Opportunities and challenges of CBDC for international payments

The emergence of central bank digital currencies (CBDC) is gathering speed, with more than half of the world’s central banks actively considering their introduction.

The reasons are varied: to compensate for the reduced use of physical notes; to improve payments in digital retail; to respond to private cryptocurrencies that could threaten the role of fiat money; and to improve resilience and reduce risk in wholesale markets – among many others – according to a new discussion paper Exploring CBDC for International Payments.

Whatever the motivation, the momentum toward CBDCs seems clear and growing. Some central banks are already conducting live experiments, and the potential for currency evolution is being framed by some as a possible revolution in how value is exchanged.

Indeed, CBDCs could have profound implications for the global financial system that need to be thoroughly assessed and worked through – not least of which is to understand how a new form of central bank money could be used in payment systems.

Among the many questions: What payments infrastructure would be required for CBDCs? Is this a new parallel world based on distributed ledgers and portable digital tokens? Or is it an integrated world fully interoperable with existing forms of money? Or is it a hybrid of both?

Equally important are the many possible impacts at a business level that need to be considered, in particular how CBDCs will impact the rest of the financial market.

“Making payments infrastructure based on CBDCs efficient and interoperable with the broader economy presents some new challenges, but the majority are the same as those faced by existing payment solutions,” says Thomas Zschach, Chief Innovation Officer, SWIFT.

“As a co-operative that is neutral and currency agnostic, with reach across 11,000 institutions in more than 200 countries, and oversight by central banks globally, SWIFT is well placed to engage closely in the debate and any future evolution of money. We look forward to actively supporting our community on issues related to CBDCs and driving responsible innovation aligned with our strategic vision for instant end-to-end transactions.”

The paper seeks to advance the dialogue around the impact of CBDCs on payments, exploring various topics from the perspective of the SWIFT community with a particular focus on cross-border payments – a topic that is only beginning to be examined closely.

Many of the complexities in making a payment based on CBDCs will be the same as for existing payment solutions, but there will be other challenges and opportunities to consider as well.

For example, what would it mean to have a CBDC, perhaps represented by a digital token, move from one jurisdiction to another?

How might it be stored or used outside its own domain? And, conversely, once CBDCs exist how will they integrate seamlessly into the cross-border world?

CBDCs will present new challenges and new opportunities, requiring new solutions. At the same time, there is little advantage in reinventing the wheel. The smart approach will be to build new solutions where needed and pragmatically combine them with existing solutions to derive maximum benefit.

“Central Bank Digital Currency has emerged as an important new tool in the global push to modernize financial infrastructure to meet the needs of our increasingly digital and connected world,” concludes David Treat, a senior managing director at Accenture, who leads its Blockchain and Multi-Party Systems practice globally.

“As an integral part of the financial services infrastructure, SWIFT plays a critical role in illustrating the possible strategic moves its members may undertake as CBDC begins to transform the financial services landscape. “