Central bank digital currencies and international payments

This paper – drawing on interviews with twenty-two senior payments professionals – documents the business processes employed in the execution of international payments and discusses how international payments might be improved through the adoption of central bank digital currencies (CBDC). This was a substantial exercise resulting in a lengthy research paper. This executive summary presents the key insights.

The motivation for this research is the focus of the industry on reducing costs, increasing speed, widening access and improving transparency of cross-border payments. An April 2020 report of the Financial Stability Board for the G20 (FSB, 2020) identifies some of the issues that need to be addressed: “fragmented data standards or lack of interoperability; complexities in meeting compliance requirements, including for anti-money laundering and countering the financing of terrorism (AML/CFT), and data protection purposes; different operating hours across different time zones; and outdated legacy technology platforms”.

To many observers technology has developed to the point where an international payment, to any destination, can and should be as straightforward as sending an email. This perception is reinforced by the observation that instant global payments can be made already using cryptocurrencies such as Bitcoin. So, it should be easy to do the same using CBDC, the fiat equivalent of cryptocurrencies.

A July 2021 report by the BIS, the World Bank and the IMF to the G20 (BIS et al., 2021) discusses the technical aspects of this. They consider arrangements for direct exchange of CBDCs of different fiat currencies, referring to these multiple CBDC exchanges as mCBDC. They consider several possible forms and applications of mCBDC in international payments.

Our focus on business processes highlights a different question, not addressed by (BIS et al., 2021). What is the nature of the CBDC opportunity in international payments? Is it:

a) Enhancement: One of several current incremental technology developments, supporting gradual improvement in arrangements for making international payments, without fundamentally changing underlying business processes

OR

b) Transformation: An opportunity for fundamental redesign of the architecture of international payments, radically simplifying business processes so that international payments can be made as directly and efficiently as domestic payments?