Simplifying cross-border payments through CBDC technology

With the world now accustomed to doing business transactions in three seconds or less, there is an opportunity for bankers to view central bank digital currencies as a platform for innovation and a new way to speed up cross-border payments.

A Juniper Research report on CBDCs and stablecoins found that “the value of CBDC payments will reach $213 billion annually by 2030; from just $100 million in 2023. This radical growth reflects the sector’s early stage; currently mostly limited to pilot projects. To understand the projected growth for CBDCs, let’s look at the problems they can solve.

CBDCs offer similar benefits to central bank money capacity for settlement finality, liquidity and integrity. This makes digital currencies backed by central banks more attractive to businesses and consumers. They allow central banks and governments to bring the level of innovation to traditional domestic markets as seen in the broader cryptocurrency industry. The ability for central and commercial banks to work with technology providers to facilitate cross-border transactions will allow banks to acquire new consumer and business customers

CBDCs enable low-cost, virtually instant settlement of both domestic and cross-border payments, reducing risk and improving the user experience. Digital currency technology such as Ripple’s CBDC platform introduces instant settlement and capabilities not possible with legacy technology. This helps ensure that payments are sent and received quickly in local currency on both sides of the transaction, while providing a platform for further innovation.

With the use of blockchain technology, the digital ledger effectively maintains an audit trail of financial transactions, reducing operating costs and reducing carbon dioxide emissions by minimizing energy consumption. An example of this is the energy efficient XRP ledger technology, which is in stark contrast to the energy used by cryptocurrencies such as Bitcoin. CBDCs also eliminate the high costs of printing and distributing fiat currency, thereby saving paper, energy, and reducing transportation costs that fiat currencies can
require.

Currently, cross-border payments have high costs and low transaction speeds. In traditional banking systems, banks may charge user and merchant fees for processing transactions, along with account fees and ATM surcharges. In a blockchain-based system using CBDC, transaction fees can be drastically reduced through the use of peer-to-peer wallets without the need for intermediaries to perform
settlement related activities.

As CBDC pilot projects unfold, it is becoming clear that there is no single magic bullet for developing and accelerating cross-border payments. There are risks inherent in the use of CBDC for these transactions, including the digitalization of the values ​​of some currencies and the improvement of settlement times and payment interoperability.

Through Ripple Payments, Ripple has significant experience in providing solutions worldwide, enabling seamless cross-border transactions, reducing risk and cost through harmonized standards.

In traditional banking systems, the complexity of cross-border payments has necessitated the use of third parties (such as payment networks and credit card companies) to facilitate the process. These third parties may charge high fees for their services in connecting different payment systems while potentially having access to transaction data. Because CBDCs can ensure that banks can make cross-border payments without intermediaries, it allows them to stop sharing data with third parties while reducing the cost of cross-border payments for everyone.

Finally, interoperability between blockchains and currencies is still evolving, but CBDC technology can enable interoperability between different currencies. Financial institutions and technology providers must learn as they plan and execute pilot projects. The beauty of digital currency technology is that it can allow organizations to be nimble when making changes while providing better change management. This allows central banks to apply much-needed adjustments throughout the production cycle.

From the few existing and completed CBDC pilot projects, we can see that challenges include interconnecting systems, achieving regulatory compliance across jurisdictions, and incorporating effective business objectives into technology design.

A key distinguishing feature of the Ripple CBDC platform is the ability for central banks and governments to adapt their currency plans during each stage of the CBDC production cycle. Adapting CBDC plans to align with a specific country’s goals requires this type of flexible decision-making and business planning before the pilot project begins. As more countries work to adopt CBDC plans, new ways to execute and accelerate cross-border transactions should continue to evolve, helping central banks deliver value to consumers and businesses.

Anthony Ralphs is Director of Product Management for CBDC, Ripple.

This article was published in OMFIF’s Future of Payments 2023 report.

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