Central bank Digital Currencies (CBDCs) are the digital form of a country’s fiat currency that is also a claim on the central bank. They are issued by central banks, whose role is to support financial services for a nation’s government and its commercial-banking system, set monetary policy, and issue currency. CBDCs have the potential to enhance the efficiency of cross-border payments, as long as countries work together.
CBDCs are not yet widely available, but several countries are exploring or testing them. For example, China has launched a pilot program for its digital yuan, which allows users to make payments through mobile apps or smart cards. The Bahamas has also issued its own CBDC, called the Sand Dollar, which can be used for online and offline transactions. Other countries, such as Sweden, Japan, and Canada, are conducting research or experiments on CBDCs, and Nigeria in 2022 launched the E-Naira CBDC systems.
Cross-border payments are currently slow, costly, and opaque. They involve multiple intermediaries, such as correspondent banks, payment service providers, and clearing houses, each with their own fees, regulations, and risks. CBDCs could offer a faster, cheaper, and more transparent alternative for transferring money across borders, by reducing the number of intermediaries and simplifying the payment process.
Tekedia Mini-MBA edition 14 (June 3 – Sept 2, 2024) begins registrations; get massive discounts with early registration here.
Tekedia AI in Business Masterclass opens registrations here.
Join Tekedia Capital Syndicate and invest in Africa’s finest startups here.
However, CBDCs also pose significant challenges and risks for cross-border payments. For example, CBDCs could increase currency substitution and capital flight in countries with weak macroeconomic fundamentals or unstable exchange rates. CBDCs could also create spillover effects on monetary policy transmission and financial stability in other jurisdictions. Moreover, CBDCs could raise legal, regulatory, and operational issues related to cross-border coordination, interoperability, and compliance.
However, CBDCs also pose some challenges and risks that need to be carefully addressed. Some of these are:
They could affect the profitability and role of commercial banks, by reducing their deposits and intermediation functions.
They could raise privacy and security concerns, by exposing users’ data and transactions to cyberattacks or surveillance.
They could create legal and regulatory uncertainties, by requiring new frameworks and standards for CBDC issuance and use.
They could have unintended consequences for the global financial system, by affecting exchange rates, capital flows, and monetary sovereignty.
Therefore, the introduction of CBDCs requires careful design and coordination among central banks and other stakeholders. The benefits and costs of CBDCs depend on various factors, such as the type of CBDC (wholesale or retail), the degree of anonymity (full or partial), the technology platform (centralized or decentralized), and the interoperability (domestic or international). The optimal design of CBDCs may vary depending on the specific needs and circumstances of each country.
Therefore, to achieve the potential benefits of CBDCs for cross-border payments while preserving financial stability, further exploration of design choices and their macro-financial implications is essential. Moreover, international cooperation and collaboration are key to ensure that CBDCs are compatible with common standards and can interoperate with existing payment infrastructures. Several initiatives are already underway to test and experiment with cross-border CBDC arrangements, such as the Multiple CBDC Bridge project by the Bank for International Settlements (BIS) along with Thailand, Hong Kong, China and the UAE, or the Project Dunbar by the central banks of Australia, Singapore, Malaysia, and Africa.
CBDCs have the potential to transform global payments by offering a more efficient, cost-effective, and transparent way of transferring money across borders. However, CBDCs also pose significant challenges and risks that require careful analysis and international coordination. As more countries explore or launch their own CBDCs in the near future, it is crucial to ensure that they are designed and implemented in a way that supports global financial stability and inclusion.