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BIS: CBDCs could solve cross border friction, but interoperability still major challenge

The world has taken major strides towards financial inclusion and making payments easy and cheap. However, cross-border transfer of funds remains both slow and expensive. In its latest report, the Bank for International Settlements (BIS) has reiterated its claim that central bank digital currencies (CBDC) could be the solution. However, the report listed several challenges that could stifle the CBDC revolution, key among them being interoperability and whether central banks are ready to work together.

Titled “Options for access to and interoperability of CBDCs for cross-border payments,” the report was compiled by the BIS in collaboration with the International Monetary Fund (IMF) and the World Bank. The three prepared the report for the G20 as part of its continued efforts to ease cross-border funds transfer.

While it notes that CBDCs will change the game in the cross-border movement of funds, BIS observed, “For central bank digital currencies (CBDCs) to improve cross-border payments, central banks must make fundamental decisions on foreign access and how CBDCs connect across jurisdictions.”

Moving of funds across the border plagued with challenges is not a secret. High costs, slow transactions, limited access, and insufficient transparency are just a few of the major challenges.

The report looks at how a CBDC could change this, basing its assessment on five criteria: “do no harm, enhancing efficiency, increasing resilience, assuring coexistence and interoperability with non-CBDC systems, and enhancing financial inclusion.”

And while it seems like an obvious solution, CBDCs come with their own caveats and limitations. For one, different central banks have varying motivations for developing a CBDC. Most developed nations are looking at a digital currency to ease payments, while developing countries are leaning more towards financial inclusion. Even the Bahamas launched the Sand Dollar as a full-proof payments system for when natural disasters strike the hurricane-prone island nation.

The CBDC interoperability paradox

CBDC usage in one jurisdiction will be relatively easy. As seen in countries with CBDCs like Nigeria and the Bahamas, all one needs to do is download a wallet, load it and start sending and receiving from people in the same country.

However, cross-border CBDC transfers are a different kettle of fish. The first challenge they face is that central banks only provide accounts to local payment service providers. This is why cross-border transfers are so expensive and slow, as there are too many intermediaries. For CBDCs to bridge this gap, central banks must give foreign firms access to their payment processes.

This would not happen overnight. And even if it did, there would arise a new challenge altogether—linking these CBDCs.

The BIS report outlines three possible solutions to these, the first being adopting common standards that would make CBDCs compatible. But if the current environment is anything to go by, this will take quite a long time before it happens. While nine out of ten central banks are exploring CBDCs globally (according to a previous BIS report), they are all building on their own private networks.

The second solution the Swiss-based bank proposes is interlinking separate CBDCs between different countries or even regionally. This is feasible, especially given that a handful of initiatives are already looking into this. They include the Multiple CBDC (m-CBDC) Bridge Project, which involves China, Thailand, United Arab Emirates, and Hong Kong.

The third option would involve creating a single cross-border CBDC platform.

BIS concludes that the three have their caveats, and there’s no one size fits all solution. Compatibility would be the cheapest, but it would not be as efficient as interlinking multiple systems. While creating a single system would be ideal, it would take the longest to build and faces several regulatory bottlenecks.

The BIS didn’t conclude which the best way forward is. It insisted that interoperability is critical if CBDCs are going to impact cross-border movement of funds.

Watch: The BSV Global Blockchain Convention presentation, CBDCs and BSV

New to Bitcoin? Check out CoinGeek’s Bitcoin for Beginners section, the ultimate resource guide to learn more about Bitcoin—as originally envisioned by Satoshi Nakamoto—and blockchain.

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