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A paper from the Payments Innovation Alliance explores how central bank digital currencies (CBDCs) could streamline cross-border payments and make it easier for businesses to send money around the world. The research was released at the World Economic Forum, where one of the authors also spoke about their findings in person.

Current Systems and the New Initiatives

The current system for cross-border payments is slow, expensive, and opaque. The new initiative by the IMF and World Bank to develop a global payments system using blockchain technology has the potential to revolutionize the way we make cross-border payments. However, there are challenges that need to be addressed before this can become a reality. First is the challenge of interoperability among central bank digital currencies. For example, if China adopts Bitcoin as its national currency and India adopts Ethereum as its national currency, how would these two currencies work together? Second, another key question is what should happen when one country’s digital currency becomes dominant in international trade? If China dominates Ethereum in trade transactions, then it could manipulate the value of Ethereum to benefit China’s economy.

Interoperability Among CBDCs – A Necessity

In a world where cross-border payments are commonplace, the need for interoperability among central bank digital currencies (CBDCs) is evident. Interoperability would allow for the easy exchange of value between different CBDCs, reducing friction and costs associated with current cross-border payment systems. However, there are also challenges that need to be addressed before CBDCs can achieve interoperability, such as ensuring that all CBDCs use the same standards and protocols, specifically when it relates to energy.

Legal Framework for Transfers Across Jurisdictions

In order to facilitate transfers of central bank digital currencies (CBDCs) across jurisdictions, it is necessary to have a clear and robust legal framework in place. Without such a framework, there would be legal uncertainty surrounding using CBDCs for cross-border payments. The benefits of having a well-defined legal framework for CBDC transfers are numerous: it would provide clarity for market participants, reduce the risk of disputes, and promote the efficiency of cross-border payments.

Commercial Banks as Gateways

Commercial banks could act as gateways between central bank digital currencies (CBDCs) and cross-border payments systems. This would allow for the interoperability of CBDCs and facilitate cross-border payments. However, there are benefits and challenges to this approach. One challenge is that a certain amount of conversion will be required between central bank digital currencies and commercial bank deposits in order to process transactions on both sides. A benefit is that commercial banks may offer greater security than other potential intermediaries such as non-bank financial institutions or cryptocurrencies, reducing settlement risk. 

A second challenge is scalability; commercial banks have limited capacity to process large volumes of transactions at high speeds due to their legacy infrastructure.

Summing up

In conclusion, central bank digital currencies have the potential to facilitate cross-border payments and enhance interoperability among payment systems. However, there are also challenges that need to be addressed, such as ensuring security and protecting user privacy. The wide variety of technical solutions being explored presents a challenge for market participants in terms of understanding which solutions offer the best value proposition. The private sector is playing an important role in supporting cross-border payments and will continue to do so as this market evolves.


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