Cross-border payments: A global public good?

Reinventing Bretton Woods Committee Conference, 15 October 2022, Washington, D.C., prepared remarks

Ladies and Gentlemen,

I'm delighted to be back in person at the IMF Annual Meetings and most grateful to the organisers for the invitation to this most interesting and timely conference. Persistent deficiencies in international payments and rising geopolitical tensions that will test the ability of existing systems to adapt are expected to increase strains to conduct international payments. This could reduce prospects for an orderly economic recovery and undermine opportunities for international trade and investments. International payments need to become more agile, be more resilient and respond faster to changing economic relationships. They also of course need to become much more efficient. It is still faster to get on a plane from London to Singapore to deliver a suitcase of banknotes than making an international wire transfer between the two cities.

International payments are still very much 20th century. It is because they rest on intermediation by individual institutions forming sometime long so-called payment chains. It is also because money is very local and typical confined to a given jurisdiction. Unlike a good that can be moved anywhere, money never moves. Making a transfer means crediting an account. It also means that the claim you acquire is with your bank irrespective of the origins of the funds. In a foreign transaction, the dollars are always in the U.S. and the euros in the Eurosystem. It implies that while a foreign exchange transaction may settle in the respective large value payment systems, that is, in central bank money, of the beneficiaries’ countries but the receive leg, the currency obtained in exchange of another currency, will “only” be a claim on the payee’s correspondent bank.

New approaches are needed. Token-based mediums like central bank digital currencies (CBDC) offer a new financial market infrastructure and smart features that are particularly well suited for international payments. I worked with Accenture on different CBDC projects to support investigations in that direction.

Wholesale CBDC project Jura by the Banque de France, Swiss National Bank with the BIS Innovation Hub and a consortium of private sector entities led by Accenture tested an alternative architecture for conducting international payments and settlement. The project explored with real transactions issuance of wholesale CBDCs by the Banque de France and Swiss National Bank, respectively, and a euro-denominated commercial paper on a distributed ledger platform to conduct payments and settlement in cross-border transactions between France and Switzerland. Banks were able to exchange outright euro CBDC for Swiss franc CBDC projecting for the first time an international payment to be made in central bank money. It made possible a foreign exchange in a payment vs payment transaction in CBDC that were instant and atomic, meaning both legs of the transaction succeed or none does. The latter implies there are no open positions and a foreign exchange transaction becomes entirely riskless. It made also possible to settle the commercial paper with the euro CBDC in a delivery versus payment cross-border transaction between a French and Swiss bank and off-shore transaction, from the point of view of France, between two Swiss banks. The project demonstrated a complete new spatial dimension of payment and settlement.

Wholesale CBDC mBridge by the BIS Innovation Hub with the People’s Bank of China, Honk Kong Monetary Authority, Bank of Thailand and Central Bank of the UAE and a consortium of 20 commercial banks from the four jurisdictions and supported by Accenture laid the foundation towards establishing an international settlement corridor. In mBrdige CBDC issued by the central banks were used among participants to settle real value international payments in instant transfers and payment versus payment transactions. The ambition is to promote an alternative international payments infrastructure and use of smaller currencies in international transactions to advance greater diversification of the international monetary system.

CBDC offers an entirely new approach to international payments. It is my view that to make meaningful progress to improve in international payments, the outright, instant and atomic exchange of mediums of payments offers a most promising approach. However, apart from CBDC, other mediums could also be used including, e.g., global stable coins. The key is to deploy high quality mediums and establish more direct monetary relations that are also better suited to adjust to changes in economic relations or other shocks. The new mediums would offer alternative payment rails and advance diversification and resilience of international payments.

The notion that cross-border payments are a public good seems right as the benefits of a well-functioning international monetary system accrue to many entities beyond its immediate participants. I therefore think that a proactive public sector engagement can play a key role to facilitate adoption of a new system. Adoption has remained hesitant amid first-mover and adverse-selection problems. Many incumbents may have few incentives to alter a system they dominate. The public sector could intervene to establish incentives and conditions conducive for change. For central banks, it may offer a historical opportunity to reshape international payments not unlike the system established with the IMF, since we are in Washington during the IMF Annual Meetings, that helped restore international payments relations after World War II. This time though the vision for an efficient system may be less about complete but more about variable international economic integration.

International payments need an overhaul. This has of course been recognised. To advance towards change, sufficient incentives need to be provided to overcome legacy inertia. The foreign exchange market would be completely transformed if different CBDCs could be used possibly establishing a more efficient, more diversified and safer system that would facilitate the orderly adoption of a greater number of international currencies supporting international financial integration while at the same is better prepared to accommodate adverse shocks.

Projects Jura and mBridge have demonstrated the feasibility of pursuing completely new approaches in international payments. Many central banks still seem to entertain a reactive rather than proactive approach defending the decision to consider a CBDC against the perceived threat of private coins and decline in cash. Central banks need to make CBDC about financial innovation to do new things and thereby equipping financial systems with greater choice and functionalities. Paper currencies proliferated during the nineteenth century to overcome the constraints of specie payments. CBDC and other token-based mediums may now be best to address future payment needs.

Thank you for your attention.