Today the Bank for International Settlements (BIS), the IMF and World Bank published a paper on cross border payments using central bank digital currency (CBDC). The report was prepared for the G20 as part of a program to enhance cross border payments, where CBDC is one of 19 building blocks. Almost every suggestion in the paper comes with a caveat, leaving the message that CBDC will not be a silver bullet to address the frictions in cross border payments.
The problem statement is quickly dispensed with. Cross border payments involve high costs, low speed, limited access and insufficient transparency. Why these are such significant issues is taken for granted. And the answers to the ‘why’ question underline the reasons CBDC might not be the best tool, apart from regional applications.
What’s the problem CBDC is trying to solve?
A brief digression from the report: As a lay person, the underlying causes appear to be straightforward. There are too many intermediaries (correspondent banking), which adds to cost and delay and creates the transparency issue because payments have multiple hops.
Secondly, anti-money laundering is a major friction in the process that obstructs a massive number of law-abiding citizens, while criminals seem to find it a mere inconvenience and circumvent it. Central bankers see statistics, but it’s a big deal when individuals or small businesses have money frozen. With globalization, this happens with increasing frequency. The topic of AML is covered in the paper, and it looks far from being resolved.
Thirdly, those that pay the most for payments are the ones that can afford it the least. Examples include offshore workers sending remittances home or remittances between third world countries. This is most acute between regions where there’s not a huge volume of transfers.
These points are also dealt with by other G20 building blocks, but it’s important to see the big picture because the CBDC paper presents more challenges than solutions.