BIS surveyed how Digital Currencies can be utilized for cross border payments
The Bank for International Settlements recently published a paper on central bank digital currencies (CBDC). Since several central banks are exploring CBDcs, there is a focus on domestic needs. The BIS is planning to encourage the banks to explore cross-border payments.
These days, cross-border payments have become highly demanded and that is due to two reasons.
The first, that there has been a reduction in the number of correspondent banks, which plays an important role in international payments. These banks provide a service so that banks do not have destination accounts, where money can be sent. For example, due to contraction in Central and South America, there was a 30% decrease between the years 2012 and 2018.
Secondly, the consumers were aware of the issues, since the use of foreign currencies has grown drastically. And that too in majorly e-commerce, travel, and migrant labor laws.
Due to this, Facebook founded Diem (initially known as Libra) project plans to be inscribed. The project received multiple mentions in the paper.
The current issues with cross-border payments include unclear foreign exchange rate (FX), unforeseeable fees, and different opening hours across various regions. And, different types of communication standards are used throughout. There is a huge number of intermediaries and high compliance costs.
Three Basic Models
The first model plans to create a compatible CBDC system with common standards for technical areas. The rollout of ISO 20022 gives the spotlight to such challenges and aligns the legal framework. But, it has been said that there is hope that CBDC will offer a clean chit.
However, an important portion of current research focuses on two-tier systems, with private entities taking on the consumer-facing role for CBDC distribution. Hence, there is a risk that this could repeat the same issues and that large banks would dominate.
The second model is to interlink domestic CBDC systems and this was done to connect water pipes with different flow rates. It is also seen as high risk and involves coordination. This route requires a clearing system, either centralized or decentralized.