OPINION PIECE
CBDC ARRANGEMENTS:
The Solution to Cross Border Payment Inefficiencies?
Kokila Alagh Founder, KARM Legal Consultants
Despite the unprecedented rise in cross-border trade and commerce, payments and funds transfers have been slow to catch up. Kokila Alagh Founder of KARM Legal Consultants examines whether distributed ledger technology based Central Bank Digital Currency (CBDC) arrangements between countries may solve issues including fragmented data formats, complex compliance checks and incongruent operating hours of payment systems across multiple jurisdictions
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ross Border Payments – Existing infrastructure and challenges
Current cross border payments infrastructure comprises multiple parties operating at disparate speeds to authenticate transactions. The banking sector remains webbed with the correspondent banks. Correspondent banks hold deposits owned by other banks (respondents) and execute third party transactions on their behalf. Settlement between these institutions is facilitated by transactional messages transmitted over an encrypted financial network (think SWIFT), then relevant accounts are credited or debited. Such arrangements allow banks to maintain branches in multiple jurisdictions and have the ability to facilitate international payments. Retail fintech applications created by non-banking institutions such as e-wallet services (HubPay and Tiqmo in UAE, etc.) and schemes such as the Asian WeChat Pay and AliPay, often rely on correspondent banking to provide foreign exchange and
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settlement services, losing transaction speed. Further, interbank settlement of cross-border card transactions relies on correspondent banking as well.
Challenges and issues Some improvements are being made. Examples of this are the integration of synchronised domestic Real time Gross Settlement systems and harmonised API protocols for data exchange across payment infrastructures and jurisdictions (for instance, Nium). That said, most transactions are still facilitated through correspondent banks. These transactions face the following issues: 1. Cost: These include compliance costs, FX conversion rates and fees, fees along the payment chain and liquidity cost for prefunding. The World Bank estimates the global weighted average cost for crossborder remittances of $200 to be 6.51%, making such remittances a costly affair. Additionally, for cardbased payments a fee of up to 10% is
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charged as card issuer/ merchant fee and FX margin. 2. Transparency: Several API-centric innovations such as SWIFT GPI have enabled end-to-end tracking of payments. However, the lack of adoption and access to these innovations means that some transfers still suffer from opacity regarding total transaction cost. Limited transparency also affects AML/CFT checks. Speed and synchronization (Liquidity and credit risk linked) The dependence on several correspondents and intermediaries, asynchronous cut-off and opening times and regulatory checks all contribute to prolonged processing periods. Non-standardized messaging and processing formats slow down crossborder payments, as mapping and format conversions are required. Speed and cost effectiveness are both consequences of interoperability and standardization. The lack of instantaneous atomic settlement
