Today the Bank for International Settlements (BIS) published a paper on cross border central bank digital currency (CBDC) in conjunction with the IMF and World Bank. It urges collaboration in designing CBDCs to enable cross border payments.
“If CBDCs are not designed with the international dimension in mind, fragmentation of CBDC systems similar to the existing fragmentation of payment systems is possible,” says the paper. Hence CBDC presents a “clean slate” opportunity.
A G20 agenda item is to improve cross border payments which are slow, expensive, inefficient and opaque because of intermediaries. They also suffer from a mismatch in operating hours. If central bank digital currencies interoperate, all of these issues could be addressed.
Much of the paper covered previous ground, such as different designs for multi-CBDC (m-CBDC) payments and a past survey of central bank thinking on CBDC for cross border payments. This publication pulls these together but also starts to explore some of the risks of cross border CBDC usage.
So what are the side effects of using CBDC for cross border payments? If frictions are removed, there should be greater international flows. More remittances, more e-commerce, more cross border stock and other asset purchases should happen.
This might not favor countries that actively control their exchange rates. These jurisdictions may be forced to adopt flexible exchange rates and move towards open capital accounts.
More cross border payments mean more globalization which can result in a greater risk of contagion. For economies that suffer from high inflation and volatile exchange rates, citizens might choose to adopt a foreign currency, and the switch could happen extremely quickly. According to the IMF, already in more than 18% of countries globally, foreign currency deposits represent more than 50% of the total. Rapid currency substitution will make it even harder for a country to address domestic issues.
The paper raises concerns that there may be a widening gap between countries that can adapt quickly to changing circumstances and those that don’t have the means to do so.
It also raises the prospect of changes in the make-up of currencies used for international transactions. One scenario is that the dollar or euro could become more dominant. Another is the potential for change, although greater use of China’s RMB was not mentioned. “The advent of CBDCs may accelerate changes to the configuration of reserve currencies, but may not change it dramatically over a short period,” says the paper.
The paper also outlined existing and ongoing collaborations for cross border CBDC. These include:
- Project Jasper – Ubin – between Canada and Singapore in 2019
- Project Jura – the recent trial between France and Switzerland
- Project Inthanon – LionRock – between Thailand and Hong Kong
- Project mCBDC Bridge – between Thailand, Hong Kong, China and the UAE
- Project Dunbar – a MAS is exploring a shared DLT for multi-CBDC wholesale payments
- Project Aber – between the UAE and Saudi Arabia