America’s currency, the U.S. dollar in particular, has traditionally been at the heart of the world’s financial and trading system. It is the most used unit for acquiring and maintaining assets, as well as for making international payments. The dollar-based international payment system consists of three key components: the U.S. dollar as the medium of exchange, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) as the platform for transferring payment messages, and the Clearing House Interbank Payments System (CHIPS) as a correspondent banking network. In contrast, emerging multi-CBDC platforms aim to provide an alternative framework for international transactions.
For instance, examine a large dollar-based international operation. If the buyer’s bank in the importer’s country and or the exporter’s bank does not have a relationship, the importer’s bank will send a payment message through SWIFT to another bank that enjoys a good working relationship with the exporter’s bank. This third party institution acting as a CHIPS correspondent bank deducts the amount from the importer’s bank account and pays the exporter’s bank account fulfilling the transaction.
The dollar system has been providing people with an opportunity to conduct transfers between countries without any restrictions for decades; however, it has negative effects – for example, for such countries that are on the sanctions list of the USA. To that end, some countries are devising alternatives. Some of the most cited are China’s Cross-border Interbank Payment System (CIPS) and Russia’s System for Transfer of Financial Messages (SPFS). However, these alternatives have quite a number of challenges. SPFS allows transactions exclusively in Russian rubles, which are deprived of appeal in the foreign companies’ eyes especially bearing in mind Russia’s isolation from the West. CIPS favors renminbi linked payments and while renminbi is not fully convertible its usage is somewhat restricted.
These are the difficulties under which the next wholesale Central Bank Digital Currencies (CBDCs) are being offered as panaceas. Multi-CBDC platforms currently being experimented with for cross-border transactions are now in full swing. Multi-CBDC platforms interlink wholesale Central Bank Digital Currencies from different jurisdictions using a common technical framework. An example is mBridge-a collaboration between the Bank for International Settlements (BIS) innovation hub and the central banks of Hong Kong, China, the UAE, and Thailand, which are now engaged in a pilot project. Recently, mBridge reached a minimum viable stage and welcomed even the Saudi central bank as a full participant.
In such a case, a multi-CBDC platform like mBridge would do away with the need for a financial messaging platform or correspondent bank. Continuing with the same example, if the importer is located in the UAE who needs to pay a Chinese exporter, then the importer’s bank can purchase Chinese Central Bank Digital Currencies directly on the platform and transfer them directly to the bank of the exporter.
Challenges for Multi-CBDC Platforms
The question of the potential viability of multi-CBDC platforms on a large scale has yet to be conclusively answered. This question leaves a multitude of doubts, even though market analysts predict that various platforms scoring different needs will evolve with their related infrastructures. Another concern is that central banks may not want their own currency to be distributed on platforms that they themselves do not direct. Furthermore, obtaining global consensus around a single platform would probably remain a figment of the imagination, with the technological challenge as much as the geopolitical one at stake.
The challenges suggest that it may take several years for multi-CBDC platforms to create turmoil in the dollar-based payment regime. At the same time, the far-reaching work in the domain of mBridge and other similar working groups, like Project Dunbar, shows that these multi-CBDC platforms may, in fact, become the reality and the lead in wholesale cross-border operations much sooner than expected. The implications of such developments for the very character of global finance can no longer be disregarded.
Geopolitically, these systems can be used by countries to derive economic influence and strengthen alliances. Even if these platforms might fragment global finance economically, they have certainly shown the potential to reduce settlement times, decrease costs, and bring more transparency to cross-border payments. These benefits make multi-CBDC platforms worth exploration as the future of global finance plays out.
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