As central banks look to the future, they are increasingly exploring the potential of central bank digital currencies (CBDCs) to improve speed, transparency and efficiency. But one area where CBDCs have particular benefits is in cross-border payments.

Central banks around the world are currently mulling the potential of CBDCs and in some cases making early, tentative steps towards making them a reality. But there is also much inter-bank and industry discussion about the myriad practicalities this involves.

Recently a public meeting hosted by the Official Monetary and Financial Institutions Forum (OMFIF) saw key figures from a number of central banks joined by industry representatives to explore their potential. And here, the possible benefits of CBDCs for cross-border payments – and the considerations required to develop them – was a key topic in the discussion.

For Simon Scorer, senior fintech specialist at the Bank of England, the initial design of CBDCs can be geared more towards either domestic or cross-border use, although adds that “even if it’s designed for domestic use, it may facilitate a certain amount of cross-border use”.

“We’re thinking about it from a domestic point of view, but one of the one of the potential benefits is as a building block for better cross-border payments in future,” he says.

“I think at this stage, a lot of central banks are still in the relatively early stages of thinking about these things, and I don’t know if we’ve fully worked out what those interactions will look like.”

How CBDCs could change cross-border payments

Exactly how CBDCs can and will change cross-border payments is extremely complex because not only are not all existing solutions the same, but there are many different ways that CBDCs can be implemented.

For example, there is currently exploration about whether blockchain will be used to underpin CBDCs – some believe it is the best solution, while others expect it to inspire the ultimate technology that powers them, but not be directly involved.

However, if we assume that blockchain is used, it can be compared with Swift, the main standard for cross-border payments, and Sky Guo, CEO of Cypherium, argues that here it provides dramatic speed increases.

“Swift usually requires manual entry of recipients’ information, and involves multiple intermediaries. It takes several days and cover hundreds of dollars to send a message. It also charges expensive membership fees and installation fees,” he says.

“A transaction [using blockchain] can be executed simply by scanning a QR code and settled in a few seconds, there are also other technologies that can connect conventional payment systems to blockchain and streamline the upgrade process.”

However, this comparison does not take into account Swift Global Payment Innovation (Swift Gpi), an updated version of Swift that has dramatically improved the cross-border payments process.

Swift Gpi became the standard in 2019, although some banks such as Societe Generale have been using it in some form since 2017 and as of December the bank processes 60% of cross-border payments using it.

Developed to provide end-to-end tracking, transparency and speed, it enables payments to be identified in real-time, meaning they can be stopped and recalled mid-transfer in cases of fraud. Payments are promised within either 30 minutes or 24 hours – a significant step-up from the previous iteration.

However, while an improvement, it does not match the potential of blockchain-based systems. RippleNet, a leading blockchain-based cross-border payments system, enables transfers to take just seconds. Not quite the extreme difference that Guo characterises, but still a significant step-up from Swift Gpi.

Interoperability challenges

Of course, with central banks around the world exploring their own takes and potential implementations of CBDCs, interoperability could pose a significant barrier to this bright future of almost instant cross-border payments.

“If one of the benefits that may emerge from the world of CBDCs is this cross border angle, then this question of interoperability is vital,” says Scorer, adding that the Bank of England is not yet at the stage of designing its own system.

“So we haven’t actually made concrete decisions on that front, but it’s clear that interoperability needs to be thought about from the beginning and I think collaboration amongst central banks, thinking about these topics to understand where there’s common ground where there is difference.”

Critically, he argues, there needs to be consensus on what form interoperability takes.

“Some people, I think, sometimes assume that means everyone needs to operate the same system, the same platform, That’s certainly not necessarily the case,” he says.

“But what is needed is to ensure that if central bank digital currencies emerge in different parts of the world, that they’re not incompatible.”

Exploring hybrid solutions

Ensuring that CBDCs can work together to facilitate rapid cross-border payments can be best handled, argues Guo, by using hybrid architecture, as this would ensure interoperability would not interfere with the security to each system.

“Central banks are unlikely to allow other countries to directly access their systems. Otherwise, malicious actors could sabotage or eavesdrop on the financial transactions of these countries,” he says.

The solution, he argues, is a hybrid system where there is an intermediary that sits between each CBDC, using smart contracts built on the public blockchain.  This is how money is already transferred between different cryptocurrencies, typically through the ERC-20 standard, a smart contract system based on the Ethereum blockchain.

For CBDCs, Guo gives the example of two parties who want to exchange digital euros with digital dollars.

“Both parties are concerned that the other party will steal their money,” he says. “To solve this, they can create a smart contract on public blockchain, lock up both of their money to be exchanged and release the locks only after the transaction on both sides are completed.”

However, for Cees van Wijk, IT team manager at ING Nederland, while he expects that there will be a “blockchain or digital ledger technology (DLT) system per currency zone”, there is more than one way to handle the system that sits between.

One approach, he says is a notary service “that provides the uniqueness and time stamping consensus on the transactions”. This method, he says is supported by Corda, a DLT developed by R3 that is currently being used in a number of central bank experiments.

“They provide out-of-the-box interoperability between difference Cordapps – applications built on Corda. Also, they provide the option to use multiple notary services,” he says.

“So, this also means that you can automatically shard your system. So if you look at the public blockchains, most of them have a full replication – all the nodes store all the transactions and the complete history of the blockchain – that is not required on Corda, where you only have those transactions which are relevant to you and to validate only those transactions that you’re involved in.”

This means that different notary services can be used in different cross-border payments for CBDCs, eliminating the need for a single global system to support interoperability.

Towards the future of cross-border payments

While CBDCs do have the potential to improve cross-border payments, Scorer argues that the matter is “still an open question”.

However, he stresses that if it is to appear, it will need to be implemented in a way where it seamlessly integrates with other aspects of financial technology.

“The way I see central bank digital currency is not as a replacement for everything; it’s going to inevitably need to coexist with existing infrastructure and potential emerging new infrastructures,” he says.

“I don’t think it’s going to completely replace anything, but we need to find a way – if it’s going to emerge – for it to sit alongside and interact with these things.”


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