CBDCs for Cross-Border Money Transfers: Threat Or Opportunity?

Twelve years ago, the first real-world cryptocurrency transaction took place; this event is now celebrated as Bitcoin Pizza day. Since then, crypto has evolved into an essential part of the fintech landscape. Governments around the world have started recognising its potential lately, with many looking into the possibilities of creating their own Central Bank Digital Currency (CBDC). Does this new development mean the end of the global financial system as we know it, including international money transfers? In our opinion, no; at least, not yet.

Why CBDC?

Historically, money tends to depreciate. For example, the value of the U.S. dollar is now only about 3% of what it was in the early 20th century. At the same time, if we look at gold, its value had remained more or less the same as when it was used to trade goods with indigenous people in South America. Hence, the dilemma is: cash is convenient for frequent payments and microtransactions but continually depreciates. In turn, gold is more stable in value but not very practical for everyday payment purposes.

Many governments now view the emergence of cryptocurrencies as a possible solution to this problem since modern technology may help mitigate depreciation while opening new prospects for Delivery Versus Product (DVP) payments for goods and services. As a state-controlled and guaranteed digital currency, CBDCs would not be as volatile as ‘independent’ cryptocurrencies. They could address a number of issues in the financial market, if not replace fiat money completely.

Current CBDC Landscape

Although earlier attempts existed, e.g., Tunisia's e-Dinar introduced in 2015, the first CBDC (currently inactive) was launched by the Bahamas in 2019. According to the Central Bank Digital Currency Tracker by Atlantic Council, as of December 2022, 112 countries are at different stages of CBDC implementation, including 11 that have already launched the currency, 15 that are piloting it, and 26 where the project is in development. Only two states, Ecuador and Senegal, have cancelled their CBDCs. The majority of the states are testing either retail or both retail and wholesale CBDC use cases.

One of the concerns in the current CBDC landscape is the interoperability of all these national CBDCs within a unified global system. In their report released in November 2021, Oliver Wyman and J.P. Morgan highlighted the need for “a full-scale multi-central bank digital currency (mCBDC) network” that can “potentially save global corporates up to $100 billion in transaction costs annually”. With CBDC architectures differing from country to country, tokens, as a means to represent any asset, from oil to securities, are viewed as a way to overcome this issue.

One of the most exciting initiatives in the field is Project Stella, run by the ECB in collaboration with the Bank of Japan. It studies the possible use of distributed ledger technology (DLT) on financial market infrastructures (FMIs); its latest report was published in 2020. More recently, in October 2022, SWIFT reported the results of two experiments similarly aimed at combining the existing payment systems with different DTL technologies and tokenisation.

Prospects & Opportunities

All these points to a potential new era in cross-border payments and transfers and raises multiple questions and concerns, as with any innovative technology. In the case of CBDCs, especially retail ones, these include issues such as cybersecurity challenges, increased government control over populations, privacy and data protection, etc. The sustainability of the bank system in its current state is also at stake because, in some cases, CBDCs might allow central banks to provide retail financial services directly to consumers without the need for intermediaries such as banks. If we hypothesise even further into the future, CB itself may give way to an algorithm.

Still, at the current stage, CBDCs are viewed as a complement to the existing financial systems and fiat money instead of an existential threat. As an international remittance provider, Profee enables money transfers from Europe to more than 45 countries. Many of our destinations are investigating their CBDC prospects, so naturally, we try to keep track of these new developments.

One of the potential challenges is multicurrency CBDCs and the tokenisation of national systems, which would mean their accessibility to foreign residents and, consequently, the elimination of foreign exchange transactions, which is one of the income pillars for cross-border payment systems such as Profee. Still, the importance of convenience of use for customers cannot be underestimated. We envisage multiple income-generating opportunities for providers such as ourselves in bridging the gap between the complexities of the novel CBDC financial system and lay users.