Sveriges Riksbank, conducted a pilot with Accenture in February 2020 on R3’s Corda blockchain platform to develop a technical solution for an e-krona that can work as a complement to cash.

While CBDC trials and implementations so far focused on domestic and mainly retail use, they have the potential to enhance the efficiency of cross-border payments without the need for a global unit of account. The Bank for International Settlements (BIS) believes that there is potential for multi-CBDC (mCBDC) arrangements to improve the interaction of CBDCs across borders. These will facilitate the interoperability among national CBDCs by improving compatibility, inter-linking or integrating national payment systems.

BIS envisioned that mCBDC arrangements could start from a clean slate to tackle frictions in the current correspondent banking system such as differences in the opening hours of payment systems, varying communication standards and a lack of transparency around exchange rates or fees. It categorised the technical options as (i) enhanced compatibility with technical and regulatory standards and overlapping participation; (ii) interlinking through shared technical interfaces or by use of a centralised or decentralised clearing mechanism; and (iii) integration into a single system – multiple CBDCs can be run on a single platform (mCBDC Bridge).

In this regard, the four central banks of China, Hong Kong, Thailand, and United Arab Emirates have been working with the BIS Innovation Hub Centre in Hong Kong on the mCBDC Bridge project to evaluate the feasibility of linking CBDCs for cross-border fund transfers, international trade settlement and capital market transactions which could benefit the whole financial ecosystem.

In a survey of 46 central banks, BIS found that the option of interlinking CBDCs appears to be gaining traction. While the finding is preliminary with a majority of respondents undecided, it nevertheless demonstrated the recognition, at least among the decided, that the future of the global financial system rests on the ability to seamlessly convert and transfer between national currencies, and their openness to explore new solutions to overcome the inadequacies of the current approach.

Keywords: CBDC, Fiat Digital Currency, Digital Assets, Retail Payments, Cross-Border Payments, Online Banking, Cashless
Institution: Central Bank Of The Bahamas, People’s Bank Of China, Sveriges Riksbank, The Bank For International Settlements
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