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CBDCs come to the international stage as a future cross-border option

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The last thing anyone reading this needs is another pundit on about Bitcoin. But lest you think this is yet another op-ed piece about the promise or volatility of digital currency, consider this statement: digital currency will become the de facto cross-border payment mechanism within the next decade, or possibly sooner.

Don’t lose sleep over CBDCs. But don’t sleep on them either.

Bold, I know. But I firmly believe that in the form of government-backed central bank digital currencies (CBDCs), the statement is conservative and based in market realities. And lest you think I’m alone in this belief, listen to someone who can actually make it happen.

“CBDCs, in my view, are the most efficient answer to this (cross-border payments),” chairman of the Reserve Bank of India Rabi Sankar said recently, adding: “For example, if India and the US have CBDCs, we don’t have to wait for the banks to be open to settle transactions… That massively takes out the settlement of risk from cross-border transactions. So, the internationalisation of CBDCs is something I am looking forward to.”

Sankar has also said on another occasion that CBDCs are crucial to addressing the payments issues that the G20 group of countries and the Bank for International Settlements (BIS) contend with. That’s not the operative director of a small central bank talking. That’s the fifth largest economy in the world. While India is not the most aggressive country in the world on the CBDC front (China takes that honour), the statement is a powerful endorsement of an underrated utility for CBDCs. Cross-border payments, despite improvements, are still painfully slow, expensive, and difficult to track, causing significant headaches for businesses across the world. When it comes to commercial banking and business payments, CBDCs will not be an immediate solution. But they will certainly be a long-term solve and recent market developments show it represents an important issue to keep an eye on.

Factors to watch on the international stage

Before diving into what CBDCs are, it’s important to understand what they’re not. They are not a new area for speculative investments like Bitcoin. They are a digital version of cash, and will resemble existing online payment platforms, but in this case supported and backed by central banks rather than private enterprises. Up until this point, CBDCs have been analysed as an isolated phenomenon, best left to a country-by-country tally. For example, the Bahamas got a lot of attention when it introduced the “sand dollar” in late 2020. Now the attention is international. This begs the question: can CBDCs play on that stage?

Undoubtedly, CBDCs will keep cryptocurrency honest, so to speak, and therefore can be adopted reliably for cross-border usage. When you place the stability of them against some of the unregulated (at this point) private sector crypto initiatives, they’re easier to secure and make it easier to rein in companies who are monetising crypto without backing them with hard assets. None of the central banks have any interest in monetising data or speculative investments for commercial purposes. So they’re a much safer bet. If a business ever wants its money back from crypto, it’s a dicey proposition, as seen recently in the press.

The internationalisation of CBDCs, which is a precondition of its cross-border viability, is currently defined by the ways in which the top economies are developing them. The EU has committed to setting a timetable by the end of 2023. The UK hasn’t even gotten that far, nor has the US. China, however, is a completely different story and may just force the hand of other governments.

The People’s Bank of China has been running large-scale digital yuan pilots across 23 cities in China. Technically, it competes with Tencent’s payment app WeChatPay, which is hugely popular in China, and also competes against AliPay. Both of these are private sector payment apps independent of state-owned banks. Now, when you consider that the yuan is not a viable cross-border currency in its analogue form, you can see why China is beyond aggressive when compared to other countries. What happens when a company like Baowu Steel makes a huge shipment to GM and wants to get paid in CBDCs?

The new network?

Say that happens. The next logical question becomes one of payment rails. CBDCs will form a new payments platform. That platform will use distributed ledger technology (DLT). DLTs are decentralised databases managed by multiple participants across multiple nodes. Blockchain is a type of DLT. In the new CBDC cross-border environment, each bank will have a node within this new infrastructure. It could cut out facilitating networks like correspondent banks, or those existing networks as we now know them will find a different role.

The open issue regarding DLTs in their current iteration is a lack of coordination. DLTs are open source, and I believe there will need to be some kind of regulating agency. It’s interesting that the International Monetary Fund (IMF) has floated the idea of becoming a CBDC settlement agency, a role that the BIS currently fills. The IMF wants to be in the centre of the action, but it also has a vested interest in making sure cross-border business payments are faster, cheaper, and more reliable.

The elephant in the room here is security and privacy. DLTs are inviolable but the issue doesn’t end there. There has been a fair amount of exaggeration and even hysteria here. For example, the US-based The American Conservative website, which usually shies away from this type of rhetoric, recently posited that “if the US government decides that you are a ‘threat to democracy’ because of your political views, your religious beliefs, or anything at all, all it will take is the push of one button, and you will be a non-person, unable to buy or sell”. But that’s not the intent of CBDCs.

Conclusion

There’s no shortage of hype, hucksters, or irresponsible behaviour surrounding cryptocurrency. It would be a huge mistake to apply that to CBDCs. If you’re a C-level executive at an established bank or fintech, you have more pressing issues on your hands, like the state of the global economy. But you also have to keep your eye on improving the state of cross-border payments. Don’t lose sleep over CBDCs. But don’t sleep on them either.

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