CBDC in international large value payments

FDF Lounge Accenture, presentation and panel discussion, 21 September 2022, Kronberg (Taunus), prepared remarks

Ladies and Gentlemen,

I would like to thank the organiser for inviting me to present here at Accenture’s Future Camp. My fellow speakers provided already an overview about CBDC and its particular application for banks. I will try to go one step deeper and outline objectives and content of several CBDC projects with a focus on international wholesale payments. Accenture has been involved in a number of leading CBDC projects including projects e-krona with the central bank of Sweden, Khokha 2 with the central bank of South Africa, project Jura with the central banks of France and Switzerland and the BIS Innovation Hub. E-krona is a retail CBDC project. Khokha 2 is a domestic wholesale CBDC project and Jura is a wholesale CBDC covering international payments and financial instrument settlement. Earlier project Jasper-Ubin with the central banks of Canada and Singapore had a similar objective. I shall focus on the latter and also make reference to project mBridge, an international payments wholesale CBDC project by the BIS Innovation Hub with the central banks of China, Hong Kong, Thailand and the UAE.

The ECB in its report on a digital euro had one particularly interesting reference, namely that a future digital euro could be held by non-residents. This may seem trivial but it is not. Today international payments cannot be performed in central bank money, except for payments in banknotes. Banknotes of course offer an important precedent. About one quarter of euro banknotes are estimated to circulate outside the Euro Area. But for digital central money bank money, it is not possible as central banks typically do not allow non-residents to hold an account with the central bank. The use of central bank money for international payments would extend the safety of central bank to international payments and could fundamentally change how large value payments in particular foreign exchange and securities settlement could be performed. The ECB indicated that a digital euro should enhance the importance of the euro as an international payment medium and as such strengthen the strategic autonomy of the European Union. The ECB has thereby launched a new round of international currency competition.

International payments remain slow, opaque slow and costly. There is policy consensus that the existing model based on correspondent banks is no longer fit for purpose. The G20 has made enhancing international payments a priority and has been looking into the role of CBDC. The current system rests fundamentally on indirect payments relations, this holds also for domestic but in particular for international payments, and therefore relies sometimes on long payment chains to perform money transfers. This means considerable risk exposures and delays. More direct payments relations could change that making payments instant. If payments were to be performed in central bank money, they could become near riskless. CBDC is meant to achieve that.

To quickly reiterate, that all references to CBDC are as a digital token that normally lives on a blockchain or other distributed ledger (DLT) platforms. The innovation with CBDC is the adoption of a new medium the digital token. DLT platforms offer many out-of-the-box features that seem best suited for the circulation and management of digital tokens. DLT features like programmability and traceability also offer the possibility to significantly enhance payments possibilities. While conventional technologies may offer some similar features, adoption is estimated to be significantly more onerous.

International CBDC projects have focused on different approaches to exchange CBDC. At least three models co-exist. The first rests on every central bank maintaining its own CBDC network and exchanges would have to be performed across networks; project Jasper-Ubin was based on this approach. The second consists of deploying a home CBDC in a foreign location to allow exchanges to be performed on a single network; project Jura uses that approach. The third establishes a settlement corridor with the participation of several central banks to share a common platform; project mBridge follows that approach.

The objective of many CBDC projects performing international payments is to allow exchanges of CBDC tokens between residents and non-residents. While Jasper-Ubin was still based on the correspondent banking model, Jura and mBridge allow an outright exchange of CBDC tokens. Such exchanges aim to perform instant and atomic exchanges, that is both legs of the transaction need to succeed or none does. This makes possible to perform delivery versus payment (DvP) and payment versus payment (PvP) transactions. The transactions would eliminate all open positions and enable instant reuse of the instrument received. It should lead to a recalibration of liquidity itself as trading parties would never be short liquidity as one either receives cash or a security that can instantly be repoed to obtain cash.

Project Jura has explored an entirely new architecture for the exchange of financial instruments and currencies with the participation of the Banque de France, Swiss National Bank, BIS Innovation Hub and a consortium of private sector entities including one French and two Swiss banks. The project was the first to perform real transactions using wholesale CBDC and a tokenised commercial paper. It involved the use of a test platform operated in Switzerland and a new issuance platform for non-listed financial instruments in France. Both platforms used permissioned Corda networks. The project included the issuance of a euro CBDC and a Swiss franc CBDC on the Swiss test platform and issuance of a tokenised euro-denominated commercial paper on the issuance platform and re-issuance on the Swiss test platform. The central banks issued CBDC on the Swiss test platform against reserves debited in their accounts of their respective large value payment systems. All transactions were conducted on the Swiss test platform. The banks performed foreign exchange transactions exchanging outright euro CBDC for Swiss franc CBDC and trading the commercial paper settled against euro CBDC between the French and Swiss banks in cross-border and offshore transactions, so e.g., a Swiss bank paid for the commercial paper in euro CBDC on the Swiss test platform in a DvP transaction; a French bank and a Swiss bank did a foreign exchange trade swapping outright euro CBDC for Swiss franc CBDC in a PvP transaction. All transactions were atomic. Each central bank was able to maintain control of transactions conducted in their respective currencies through a novel control allocation as part of the consensus mechanism of Corda.

Jura allowed for the first time Swiss entities to hold a euro CBDC and French entities to hold a Swiss franc CBDC thereby making possible cross-border and offshore payment and settlement in CBDC. The project demonstrated an alternatve to establishing monetary relations between resident and non-residents. The approach completely eliminates intermediaries and open positions and thereby mitigates greatly prevailing risks in international exchange. Herein lies the essential innovation. It outlined how the ECB’s vision of a more prominent role of the euro in international payments could be achieved by equipping the euro with greater functionality and utility.

Project mBridge pursues an alternative approach to international payments. The project offers broad access to central bank money and aims to shift international payments among the participants from the general use of a third-country currency to using local currencies. To illustrate the latter, data for 2019 for Thailand show that about 77 percent of imports are invoiced in dollars compared with 9 percent of imports invoiced in the home currency as 7.3 percent of total imports are from the U.S.1 Similar patterns exist among advanced economies, e.g., for the United Kingdom, while in 2020 imports from the U.S. by the United Kingdom represent 17 percent of total imports from outside the European Union, 68 percent of imports are invoiced in dollars.2

The objective of mBridge is to explore establishing a settlement corridor where all participants are subject to common rules. Participants will be able to use CBDC to conduct international payments including transfers and PvP transactions in CBDC denominated in the currencies of the participant central banks affording similar to Jura the outright exchange in CBDC. While in Jura, the Banque de France deployed its CBDC on the basis of prevailing conditions of the Swiss test platform, a settlement corridor would likely have to rest on a multilateral governance arrangement. Similar to a scheme, a settlement corridor would afford trading certainty but resting on multilateral agreements may prove more difficult to scale.

International payments are marred by decade-old problems. In part this is due to the architecture of payments. It is also very much due to the fact that most international payments are conducted in a very narrow set of international currencies. CBDC may be able to address both by establishing new and more direct monetary relations and by offering new functionalities that may also make smaller currencies more accessible and more attractive to use thereby supporting an increasing diversification of the international financial system. This would be one of the most important contributions of CBDC.

Thank you for your attention.

1 Boz, E. et al (2020), Patterns in invoicing currency in global trade, IMF Working Paper. Thailand is only country for which data are available.

2 HMRC (2020), UK non-EU trade in goods by declared currency of invoice 2020 data.

Economics Advisory, September 2022