CBDC in international payments

UBS and Reinventing Bretton Woods Committee conference
IMF 2021 Spring Meetings 6-8 April 2021

Prepared remarks, 8 April 2021

Dear Conference Participants,

I would like to thank the Reinventing Bretton Woods Committee and UBS very much for the opportunity to participate in this panel discussion. In my remarks, I shall focus on CBDC in international payments. In my work with Accenture, I'm currently engaged in a large CBDC project with the central bank of France with a focus on cross-border and off-shore transactions. The BIS Innovation Hub has also recently announced an extension of the project Inthanon-Lionrock by the Bank of Thailand and Hong Kong Monetary Authority under the new name Multiple CBDC Bridge. So, CBDC and international payments are very much a trending topic.

CBDC will, I believe, have its greatest impact on international payments. International payments represent among the most urgent payment problems with broad-based implications for the distribution of international liquidity, capacity to conduct international transactions and scope for international economic integration. CBDC is set produce two key outcomes: It will endow national currencies with new functionalities and utility; it will likely strengthen the role of national currencies in international payments. CBDC may therefore alter the relative attractiveness of currencies and help recalibrate international payments relations and strengthen the international monetary system.

To clarify, when I refer to CBDC I mean a token based CBDC issued on a blockchain or distributed ledger technology (DLT)-platform. Account-based central bank money I consider are reserves. The innovation with CBDC rests in the adoption of digital tokens as a new format of money with properties akin to bearer instruments to complement bank notes and reserves.

CBDC is not so much about payments but more about settlement. The importance of CBDC for settlement rests in the native properties of tokens. Tokens can do certain types of transactions better in particular bi-directional trades such as payment versus payment (PvP) and delivery versus payment (DvP). If financial instruments and currencies were available as tokens, exchanges would rest on a simple token swap offering instant and atomic transactions, meaning both legs of the transaction go through simultaneously or none goes through. This would imply that trading would no longer be subject to any open positions affording riskless settlement irrespective of space and time. International securities trading and foreign exchange are therefore two key use cases for CBDC.

I shall first offer some comments on the conditions for using CBDC in an international setting, second discuss different CBDC international high-level network architectures, and then conclude.


Conditions for international CBDC use

For CBDC to be deployed in international payments, a number of additional conditions will have to be met including but not limited to: i) access policy, who will be allowed to hold CBDC; ii) liquidity accommodation, who can demand CBDC; iii) jurisdictional and regulatory boundaries, whose rules apply when CBDC is used in international payments.


CBDC international high-level network architectures

The deployment of CBDC in an international setting can occur on the basis of a number of possible network architectures. Each approach brings its own challenges and the decision of a preferred approach will rest in large part on its scalability and the nature of frictions central banks would find least problematic. I shall discuss three plausible models offering only a most high-level perspective:


Conclusion

To conclude, the use of CBDC promises to significantly improve international payments amid the native properties of digital tokens. CBDC may significantly reduce risks in international payment, increase competition between domestic and international exchanges and offer greater choice. The deployment will depend on central banks being confident that foreign use of their currencies will be consistent with their monetary policy and financial stability objectives. Different arrangements can be found to ensure CBDC can be deployed under the highest possible prudential standards.

CBDC may offer central banks an opportunity to make their monies truly international. Central banks at times have resisted use of their currencies abroad. But the ECB has hinted that a new regime about the role of central bank money in set to emerge. CBDC may make international currencies a reality for the first time since the demonetisation of gold.