In a joint report, the International Monetary Fund (IMF), the World Bank and the Bank of International Settlements (BIS) have proposed to the G20 that a cross-border network of central bank digital currencies (CBDC), underpinned by efficient technological integration and proactive international cooperation, could be of significant benefit to the world economy.
The report focuses on broadening the horizon beyond central banks’ individual studies of CBDCs for domestic needs, emphasizing that it is crucial to coordinate work at a global scale and to find common ground between various national efforts to reap the full benefits of digital currency.
If tackled astutely, the IMF, the World Bank and the BIS believe that the creation of CBDCs could offer a “clean slate” that would enable the global financial system to significantly enhance the efficiency of cross-border payments.
The report paints a bleak picture of the current system for cross-border payments, which is beset by long transaction delays and high costs due to an excessive number of intermediaries operating across different time zones across the correspondent banking process.
Moreover, cross-border flows are often opaque and difficult to trace, presenting a problem for Anti-Money Laundering (AML) and combating the financing of terrorism (CFT) implementation. Over the past decade, the attenuation of cross-border banking relationships has left some countries struggling to integrate into the global financial system fully.
The report weighs the significant benefits that CBDCs could present for increased efficiency and enhanced economic inclusion against the potential global macro-financial implications and risks involved in the widespread use of CBDCs for cross-border flows.
These challenges include dealing with the sudden capital flow reversals enabled by more frictionless cross-border flows and the potential impact on countries’ ability to manage their exchange rates. If the foreign currency becomes easier to obtain, store and spend, widespread currency substitution could potentially undermine states’ monetary policy independence and pose risks to both issuing and receiving countries.
A worldwide push for CBDC issuance, the report notes, would therefore require tight integration of multiple CBDCs and uniformity of design choices, alongside specific measures designed to mitigate these macro risks.
The groundwork would not only be conceptual and design-focused but would imply coordinated strategies, standardized practices and a degree of structural integration, ranging from the creation of new international payment infrastructures to targeted policies. The latter, for example, could include introducing limits on foreign CBDC holdings or transfers.
In addition to extensive infrastructural cooperation on technological interoperability and payment system access, there would need to be a similar level of regulatory coordination, implying the alignment of supervisory and oversight frameworks for cross-border flows and the coordination of AML and CFT measures.
While most countries are studying or developing pilots for CBDCs, central banks have taken a wide variety of distinct approaches to CBDC design and have paced their research and development efforts differently. China’s digital yuan is well ahead of the international game, and multiple countries have piloted CBDCs for cross-border use, including France, Switzerland, Singapore and Bahrain, to name just a few.