Cross-border payments are among the most important payment options for global trade, remittances, and the supply chain. However, these payments also tend to be very slow and often costly.
One way to address this issue is to use Central Bank Digital Currencies, which are somewhat similar to cryptocurrency in terms of features but much less risky because they are issued and backed by the central bank. In this article, we’ll explore the potential uses and advantages of CBDCs.
CBDCs Today: Global Experiments and Early Issuers
As many as 90 percent of all central banks are experimenting with the pilot project of CBDC. Several countries, such as the Bahamas, Jamaica, Nigeria, and China, are conducting trial runs, with millions of users already having access to the currency.
However, the biggest change will come when these currencies are used wholesale and to finance trade and commerce across borders. There’s no such experimentation yet, but it will soon happen, since it’s the logical next step.
One of the most ambitious initiatives to establish instant cross-border transactions is Project mBridge, which connects central banks across Asia and the Middle East via a single digital currency platform.
Some industries will be among the first to adopt the use of these payments. For instance, the history of crypto casinos is one of rapid adaptation to the latest technological developments. It’s a very competitive industry that uses any advancements that make payments easier for its users.
What’s broken in Today’s Cross-Border Payment System
There are many problems with the current cross-border payment system, and in many ways, the use of digital currencies addresses almost all the inefficiencies created by fiat payments. The system relies on a chain of banks transferring funds among themselves, and that’s what’s causing most of the problems.
· High costs are among the most significant downsides of using a traditional payment system. For remittances, the fee may be as high as 6 percent.
· Transfers are very slow, and they can take up to 5 days in some cases. They are also not available on bank holidays.
· Fee structures are often very complicated, and users don’t know exactly what they owe until the transaction is complete.
· Smaller countries have lost correspondent banking relationships due to compliance costs.
These issues affect businesses, foreign workers, and everyone who needs a fast transaction. Small and developing countries are affected the most.
How Global CBDCs Could Reshape International Payments
There are a few innovations that the CBDC will bring to users, and once they become common, the whole international payment system will adapt to match the quality of its services.
The key innovation will be the so-called atomic settlement. This means the transfer and currency conversion will occur simultaneously. That way, the deal is settled between two central banks, and there’s no need for intermediaries, which can cause delays and increase costs. Such an arrangement also increases liquidity, reduces risk, and limits operational errors.
Today’s foreign exchange market uses a variety of platforms, each with its own user experience and payment policies. Having a unified system that always works the same way, regardless of country or currency, would be a huge improvement for end users. The payments would also be available 24/7.
The overall fees would also be reduced to near zero, and in some cases to zero. This is a feature that would affect the foreign workers sending remittances home the most. Some industries, such as online gambling, could also benefit from allowing end users to keep as much of their winnings as possible.
CBDCs can also be programmable in the same way as cryptocurrencies. Smart contract payments are automated and occur instantly when the conditions set by the program are met. These features are especially useful for cargo delivery and international trade.
Risks and Policy Trade-Offs for International Use
There are also risks involved in introducing such a big change to the international payment systems. The most significant risks to consider include:
· Faster payments can accelerate capital flows and, in turn, increase volatility, especially when it comes to currencies used in developing markets.
· If CBDCs become popular, they may eventually replace fiat currency altogether, especially in markets that already don’t trust their national currency and have many tech-savvy users.
· Instant transfers will require a global ID system and harmonized compliance networks across many countries. For many users, this may be seen as an invasion of privacy.
· Cybersecurity efforts need to be stepped up to a completely new level. These transfers will be a major target for hackers and scammers, and governments need to develop a plan to protect the growing user base.
To Sum Up
CBDCs are digital currencies created and backed by central governments. These are used to make payments abroad without the risks and downsides that users face when using fiat money. They would make payments faster, more securely, and more cost-effectively.
Almost all governments worldwide have considered this option, but only a few are now in the testing phase, and fewer still are carried out in collaboration across countries. There’s potential for this technology, and as cryptos become more popular, governments will get involved.
Foreign workers will be the first to use the services, but many other industries, such as casinos and shipping, will also benefit right away. There are some potential downsides as well, mostly due to security risks and the chance that fiat currencies could be replaced altogether.
