Over the past two years, central bank digital currency (CBDC) has garnered considerable attention and found its way into the lexicon and discussions of finance chiefs and corporate treasurers. This is because “105 countries, representing over 95 percent of global GDP, are exploring a CBDC”, according to the Atlantic Council Geoeconomic Center’s Central Bank Digital Currency (CBDC) Tracker.

The tracker also mentions that a new high of 50 countries are in an advanced phase of CBDC exploration (development, pilot or launch), with 16 of the Group of Twenty (G20) countries already in the development or pilot stage. Of the Group of Seven (G7) economies, the US and the UK are lagging behind on CBDC development. While the US and the UK have taken the slow lane in the global CBDC race, China leads the world with its state-backed CBDC (e-CNY or digital yuan) pilot set to expand in 2023, even as South Korea, Japan, India and Russia have made significant CBDC progress over the past six months.

CBDC, considered by many to be the future of money, banking and payments, is a digital form of money or currency issued and regulated by the central bank of a country. CBDCs can be designed for retail or wholesale use. Wholesale payments (and settlements) would be between financial institutions and corporations, while retail payments would serve more as a digital version of cash that comprise the day-to-day payments between consumers and businesses.

Central Banks around the world are developing a digital representation of their national or sovereign currency, backed by government commitment that promises to be a means of payment (domestic and cross-border), a store of value and a common unit of account.

While it is expected that CBDCs will also serve as vehicles for financial regulation and stability, monetary policy, and financial inclusion, cross-border payments are probably where CBDCs will force the greatest change and disrupt cash management.

Here’s how CBDCs can revolutionise cross-border payments

1. Cheaper, faster, safer, more efficient and transparent

“Twenty percent of large organizations will use digital currencies for payments, stored value or collateral by 2024”, according to Gartner, Inc. This prediction has important implications for finance chiefs and treasurers as they consider adoption of digital currencies.

“While volatility of cryptocurrencies remains a concern, anticipation of clearer regulatory guidance, and the advent of CBDCs, now offers CFOs more avenues to pressure-test use cases for digital currencies”, said Alexander Bant, chief of research in the Gartner Finance practice.

Avivah Litan, vice president and distinguished analyst in the Gartner IT practice, also observes that “The rise of central bank digital currencies (CBDCs) will push many large enterprises to incorporate digital currencies into their applications in the coming years.”

“Digital currencies will be primarily used by these organizations for payment, a store of value and the ability to leverage high-yield investments available in decentralized finance (DeFi) applications”, noted Litan.

Improving the efficiency of international payments has long been a priority for international regulators, CFOs and treasurers. It is expected that the rise of wholesale CBDCs will make cross-border payments cheaper, faster, safer and more transparent, efficient and resilient.

According to the think tank Brookings Institution, “CBDCs can solve some of the inefficiencies of the dollar-dominated financial system. Global corporations pay an estimated US$120 billion in transaction fees every year, and CBDCs can lower these costs.”

The efficiency, cost reduction, and speed factors are cogent reasons that will push many finance chiefs and treasurers to explore or embrace CBDCs and accelerate the movement away from physical cash.

Using a digital currency backed by a central bank for foreign payments or transactions would also reduce settlement layers and the friction in payment systems, simplify the process, enhance compliance, and improve the speed of transactions. To do so, CFOs and treasurers would need to understand the above areas of competitive value and the infrastructure needed to incorporate CBDC into their organizations.

2. Reshape exchange rates, help treasurers raise money in global capital markets and diversify portfolios

Moving funds or money digitally across borders will reshape exchange rates and international capital flows. Access to competitive foreign exchange (FX) pricing will mean corporate treasurers do not have to accept potentially non-competitive FX rates offered by correspondent banks and can choose from attractive FX rates quoted by participating banks in the CBDC cross-border network.

Cross-border payments through wholesale CBDCs will also help CFOs and corporate treasurers raise money in global capital markets as they also diversify their portfolios. For securities and other financial instrument trading or purchases, CBDC would enable settlement of securities in central bank money in cross-border and off-shore transactions. This may enhance settlement efficiency and also make it highly conducive to facilitating deeper financial integration. In addition, trade will get a boost because of CBDCs, particularly for emerging markets that rely on export revenues to contribute significantly to their GDP.

3. Reduce or end the need for any global currency or correspondent banks

The European Central Bank (ECB) has hailed CBDCs as the “holy grail” of cross-border payments, with the ability to deliver cheap, universal, secure and immediate payment solutions that can outperform Bitcoin and stablecoins, among others.

The Bank for International Settlements (BIS) is building a multi-CBDC (mCBDC) platform, called “mBridge”, to deliver real-time, cheaper, safer and more efficient cross-border payments and settlements.

The mBridge project is a cooperation between the BIS Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority; the Bank of Thailand; the Digital Currency Institute of the People's Bank of China; and the Central Bank of the United Arab Emirates.

The purpose behind this CBDC project is to create a multilateral payment platform that can serve as an alternative to the complexities and inefficiencies of the correspondent banking system by following a single set of rules and adopting common technical standards and legal frameworks to join up national digital currencies in interoperable platforms.

“The common prototype platform for mCBDC settlements was able to complete international transfers and foreign exchange operations in seconds, as opposed to the several days normally required for any transaction to be completed using the existing network of commercial banks and operate in a 24/7 basis”, as per the BIS.

“The cost of such operations to users can also be reduced by up to half”, the BIS further added.

While such a wholesale cross-border payment platform would facilitate messaging and settlement and offer significant benefits to corporations, it will require seamless and solid cooperation among central banks worldwide, which will be very complex given that it requires onboarding several countries into one platform while addressing political, economic, technological and complicated cross-jurisdictional regulatory hurdles. This means the global adoption of the mCBDC Bridge project is not likely to happen anytime soon.

This is also a sign that no digital currency, including a CBDC system, can replace or dethrone the US dollar as the global reserve currency or a currency of choice anytime soon given the dollar’s dominant role in international transactions and financial markets. However, the demand for dollars could decline as CBDCs could gradually obviate the need for the preferred international currency to serve as an intermediary in foreign transactions.

Treasurers should bear in mind that CBDCs have the potential to transform corporate cross-border payments and cross-currency flows, primarily because they offer more efficient international payments using a government-issued and central bank backed digital legal tender, which in time to come can reduce or end the need for any global currency or correspondent banks in international financial payments.

Conclusion

According to a news story published on CTMfile two weeks ago, “The IMF announced this month that it was involved in a collaborative project involving an interoperable CBDC platform that would connect multiple global CBDCs and enable cross-border transactions.”

International agencies like the BIS, the International Monetary Fund (IMF), and the World Bank are urging central banks to consider interoperability early in the design of CBDCs, even as they jointly released a report in July 2022 that looked at three options for cross-border interoperability to address challenges including high costs, low speed, limited accessibility and the lack of transparency.

While the BIS believes that CBDCs will change the game in the cross-border movement of funds, the joint report by the BIS, the IMF and the World Bank highlighted its main conclusion: “CBDCs have the potential to enhance the efficiency of cross-border payments, as long as countries work together.”

Interoperability and international cooperation are the key drivers that will power CBDC cross-border payments. The era of physical cash is declining, and the age of digital currencies has begun. And while central banks and regulators gear up for CBDCs while assessing critical factors like interoperability and multilateral collaboration, corporate treasurers should watch the global CBDC space closely, understand its nuances, and start thinking about adding this form of digital currency to their balance sheet and assets strategy. Otherwise, they run the risk of being left behind by their competitors.