Will central bank digital currencies (CBDCs) impact cross-border payments in 2024?

Payments is arguably the face of fintech. When you think of financial technology, it’s easy to think of solutions that make payments faster, easier and more accessible.

As of December 2023, 130 countries, representing 98 percent of global GDP, have explored central bank digital currencies (CBDCs), according to the Atlantic Council’s CBDC Tracker. With so many countries looking for centralized digital assets, we tried to find out how this would affect the cross-border payments market.

Fundamental Risks for Using CBDCs

Nina Moffatt, fintech and regulatory partner, at law firm Paul Hastings, notes that while CBDCs are an attractive option, risks such as settlement times are hindering mainstream adoption.

“Central Bank Digital Currencies (CBDCs) are an increasingly attractive option for governments around the world, with their promise to interconnect digital payment systems. Ninety-eight percent of the world economy is reportedly already exploring digital versions of their currencies. However, CBDCs will not be the silver bullet to develop and accelerate cross-border payments.

“There are some fundamental risks inherent in the use of CBDCs. These include translating 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 payments simplification platform notes that while CBDCs have the potential to accelerate transaction speeds, they are not the perfect solution to cross-border problems.

“CBDCs can reduce the cost and time it takes to complete cross-border payments by streamlining transactions. However, 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. If thus, it is unlikely that our CBDCs will see a material impact in 2024.

Consumers will not see major changes

Looking at the impact of CBDCs from a consumer’s perspective, Anish Kapoor, CEO, bank integration-as-a-service provider AccessPay, didn’t think users would notice a radical transformation.

“CBDCs are expected to affect cross-border payments in 2024, but mainly around settlement times rather than causing a significant change in the end-user proposition. The digital currencies affect the technical aspects of cross-border transactions rather than changing user experiences.

“CBDCs can contribute to faster and safer cross-border settlements, reducing the time traditionally associated with international fund transfers. This technical optimization aligns with the broader trends we see in the financial industry towards faster, more reliable and cost-effective cross-border transactions.

“While CBDCs are expected to play a pivotal role in reforming the back-end processes of cross-border payments, the day-to-day experience for end users may not undergo a radical transformation.”

Certain economies will have different reactions

For David Sewell, partner, financial services regulatory practice, Freshfields, the multinational law firm, different economies will react differently to CBDCs. Although developing economies may look more favorably on them, he does not think G7 economies will be much affected.

“The European Central Bank (ECB) made headlines last October by announcing that it will move to the next phase of its digital euro project, but this ‘preparation phase’ will last at least two years and a decision to create a digital issuing euros seems to be a way. 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 that found widespread public skepticism towards a CBDC. While the British authorities a announced new round of CDBC study, the Treasury Committee of the British Parliament expressed concern.Fed leadership was vocally skeptical and promised to proceed with the issuance of a retail CBDC only with the authorization of 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 is still considerable uncertainty. China continues to promote the 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 , announced retail CBDC pilot programs, but the impact of these projects will not be felt in 2024.