Last week the International Monetary Fund (IMF) published a note exploring design and policy considerations for the use of retail central bank digital currencies (retail CBDC) for cross border payments. To date there have been numerous cross broder CBDC trials, but most have explored using wholesale CBDC, with the exception of Project Icebreaker. Additionally, there are other ad hoc initiatives, such as the use of the digital renminbi outside of China with tie-ups including Hong Kong and Singapore.
The IMF’s paper developed a framework for arriving at design decisions across five areas: access, communication, currency conversion, compliance and settlement.
One of the primary takeways of the Project Dunbar cross border CBDC trial was that many central banks are reluctant to allow foreign banks to access their wholesale CBDC. Hence, access is a key policy decision.
The trade offs in who can access the CBDC
Access decisions include whether foreigners are allowed to use the CBDC. If so, are they just tourists or based abroad? Are foreign financial intermediaries allowed to hold the CBDC? While the IMF paper explains many of the trade offs, it is low key in highlighting how crucial these decisions are.
Say a consumer wanted to send money to someone in another country. They could potentially go online and swap their local CBDC for the foreign CBDC and send it to their friend. If the destination CBDC doesn’t support foreign consumer usage, that would not be possible. So, the sender would have to go through an intermediary such as a payment service provider (PSP).
If the PSP tries to do the same thing, it would also need to be able to access the foreign CBDC. If it can’t, it would have to go through an intermediary or use correspondent banking, which rather defeats the object.
Where foreign consumers are allowed to hold a CBDC, this could impact economies if citizens prefer foreign currencies rather than local ones.
The IMF report suggests using holding limits to address this. These limits could potentially be different for domestic users, tourists, and foreigners who are not present in the country. The downside is complexity.
Access impacts the largest payment cost: FX
From a design perspective, access cannot be viewed independently of foreign exchange. While many cross border payment initiatives explore efficiency gains through speed and compliance, only a few target foreign exchange (FX). That’s despite FX making up by far the largest proportion of cross-border payment costs. If a central bank wants to promote better exchange rates, then it’s necessary to encourage competition. And that usually means allowing access to foreign providers.
Even if a central bank allows some access by foreign providers, foreign exchange needs liquidity. That’s particularly true if cross border CBDC operates 24/7 and outside of the real time gross settlement (RTGS) system hours. The central bank will likely provide liquidity to domestic participants. But will it be willing to do so for foreign institutions as well?
These are just a few of the issues raised in the IMF paper.
