Payments are arguably the face of fintech. When you think about financial technology, it is easy to think about solutions which are making payments faster, easier and more accessible.
As of December 2023, 130 countries, representing 98 per cent of global GDP, were exploring central bank digital currencies (CBDCs) according to the Atlantic Council‘s CBDC tracker. With so many countries looking towards centralised digital assets, we set out to find out how these would impact the cross-border payments market.
Fundamental risks to using CBDCs
Nina Moffatt, fintech and regulation partner, of law firm Paul Hastings, notes that while CBDCs are an attractive option, risks such as settlement times are preventing mainstream adoption.
“Central bank digital currencies (CBDCs) are an increasingly attractive option for governments across the world, with their promise of interconnecting digital payment systems. Ninety-eight per cent of the global economy is reportedly already exploring digital versions of their currencies. However, CBDCs will not be the silver bullet to developing and accelerating cross-border payments.
“There are some fundamental risks inherent in using CBDCs. These include the translation of currency values into digital form, ensuring settlement times and interoperability in payments, meaning the industry will need to consider alternative solutions.”
Better interoperability between banking systems
Ola Oyetayo, co-founder and CEO, Verto, the payment simplification platform notes that while CBDCs have the potential to accelerate transaction speeds, they aren’t the perfect solution for cross-border problems.
“CBDCs could reduce the cost and time taken to complete cross-border payments by streamlining transactions. However, for this to have a significant impact on cross-border payments, there will need to be significant developments in terms of the interoperability and cooperation between different banking systems. As such, it is unlikely that we will see CBDCs having a substantial impact in 2024.”
Consumers will not see big changes
Looking at the impact of CBDCs from a consumer’s perspective, Anish Kapoor, CEO, AccessPay, the bank Integration-as-a-Service provider, did not think users would notice a radical transformation.
“CBDCs are anticipated to impact cross-border payments in 2024, but primarily around settlement times rather than inducing a significant change in the end-user proposition. The digital currencies are influencing the technical aspects of cross-border transactions rather than altering user experiences.
“CBDCs can contribute to quicker and more secure cross-border settlements, reducing the time traditionally associated with international fund transfers. This technical optimisation aligns with the broader trends we are seeing in the financial industry towards faster, more reliable, and cost-effective cross-border transactions.
“While CBDCs are expected to play a crucial role in reshaping the backend processes of cross-border payments, the day-to-day experience for end-users may not undergo a radical transformation.”
Certain economies will have different responses
For David Sewell, partner, financial services regulation practice, Freshfields, the multinational law firm, different economies will respond differently to CBDCs. While developing economies may look at them more favourably, he does not think G7 economies would be impacted much.
“The European Central Bank (ECB) made waves last October by announcing it would move to the next phase of its digital euro project, but this ‘preparation’ phase will last at least two years and a decision to issue a digital euro seems a ways off.
“The Federal Reserve, Bank of Canada, and Bank of England are studying CBDCs, and there are challenges in each country. The Bank of Canada recently released a report finding widespread public skepticism toward a CBDC. While the UK authorities have announced a new round of CDBC study, the Treasury Committee of the UK’s Parliament has expressed concerns. Fed leadership has been vocally skeptical and promised to move forward on issuing a retail CBDC only with authorising legislation from Congress.
“Meanwhile, opposition to a CBDC has become a talking point for presidential candidates.
“Things are more promising for CBDCs elsewhere, but there’s still significant uncertainty. China continues to promote use of its digital yuan, but for now its use in cross-border payments is quite limited. Other countries, such as Singapore and South Korea, have announced retail CBDC pilot programs, but the impact of these projects won’t be felt in 2024 regardless.”
