Why Central Bank Digital Currencies May Be the Next Disruptor in Payments

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    A brief guide to the global CBDC race and how it may transform the cross-border payments market.

    Market research data for central bank digital currencies CBDCs
    Ignacio Carballo

    Ignacio E. Carballo

    Director – Financial Inclusion and Alternative Finance Lead – APAC and LATAM

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    Over the last decade, the financial services industry has entered a new digital era. This process was dramatically accelerated by the Covid-19 pandemic and one of the key trends that it unleashed was a global race to develop what became known as the Central Bank Digital Currencies (CBDCs). Currently, over 90% of the world’s central banks are studying the possibility of issuing CBDCs, and 60% are already performing tests or proofs of concept.1

    Additionally, some of these financial institutions are striving to develop CBDC-based cross-border digital payment systems that could revolutionize the market for international payments.

    In part, this global CBDC race has been a response to the growth of the cryptocurrency industry and the disruptions it caused in private and public sectors globally. Faced with the increasing popularity of Bitcoins and other digital currencies worldwide, central banks in various countries decided it was time to counter what was ultimately a direct threat to their monopoly on issuing money.2 Unsurprisingly, in a world where financial digitalization has been advancing fast, they concluded that the most logical way to do so was to launch their own digital currencies.

    Other factors have contributed to fueling central banks’ interest in CBDCs, such as the growing demand for innovative digital payment solutions in retail, the decline in cash usage, and the soaring adoption of privately-issued digital assets (mostly stablecoins).

    An Explanation of CBDCs

    CBDCs are, essentially, digital currencies issued by central banks. Their value is tied to the official currency of the issuing country through legal guarantees created by local regulators. This underlying support system distinguishes CBDCs from other types of digital assets, such as floatable cryptocurrencies or stablecoins, which are “decentralized” and/or operated by the private sector.

    CBDCs, like all crypto digital assets, are what experts refer to as “programmable money”— a digital type of money whose automated behavior is defined by computer programs and digital systems. Unlike cryptocurrencies, however, they can also be used by central banks to advance their monetary and social policies. The foundational principles and core features of CBDCs were defined in 2020 in a report published by the Bank for International Settlements (BIS) and several other financial institutions.3 Since then, as PCMI has noted, it has become clear that CBDCs can appear in many forms, as central banks around the globe experiment with different approaches in their digital currency initiatives.

    Main characteristics of retail and wholesales CBDCs

    Cross-Border CBDCs

    Cross-border transactions have long been crucial for the development of various financial and economic activities involving individuals and companies from different countries. The problem is that these transactions have always been costly, slow, complex, and lacking transparency.

    For instance, according to JPMorgan, to process around US$24 trillion in wholesale cross-border transactions annually, global corporations pay over US$120 billion in fees, including the costs related to stranded liquidity and delayed settlements.4

    Several countries have seen the CBDC model to make cross-border payments faster, cheaper, and more transparent. Their financial authorities believe that, ultimately, the widespread adoption of cross-border CBDCs could have far-reaching positive implications for economic growth, financial inclusion, and global trade and development.

    It is true that the success of these initiatives requires time and substantial cross-country cooperation. Still, bilateral or multilateral CBDC projects that connect different digital currencies in a common technical infrastructure have the potential to significantly improve the current system for cross-border payments, making it more efficient and accessible. Below we break down some of the different CBDC trials/pilots that have recently occurred around the globe.

    Cross-border CBDCs projects around the world, including mBridge, Dunbar, Sela, Icebreaker, Mariana, Jura, Onyx, Rosalind, and more.

    According to the Atlantic Council, in the last few years at least 14 relevant cross-border CBDC projects were researched, piloted, or launched globally — though not all of them are still running. These projects include both bilateral and multilateral CBDCs and have often been supported by BIS,5 which has aggressively promoted digital currency initiatives around the globe. One of these projects, the so-called Project mBridge, serves as a clear-cut example of the potential of cross-border CBDC initiatives to disrupt the payments markets worldwide.  

    Resolving Cross-Border Pain Points

    Project mBridge is a joint initiative of central banks to create a blockchain-based digital platform for cross-border payments. Experts regard mBridge both as a potential threat to the traditional dollar-based global payment system and also as an opportunity to improve the long-standing pain points of cross-border payments.

    Several financial institutions are involved in mBridge, including the BIS Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority (HKMA), the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China, and the Central Bank of the United Arab Emirates (UAE).

    Using a new blockchain called the mBridge Ledger, these institutions have collaborated to create a multi-CBDC platform. The idea is that mBridge will be used to process real-time, peer-to-peer, cross-border payments and foreign exchange transactions involving China, Thailand, the UAE, and Hong Kong. The initiative complies with national policies and legal frameworks, local regulations, and governance requirements.

    A pilot project involving international trade transactions was conducted with the help of central banks, financial institutions, and companies in the four jurisdictions. According to the Chinese press, in China this initial test included Tencent, the owner of WeChat Pay and the WeChat app.

    The success of this first initiative was announced in October 2022, with mBridge being able to validate 160 transactions and settle US$22 million in digital payments and foreign exchange operations.6 These transactions involved 20 commercial banks and were processed over a period of six weeks.

    Participating commercial banks in the mBridge pilo, in United Arab Emirates, China, and Hong Kong.

    Eddie Yue— the CEO of Hong Kong Monetary Authority — recently announced that mBridge may soon experience a major expansion. In a speech in Shanghai,7 he said that other central banks will not be required to have their own CBDCs to participate in the project and that the next step for mBridge is to gradually transition to the commercialization stage.8

    According to the Hong Kong Monetary Authority, the project will launch a minimum viable product by mid-2024. Should it prove viable, the mBridge model could consolidate itself as an alternative to Swift’s dominant payment infrastructure and set a precedent for further payment fragmentation across other regions.9

    Key Takeaways and Future Developments

    The Project mBridge demonstrated that quicker, more affordable, and secure cross-border monetary settlement systems can be built with the help of CBDC technology and a well-managed cooperation between central banks. However, while multilateral CBDC projects have the potential to disrupt the traditional cross-border payment paradigm they also face some challenges:

    Lack of legal frameworks. A strong governance model is crucial for cross-country cooperation to succeed. This includes a robust legal framework and a solid operational structure with mechanisms for the resolution of cross-country disputes.

    Competition among governments. As CBDCs’ structures develop, it’s possible that governments will start to compete against each other to ensure the prominence of their own digital currency and real-time payment (RTP) solutions

    Despite these challenges, there is little doubt that RTP systems and CBDCs are poised to challenge existing global payment systems, including SWIFT, other cross-border payment rails, and cryptocurrencies — a trend that both banks and fintechs should start preparing for.

    This does not mean that the revolution is just around the corner: established banking and payment systems will have some time to adapt and may coexist with the new cross-border structures, at least in the medium term.

    That said, the entire payments industry needs to start crafting strategies tailored to CBDCs. Banks, card operators, and other payment providers must review their strategies and enhance the quality of their products and services, adjusting to what may sooner or later become a new reality in cross-border payments.

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    1. For updated state of CBDCs around the world, you may access to these two sources: cbdctracker.org and Atlantic Council CBDCtracker ↩︎
    2. See “Why governments around the world are afraid of Libra, Facebook’s cryptocurrency” Washington Post, Jul 2019, Access here ↩︎
    3. Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riksbank, Swiss National Bank, Bank of England, and Board of Governors of the Federal Reserve. ↩︎
    4. See 2023 report of JPMorgan and OliverWyman “Unlocking $120bn value in cross-border payments: How banks can leverage central bank digital currencies for corporates”. Access here. ↩︎
    5. See “BIS Innovation Hub work on central bank digital currency (CBDC)”. Access here. ↩︎
    6. See BIS “Project mBridge” here. ↩︎
    7. See “mBridge CBDC project preparing for new members, launch of minimum viable product”. Sep. 2023 Access here. ↩︎
    8. See “mBridge CBDC project nearing commercialization”. Sep. 2023. Access here. ↩︎
    9. See “mBridge to launch cross border CBDC payments by mid 2024” 10 October 2023. Access here. ↩︎

    Ignacio Carballo
    Ignacio E. Carballo

    Ignacio leads the area of Alternative Finance at PCMI. Economist with a broad academic foundation in research, he has worked in Alternative Finance and Financial Technology (Fintech) for Development for over fifteen years.