Challenges associated with cross-border payments
Cross-border payments are generally slower, more expensive and more opaque than domestic ones. They tend to flow through the so-called correspondent banking network, where chains of banks work to get funds from the payer to the payee.
Setting up cross-border and multicurrency systems is a very complex undertaking facing both technical and political challenges:
- Cross-currency payments require an FX conversion which necessitates a “balance sheet” from the side of the banks and the willingness and ability to manage risks;
- Liquidity management in foreign currencies is done via pre-funding which entails costs for the banks involved. This is because in cross-border multicurrency systems the settlement agent might not be willing or able to provide intraday liquidity to foreign participants or in foreign currency;
- There is a need for a high degree of technical interoperability across payment systems;
- On the political side, cross-border systems often need to be have a high degree of shared political will among participating jurisdictions.
Payments without borders
Authors: Morten L. Bech, Umar Faruqui, Takeshi Shirakami
From: BIS
Possible mCBDC arrangements which could facilitate cross-border payments
There are three possible models of multiple CBDC arrangements which could facilitate cross border payments:
- Compatible CBDC systems: an mCBDC arrangement in this case, although it will resemble a traditional cross-border arrangement, it will have the advantage of starting afresh with the design of technical standards as well as aligning legal, regulatory and supervisory standards.
- Interlinked CBDC systems: This system could take two forms : (a) a shared technical interface; or (b) a common clearing mechanism.
- Single system for mCBDC: Multi-currency CBDC systems could vary significantly in their designs. One possibility is for CBDCs to be issued onto a common distributed ledger, potentially exploiting economies of scale in development and maintenance. Another possibility, and one studied by the Bank of Thailand and the Hong Kong Monetary Authority, is to have two systems directly engage in a shared “corridor” network with a jointly controlled operator.
Multi-CBDC arrangements and the future of crossborder payments
Authors: Raphael Auer, Philipp Haene and Henry Holden
From: BIS
