SWIFT INSTITUTESWIFT INSTITUTE WORKING PAPER NO. 2020-002

CENTRAL BANK DIGITAL CURRENCIES AND
INTERNATIONAL PAYMENTS
CHUSU HEALISTAIR MILNEMARKOS ZACHARIADIS

PUBLICATION DATE: MAY 2022

The views and opinions expressed in this paper are those of the authors. SWIFT and theSWIFT Institute have not made any editorial review of this paper, therefore the views andopinions do not necessarily reflect those of either SWIFT or the SWIFT Institute.

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Central Bank Digital Currencies andInternational Payments
Chusu He* , Alistair Milne†, Markos Zachariadis‡
May, 2022§

Table of Contents
1 Introduction................................................................................................................ 7
2 International payments and CBDC design choices .............................................. 10
2.1
Frictions in international payments. .................................................................. 10
2.2
CBDC design choices and international payments ........................................... 17
3 Competition and innovation in payments .............................................................. 21
3.1
A decade of change in payments technologies and regulation.......................... 21
3.2
Platforms and network externalities as barriers to CBDC adoption.................... 23
4 Four international payment scenarios: how CBDC can help improve ................. 26
4.1
Overview......................................................................................................... 26
4.2
Small business payments................................................................................ 29
4.3
Larger corporate transactions .......................................................................... 31
4.4International retail purchases........................................................................... 31
4.5
Remittances.................................................................................................... 33
5 Using CBDC to redesign international payments architecture ............................. 33
6 Conclusions............................................................................................................. 40
References ..................................................................................................................... 44
Appendix A. Interview design and interview questions. .............................................. 47
7 The six page interview document .......................................................................... 48
7.1
Introduction ..................................................................................................... 48
Part A. CBDC design choices and international payments .......................................... 49
Part B. Scenarios of CBDC implementations for international payments ..................... 50
Part C. General questions on the impact of CBDC on international finance ................. 52
Typology of key design choices for CBDC.................................................................. 53
Appendix B. Central bank work on CBDC .................................................................... 55
Some leading CBDC initiatives ..................................................................................... 58*

School of Management, University of Bath, email: ch704@bath.ac.uk, Orcid: https://orcid.org/00000002-2464-9280†
School of Business and Economics, Loughborough University, email: a.k.l.milne@lboro.ac.uk, Orcid:
https://orcid.org/0000-0002-4135-3983‡
Alliance Business School, Manchester University, email: markos.zachariadis@manchester.ac.uk,
Orcid: https://orcid.org/0000-0002-6534-781X§
This paper has been supported by the SWIFT Institute, under their grant agreement 2020-002.
SWIFT has f acilitated our work through providing introductions for some of the interviews reported inthis paper and through feedback on the research design. We would also like to acknowledge thegenerous amount of time provided to us by the twenty-two individuals who made themselves available
f or our interviews. We are fully responsible for the views and the analysis presented here.

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Executive summary
This paper – drawing on interviews with twenty-two senior payments professionals –documents the business processes employed in the execution of international payments anddiscusses how international payments might be improved through the adoption of central bankdigital currencies (CBDC). This was a substantial exercise resulting in a lengthy research
paper. This executive summary presents the key insights.
The motivation for this research is the focus of the industry on reducing costs, increasing
speed, widening access and improving transparency of cross-border payments. An April 2020
report of the Financial Stability Board for the G20 (FSB, 2020) identifies some of the issues
that need to be addressed: “fragmented data standards or lack of interoperability; complexities
in meeting compliance requirements, including for anti-money laundering and countering thefinancing of terrorism (AML/CFT), and data protection purposes; different operating hours
across different time zones; and outdated legacy technology platforms”.
To many observers technology has developed to the point where an international payment, toany destination, can and should be as straightforward as sending an email. This perception isreinforced by the observation that instant global payments can be made already using
cryptocurrencies such as Bitcoin. So, it should be easy to do the same using CBDC, the fiat
equivalent of cryptocurrencies.
A July 2021 report by the BIS, the World Bank and the IMF to the G20 (BIS et al., 2021)
discusses the technical aspects of this. They consider arrangements for direct exchange of
CBDCs of different fiat currencies, referring to these multiple CBDC exchanges as mCBDC.
They consider several possible forms and applications of mCBDC in international payments.
Our focus on business processes highlights a different question, not addressed by (BIS et al.,2021). What is the nature of the CBDC opportunity in international payments? Is it:a) Enhancement: One of several current incremental technology developments,
supporting gradual improvement in arrangements for making international payments,
without fundamentally changing underlying business processesORb) Transformation: An opportunity for fundamental redesign of the architecture ofinternational payments, radically simplifying business processes so that international
payments can be made as directly and efficiently as domestic payments?
It seems that many discussing the problems of international payments are unaware of thecomplexities of the supporting business processes. In consequence, this central question has
been largely overlooked. Yes, sending an international payment could become as easy as
sending an email, but this would require substantial change in the way international payments
are conducted, simplifying the underlying complexities of business processes.

3What are these complexities? From the customer’s perspective, an international payment isstraightforward. It is the debiting of the sender’s account followed by the crediting of therecipient’s account in a different currency and different country. Underlying this though aremany operations, as transactions move through accounts on intermediary balance sheets.
As an example, consider a domestic bank processing an international payment on behalf of acustomer (see Figure 2 of the paper). This domestic bank accesses an international bank thatin turn holds a foreign currency account with a correspondent bank in the destination country.
Money is not itself transferred internationally. Instead, the payment is executed utilising acredit balance on an account held by international bank with its correspondent. Exchange ofmoney from one currency to the other only takes place later and to the extent needed; forexample, whenever the international bank uses foreign exchange transactions to restore its
credit balance with the correspondent
There are several supporting settlement transactions: (i) first, at the time of the payment, two
independently conducted single currency domestic settlements, for debiting the sender’saccount and for crediting money to the recipient’s account; (ii) then later, if required, further
settlement of the foreign exchange transactions used to restore credit balances with thecorrespondent.
The interviews reported here provided insight into other payment scenarios and theirsupporting business processes. International bank payments, of the kind described in theprevious paragraphs, are mostly used by smaller companies and for person-to-person moneytransfers. Payments by larger companies can be much simpler, as they often already holdaccounts in both jurisdictions. This eliminates the need to use an international bank andcorrespondent bank as middlemen for international payments. They still require aninternational bank, but only for multiple currency cash management, helping them with foreignexchange transfers to correct cash imbalances between currencies and jurisdictions.
Separate arrangements, operating in parallel to international bank payments, address otherspecific needs. Specialised non-bank financial institutions provide migrant remittances, often
beginning with a deposit of physical cash and ending with a physical cash withdrawal. Most
international retail payments, by tourists and travellers or for international online purchases,
take place under the further arrangements of international card schemes, such as Visa andMastercard, with payment passing through the balance sheets of their own chains ofparticipating bank and non-bank intermediaries.
Technology is addressing the inefficiency of international payments, albeit slowly. The speed
and transparency of international bank payments has been substantially improved by SWIFT
gpi. Non-bank alternative foreign exchange providers are capturing an increasing share ofinternational payments. While substantially improving services, these use similar businessprocesses as the incumbents they challenge, with payments passing through sever alintermediary balance sheets. Their competitive advantage comes from better interfaces, lowoperating costs from employing specialised technology unencumbered by legacy, andoperational integration with domestic faster payment schemes to support rapid co mpletion of
payment instructions.

4Turning to the role of CBDC in improving international payments, the research adopts a broad
definition. CBDC is taken to be any widely held electronically recorded central bank liability
available for transfer, whether recorded on a distributed ledger or a more conventional
database. This could be a ‘retail CBDC’ held by citizens, residents and domestic companies
and potentially also by others. Or it could be a ‘wholesale CBDC’, used in larger valuetransactions and held by non-bank financial institutions, banks and possibly also large nonfinancial corporations.
We obtain the following findings:•

The most direct way of using CBDC to improve international payments is allowing
wholesale CBDC to be accessed and used for settlement by a wide range of international
intermediaries, e.g. non-bank payment service providers and foreign banks. This will avoid
the need for a correspondent bank in payment transmission, in turn removing substantial
barriers to entry in international payments, without any transformative change ininternational payments processes. The resulting increase in competition can then reducethe cost and opacity of international payments across all international payment scenarios.

This must though overcome two barriers. Central banks worldwide will be cautious aboutallowing foreign intermediaries access to their balance sheet. Also, wholesale CBDC
accessed by foreign intermediaries must support the routing payments through the domestic
payment scheme of the recipient, ideally on an immediate 24/7 basis. i.e. interoperability withdomestic payment schemes, especially domestic faster payment schemes.
•

Without a transformative redesign of international payments processes, theintroduction of retail CBDC can only have only a limited impact on international
payments, supporting improvements in some specific payment scenarios. It could be
used by tourists or travellers as a cheaper and more convenient alternative toacquiring and holding physical currency. Retail CBDC, if it promotes financial inclusion,
reduces costs of remittances by removing the reliance on local agents for making
payments of physical currency to the recipient. Retail CBDC, if accompanied by thedevelopment of comprehensive domestic identity solutions, can also reduce theburden of KYC and AML monitoring in international payments.

The reason for this limited impact is that, without a transformative change in international
payment processes, direct use of retail CBDC to execute an international payment will not
be possible. Under current business processes, international payments (exceptions arethose made using cryptocurrencies and physical cash e.g. US dollar bills) take place on thebalance sheet of financial intermediaries. Holding retail CBDC and using it to make aninternational payment is no different than holding and using commercial bank money – it still
has to be exchanged and then transferred as claims on financial intermediaries.
•

It is possible that over a longer time horizon the emergence of retail CBDC could resultin a transformation of business processes for international payments. We discuss one
possible radical change of this kind. Suppose many households and corporates in bothsending and receiving countries hold CBDC. In this case a market could arise for direct
CBDC exchange without, unlike today, the payment having to pass through any
intermediary balance sheets. Intermediaries would still be used, but they would be
brokers, not dealers, helping customers find a counterparty with a ‘double co -incidence5

of wants’ in foreign exchange, wanting to acquire the customer’s CBDC in exchange
for their own. Just as with exchange of cryptocurrencies transfer of ownership would
then be immediate, with no subsequent settlement, and international payments would
indeed be as easy as sending an email.
•A market for such real time exchange of retail CBDC, if it ever develops, is some way
in the future. However, if the authorities wish to encourage a movement in thisdirection, they could support the development of a spot market for real time exchangeof wholesale CBDC amongst large corporates and financial intermediaries. Ourinterviews indicate that there could be demand for such exchange in the relative near term, allowing intermediaries and large corporates to manage their liquidity on a global
real-time 24-7 basis. The reduction in costs of liquidity provision could then in turnsupport further efficiency gains across the full range of international payments
scenarios. The existing T+2 settled foreign exchange markets (really a short termforward market) could run alongside this true 24-7 spot market exchange, to support
leveraged position taking and foreign exchange risk management.

Our analysis has one further implication. Policy needs to clearly distinguish two different goals:(i) near-term practical improvements in the cost and performance of existing international
payment services; (ii) medium- and long-term reshaping of the architecture of international
payment services to provide new and improved services that cannot be supported by existingarrangements. In terms of policy goal (i), the most obvious and immediate ways in which
CBDC can be helpful are, in our analysis: providing wider intermediary access to central bankmoney in the form of wholesale CBDC; and interoperability and compatibility of wholesale
CBDC with existing domestic payment systems; along with comprehensive globally accepted
identity solutions.
These relatively mundane nitty-gritty enhancements to existing arrangements matter more, fornear-term improvement to international payments, than the interoperability CBDCs being
explored through current experiments with mCBDC, interoperability that is only needed in thecontext of longer term transformative change, with the emergence of widespread retail holdingof CBDC and the opportunity this creates for redesign of the business processes ofinternational payments.

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1 Introduction
Central banks worldwide are examining closely the new digital monetary technologies withmany of them considering launching their own central bank digital currencies (CBDC). A few
have already implemented forms of CBDC (predominantly in the pilot stage) that can beused as alternatives to central bank notes in daily payments, for example the e-CNY in
China). Many more – including the ECB, Bank of England, and the Federal Reserve – haveinitiated projects assessing the feasibility of creating their own digital currency and are
publishing interim research and policy papers on what this would entail.
Our paper investigates the implications of the introduction of CBDC for international
payments, with a focus on the impact on the low value payments made by small businesses,
on merchant expenditures by consumer and travellers and on person-to-person international
remittances. The investigation has been based on both desk research, with an extensive
review of the research and policy literature, and twenty interviews with twenty-two payments
professionals.
To conduct this investigation in a structured way, we had from the outset to deal with threebroad issues. First, what counts as a ‘central bank digital currency’. Here we haveconsciously avoided the perspective of some technological purists: those who consider that
an electronic form of money only qualifies as a digital currency if it is held on a distributed
ledger i.e. multiple decentralised records of holdings reconciled through a ‘consensus
process’. This is the form of record keeping often referred to as a ‘blockchain’ or more
broadly a ‘distributed/shared ledger system’. We do not wish to limit the scope of our inquiry,
hence, for the purposes of our investigation, CBDC is any widely held electronically recorded
central bank liability available for transfer, whether recorded on a distributed ledger or on amore conventional database. This could be a ‘retail CBDC’ held by citizens and domestic
companies and potentially also by non-citizens and overseas companies. Or it could be a‘wholesale CBDC’, used in larger value transactions and held by non-bank financial
institutions as well as banks and possibly also some large non-financial corporations.
Secondly – this is a principal contribution of our analysis compared to much other current
discussion on CBDC – we pay close attention to the often quite complex current
arrangements for the execution of both domestic and international payments, involving
several stages of processing and a number of different intermediaries. A consistent theme ofboth our desk review and interview findings is that a proper understanding of the impact of
CBDC on international payments must be based above all on understanding theseprocesses and in particular on the central role of settlement in central bank money inpayments processing.
This leads us to focus on the following issue: what is the nature of the CBDC opportunity ininternational payments?
a) Is the creation of CBDC one of several current incremental technology
developments, supporting gradual improvement in arrangements for making
international payments? ORb) Is the creation of CBDC an opportunity for fundamental and transformative
improvement in the way international payments are handled?
The answer obtained in this paper is (a); the creation of the CBDC is most obviously an
opportunity for incremental improvements for international payments, rather than afundamental transformation. The introduction of CBDC – along with other accompanying
technological innovations – can promote greater efficiency in the conduct of many aspects ofdomestic and international payments without necessarily disrupting, but rather co-existingwith the extant payments architecture. This is especially through the access it provides to7

settlement or directly held money, allowing the firms involved to address operational
inefficiencies and improve service quality. It can also reduce barriers to entry, promote
greater competition in the different component services underlying an international payment
and with appropriate supplementary measures on digital identity improve the transparency
and convenience of payment services.
It may also be (b); a transformative change in the existing architecture is also possible,
based on a widespread adoption of CBDC, but this requires substantial and costly changes
in order to support institutional arrangements along with new financial infrastructures for
direct exchange of CBDC. This could lead to financial intermediaries, non-financial
companies holding and exchanging different national currencies directly and immediately
with each other; and even support similar direct exchange amongst individuals (though fromour research we’ve identified that this is unlikely in the near future). The development ofsuch direct exchange could remove the need for many, though not all, of the supporting
services currently required in international payments and further improve customer
outcomes.
At the same time (b) is far from being an automatic consequence of the creation of CBDC.
Existing arrangements work well enough in many situations. Where they do not, much canbe done using digital technologies to reduce costs and increase the speed, reliability andtransparency of both domestic and international payments without issue of CBDC. The
launch of a retail CBDC brings with it commercial risks, especially in advanced countries
where most domestic payment needs are already met. A retail CBDC may simply fail toattract a sufficient critical mass of domestic users, especially when alternative, adequate
arrangements for executing domestic payments already exist.5
Thus, a future of radical change in international payments based on direct exchange of
CBDC is conceivable, but it appears from our research that this highly uncertain for two
reasons: first it requires world-wide adoption of domestic retail CBDC which may not beeasily achieved; second, even where retail CBDC is used on both sides of the paymenttransaction, substantial policy intervention is needed to develop new arrangements for theforeign exchange of retail CBDC, interventions with uncertain overall economic benefits. In
our assessment the most that can be done along these lines in the foreseeable future, issupporting the direct real-time exchange of wholesale CBDC by financial intermediaries andlarger non-financial companies, in order to reduce entry barriers and promote competition inboth the foreign exchange and final settlement of international payments.
Further international finance aspects of CBDC lie outside the main scope of our research.
The introduction of CBDC could conceivably impact on dominance of the dollar as aninternational reserve currency. From this perspective the push to develop CBDC can beinterpreted as geopolitical: driven by a desire to challenge and also defend the existing
global financial order. Widespread international holding of CBDC might also weaken
domestic monetary sovereignty, especially in smaller countries with weak economies andfinancial systems.
Our analysis suggests some caution about any sweeping statements on the impact of CBDC
on international financial order. We find that the impact of CBDC on international payments
depends critically on detailed design choices. This is equally true with respect to the
5 The battle of analog video recording formats of the 1970s and 1980s provides someparallel (https://en.wikipedia.org/wiki/Videotape_format_war ). Betamax launched first andoffered some advantages in terms of a smaller cassette size with better picture and soundquality. Ultimately though the competing VHS format triumphed. The greater length ofrecordings together with lower cost of the recording machines led to VHS rather than
Betamax achieving critical mass of users and widespread adoption.

8

potential further impacts of CBDC on international financial arrangements. For example, if
central banks choose to limit international access to retail CBDC the implications forinternational financial arrangements will also be limited. On the other hand, it is possible thatthe major countries seize an opportunity created by CBDC, using it to aggressively compete
for greater use of their fiat as an international store of value and medium of exchange . In this
scenario – which is far from certain and depends on international politics as much as
financial technology – then there can be major implications for the international financial
order. In short, there are a lot of ‘ifs’ for such an impact to arise. Assuming that CBDC must
substantially alter international financial arrangements appears at best a rather crude andsuperficial assessment.
The research methods used in this paper are desk research supplemented by hour longinterviews with payments professionals and well-informed commentators on digital payments
technologies. We conducted twenty interviews across six different categories of professional
backgrounds (all under ‘Chatham house rule’ i.e. an understanding that they were speaking
as individuals, not representing their organisations, and that we would not attribute views to
any individual or organisation). The interviews were all ‘one to one’, except for one interview
with a payment service provider where we interviewed three employees together. Table 1.
Provides a breakdown of the interviews according to the main professional experience of
those interviewed.
Table 1: Breakdown of Interviews
Category (by main professional experience)(i)International banks(ii)International card schemes(iii)
Non-bank payment service providers(iv)
Regulators and infrastructure providers(v)
Payment technology consultants
Total

Number
5
2
3
7
3
20

The three co-authors have a combined prior experience of more than 50 years of researchon payments and financial infrastructures. The analysis draws on this experience. As thisexperience has taught us only too well, detail matters considerably in payment arrangements
and in most cases answers cannot be binary (yes/no) but most often “it depends”. Thus, wehave made free use of insights that emerged from the interviews throughout the drafting of
the document. The paper contains different sections on the challenges of international
payments and CBDC design choices, on the economics of payments innovation, on theinsights from our interviews on specific international payment scenarios and on potential
radical change. But the interviews have provided essential insights throughout the paper.
The paper is arranged as follows. Section 2 discusses the business and policy context,
summarising the processes involved in international payments and reviews concerns abouthigh costs and frictions. It also reviews the current interest in CBDC, distinguishingwholesale from retail CBDC and providing some initial discussion of their implications forinternational payments. Section 3 is a brief summary of the economics of competition andinnovation in payments, highlighting both the rapid rate of current technological change but
also the importance of network externalities in determining which innovations are actuallyadopted in practice. Section 4 summarises the findings from our interviews, on the impact of
CBDC on four different international payment scenarios. Section 5 discusses the possibilityof radical change. Section 6 concludes. Appendix A provides detail on our researchmethodology and provides the questions used in our interviews. Two further Appendices B
and C provide some background information on three leading CBDC initiatives.

92 International payments and CBDC design choices
Interest in financial technologies has exploded in recent years, driven by the emergence ofprivate digital currencies (cryptocurrencies and stablecoins) and perceived potential from
employing new technologies in payments. This section is preliminary ‘setting of the scene’,
before presenting our own research. It reviews: (i) the challenge of lowering costs andincreasing speed and transparency in international payments; and then (ii) the rapid increaseof interest in issue of central bank digital currencies (CBDC) and their potential use ininternational transactions.

2.1

Frictions in international payments.

To understand the frictions in international payments it is necessary, first, to understand theinstitutions involved and how they ‘settle’ payment transactions through the exchange andtransfer of central bank money.
We begin by comparing two figures, Figure 1 and Figure 2, in order to illustrate thecomplexities of current international payments arrangements. Figure 1 represents theexecution and settlement of a domestic payment; Figure 2 the more challenging case of aninternational payment.

Central bank (CB)Transfer between
CB reserve accounts.

Bank ABank B
Transfer between customer accounts.

Account -100

Account +100

Sender(payer)Recipient(payee)Payment flows
Settlement flows
Figure 1: Execution of a Domestic Payment

Figure 1 is a stylised, albeit not exhaustive, illustration, presented in order to highlight thecontrasts between domestic and international payments. Customers are usually unaware of
the need for a supporting settlement. From their perspective the €100 simply move from thepayer’s to the payee’s account. But this money is a bank balance sheet liability and so inorder to settle the transaction, an equivalent amount of monetary assets must transfer fromthe reserve account of the sending bank to the reserve accounts of the recipient bank.
In practice, while still relatively simple, domestic payment operations are a little more
complicated than shown in Figure 1:

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•

•

•

•

•

The payment and settlement flows need not precisely match in timing andmagnitude. Lower value payment schemes use ‘deferred net settlement’ or DNS.
These schemes maintain a running total of settlement obligations between banks andthen settle multiple customer payments with batch transfers of central bank reservesat specified times during the day. These customer payments are to a large extent
offsetting, so reducing their need to hold central bank reserves ready for settlement,
but at the cost of some exposure to interbank credit risk.
Central banks also support high value payment schemes using ‘real time grosssettlement’ or RTGS. Here the settlement (reserve transfer) and custom payment(deposit transfer) are matched in timing and value. But the largest payments, arisingfrom financial market transactions, can be constrained by reserve holdings, in turncreate sequencing problems with the possibility of a gridlock if banks are all waitingfor other banks to initiate other RTGS payments. Central banks address theseliquidity problems through providing banks with ‘intraday’ credit that must be repaidby the end of RTGS operating hours and sometimes also with approval for a limited
amount of payments netting. Typically, this provision for liquidity is reserved f ordomestic banks operating in the local domain or for institutions they oversee in some
way or for whom there is a reciprocal arrangement with another central bank 6.
Holding a reserve account with the central bank requires a domestic banking licenseand compliance with all the requirements of domestic bank supervisions andregulation. Many intermediaries, for example e-payments institutions, smaller credit
card companies and cooperative institutions, participate indirectly in domestic
settlement through an ‘agency relationship’ with a domestic bank, i.e. instead ofholding a reserve account with the central bank they hold an account with an agent
bank and settlement takes place through a debit/ credit to this account and acorresponding debit/ credit to the agent bank’s reserve account (in much the same
way as foreign banks use correspondent banks in international payments).
Below in Section 3 when we discuss payments innovation, we contrast three broad
payment scheme ‘architectures’: (i) bank payment schemes, (ii) card payment
schemes with funds eventually credited to merchant bank accounts; and (iii) e-money
payments. All of these fit into the schema of Figure 1, but in slightly different ways.
The figure represents the usual arrangement for bank payments. Card payments are
similar, but final settlement including crediting the recipients account – especially withcredit card payments – can be more substantially delayed. Payments employing an
e-money scheme are often between accounts held with the same e-money provider.
In this case – and also in the case of a payment between two customers of the samebank – no settlement is necessary, but settlement is still required for transferring
funds between e-money and bank accounts. Notice also that there is something of an
overlap in the services provided by deferred DNS bank payment schemes and realtime RTGS bank payment schemes. Many countries have now developed ‘faster
payment’ schemes which allow payments to transfer between accounts at two
different domestic banks digitally within minutes. These are still though DNS
schemes, the banks involved carry out settlement subsequently. In countries wheresuch retail faster payment schemes are not yet universally available (the US is an
example), the RTGS system is sometimes instead used to facilitate retail paymenttransfer in near-real time between different institutions, with the retail customer
paying a transaction fee.
While not shown in this diagram, there are often transaction fees and charges
associated with such services. These vary considerably from country to country andfrom customer to customer. In some countries, e.g. the UK, personal customers
enjoy ‘free in credit’ banking, meaning no charges for payments provided they
maintain a positive credit balance in their account. In other countries retail customers

6 One can refer to the Nordic example here where arrangements are reciprocal.

11

must pay modest transaction fees. Merchants who receive card payments from retailcustomers pay fees, which are particularly large on credit card payment with theirfurther associated services and in the newly emerging ‘buy now pay later products’.
Small businesses payment charges are a major part of the revenue in small businessbanking.
A final central point, it is difficult to overstate the critical roles of both regulation and trust in
payments. DNS requires trust in the ability of bank counterparties to settle their obligations.
This in turn requires limited entry to payment schemes. Only adequately regulated andtherefore trusted institutions can be eligible for holding reserve accounts at the central bankand participating directly in settlement. Issues of trust also arise in RTGS, since doubts
about the ability of other banks to make anticipated payments can lead to other banks
delaying or refusing payments and create a systemic breakdown of the system. Regulators
like to ensure that there is a RTGS closure window, over the weekend, a window that can beused if necessary to manage the resolution of a distressed bank and the meeting of its
payment obligations without systemic impact on other banks and the wider payment system.
Regulation and oversight are also of course critical from the perspective of dealing with
operational risk and ensuring data security. As we shall shortly discuss, many of the costs
and frictions in international payments arise not because of inadequate technology but
because of inadequate trust.
Figure 2 illustrates the additional complications involved in an international payment. Again,
this is a stylised representation with many possible variations. It still though usefully
highlights three features that distinguish international payments from domestic.
1. Additional fees which increase the cost of almost all international paymenttransactions relative to domestic payments.
2. The associated supporting foreign exchange and settlement is often not directly
linked to customer payments (unlike settlement of domestic payments, where strict
rules determine the scheduling of settlement either immediate real time grosssettlement or deferred net settlement).
3. The operational and also legal and regulatory complications of a payment moving
between two different jurisdictions and across multiple institutions.
The complications of this figure are required to capture the complexity of an international
payment when compared to a domestic payment. The intermediaries are no longer tied intoa single domestic system, with clearly established responsibilities and processes allowing
them to trust each other and automate operations. Now they must engage in three different
areas of operations: domestic payments within the sending country, foreign exchange andthen domestic payment within the receiving country. On occasion, if there is no large
domestic bank with a direct relationship to the receiving country, the transaction is evenmore complex than shown here. It can then be necessary to involve a second large bank ina third jurisdiction, in order to provide access to the foreign jurisdiction.
In Figure 2, just as in Figure 1, payment transfer requires supporting settlement, with adebiting of a reserve account held with the domestic (sending) central bank and the creditingof a reserve account held with the foreign (receiving) central bank. However, in contrast to
domestic payments (i) relatively few ‘large’ banks are set up to engage in international
payments, so smaller banks often rely on a domestic large bank for international payment
processing; (ii) even these large banks will not usually have reserve accounts with the12central banks in both jurisdictions, instead relying on a correspondent bank to handle therequired reserve transfers in the foreign jurisdiction;7
Nostro/ Vostro AccountCurrency A Currency B
Central bank A

Large
bank

Nostro accountDomestic
sender(payer)Correspondent
Small
bank

Small
Bank

D Account -100

Central bank B

Forex and
Money
Markets

Forex rate
1 = 200

1000 (5%)
lost in margins/fees
F Account +19000

Domestic Foreign
jurisdiction jurisdiction
Payment flows
Settlement flows

Rebalancing flows inforex/money markets

Foreignrecipient(payee)Figure 2: Money and Foreign Exchange Markets
A further central feature of this payment, illustrated in Figure 2, is that there is typically nointernational payment of money matching the domestic payments (out of the customer’s
account with the small domestic bank to the large international bank; from correspondentbank to the recipient’s account with the small foreign bank). This instead depends on thefinancial obligations, recorded in ‘nostro/vostro’ accounts held between banks and theircorrespondent (nostro and vostro are the Italian words for ours and yours, these account areat the same both our account held with you and your account held with us). In Figure 2 thelarge bank holds a nostro account in the foreign jurisdiction currency B with thecorrespondent. The payment is made through drawing down a balance or sometimes on aline of credit on this account. As one informant put it to us “The surprising feature ofinternational payments is that they do not really exist”.
There are other possibilities than that illustrated in Figure 2. Instead of using a nostro
account held with a correspondent, the payment may be financed out of a vostro account in
the domestic currency A held at the large bank by a recipient bank in the foreign jurisdiction.
Another possibility is an international bank establishing a local subsidiary (as opposed tohaving an account with a local correspondent) . This is a logical step – if there are sufficientinternational payments to justify the set up costs of obtaining direct access to local clearing
and central bank liquidity. In addition, many payments (in particular remittances) are madeby money transfer operators who are typically present in many markets. In this scenario,
many of the payments are “self-cleared” as an internal book transfer for the institution
internally. Technically, these payments may still be considered to be “correspondentbanking” but not according to the typical usage of the term in the payments literature.

7 This would usually require two separately licensed and regulated subsidiaries since, withthe principal current exception of Switzerland, central bank rules and regulations prohibit
branches of foreign banks from holding central bank reserves or directly accessing domestic
payment schemes.

13Domestic settlements of payments, even when deferred, take place fairly soon after thepayment is initiated, often only a few hours after the initial payment instruction. Domestic
money markets and central bank collateralized lending provide the necessary liquidity.
Interbank exposures are generally fairly quickly extinguished.
International payments rely to a greater degree on intermediary bank balance sheets andrelatively longer lasting interbank exposures. Processing of international payments results inthe building up or running down of liabilities, in this case between the large bank and thecorrespondent. Typically, the correspondent would generally expect a client to keep their‘nostro’ account topped up enough for the correspondent to apply a debit to make theonward payment. The correspondent may give credit, sometimes intraday sometimes
longer, in which case it would allow the previous institution to go overdrawn to make thepayment. The previous institution would still be expected to top up the account at somepoint by whatever means of rebalancing works. There are many possibilities: it could
exchange another currency for the required foreign exchange and transfer to thecorrespondent; it might do a foreign exchange deal directly with the correspondent ; it mightsell a financial asset to the correspondent bank or another foreign counterparty.
Any supporting foreign exchange transaction will also depend on the foreign exchange
regime. If the recipient jurisdiction operates a fixed regime, pegging its currency to say the
US dollar, then the transfer of dollars would result in the central bank of the recipient country
acquiring additional foreign exchange reserves in exchange for supplying the domestic
currency. With a floating exchange rate international investors would have to be persuaded
to hold more funds in the sending country (replenishing the reserves with the domestic
central bank) and less in the receiving country.
Despite these additional settlement processes, from the perspective of the two customers,
an international payment remains fairly simple – appearing little more complicated than anemail. A debit from one account (here in Figure 2 - 100) and a credit to another account(here + 19,000, assuming a market exchange rate of 200:1). The customer experience isthough very often disappointing, compared to that of a domestic payment, withcomparatively high fees and charges and what can still be unpredictable and opaque
processing.
High costs and processing problems result from the complexity illustrated in Figure 2:(a) The requirement for several intermediaries, each playing a role in this payments
chain and each adding their own mark-up, results in quite substantial costs and fees.
Here the current central market exchange rate is assumed to be 1 = 200, with total
margins and fees deducted from payment of 1,000. In this example these margins
and fees can be charged on the two customers in three ways: a deduction before thepayment is sent, a margin on the foreign exchange rate and a further deduction
before the credit is made to the holder of the account.
To make the example more concrete, the 1,000 deduction might consist of a 1% or 1
initial deduction by the small bank from the payer so only 99 forwarded for exchange;
an exchange rate of 1 = 196 , 2% below the current mid-market rate of 200, so 99
becomes 99 x 196 = 19404 then a further 404 deduction (2.08%) so the payee
receives 19,000). The exchange rate of 196, rather than 200, is what is reported tothe payer and payee, but this deduction could in turn be shared in different ways
between the large bank, the correspondent bank and (if an actual foreign exchangetransaction is required rather than just a book entry) any counterparties in foreignexchange markets.
(b) As discussed below in Section 3, every payment is accompanied by accompanying
information, the required information for the transaction itself together with othercontextual information. Incompatibility and error in these information flows, or failure14

to comply fully with requirements for identification of customers and to reportpotential AML breaches (suspicious transaction reports) and compliance withinternational sanctions can lead to a suspension of processing and the need for amanual intervention.
(c) These informational frictions are exacerbated by system incompatibilities between
jurisdictions, both between the payment schemes in the two jurisdictions (for example
differences in RTGS opening hours; the absence of a retail instant payments
solution) and also between the systems of the individual banks. Messaging andpayments standards such as ISO20022 (in which SWIFT is the registration authority
and also plays a leading development role of the financial repository) address someof these incompatibilities. Nonetheless adopting standards is a substantial
investment and many inconsistencies remain and it will take time to resolve them.
(d) Another reason for this is market power rooted in lack of competition. A particularconcern is that the high costs of AML and sanctions compliance have resulted in a“de-risking” of correspondent banking, with many institutions forced to withdraw fromproviding correspondent banking services, leaving the few that remain with
substantial market power and an ability to impose comparatively large margins fortheir services. For major currencies with many competing correspondent banks , thisis not such a major concern. But for many low- and middle-income jurisdictions derisking leaves few remaining correspondent banks, undermines competition and isthus a substantial cause of high charges for international payments.8(e) For less active ‘corridors’ (bilateral currency exchanges) the sending bank ( ‘large
bank’ in Figure 1) may not have a corresponding banking relationship; so, further
banks may be interposed in the chain to provide that relationship, sometime s eventwo banks with potential multi-currency exchanges.
(f) Finally, there are the concerns over lack of transparency: even a minor error in
instructions can lead to delay or interruption in an international payment transaction
with a more pronounced impact if there is no mechanism for communicating this backto the sender and requesting if necessary further action.
Figure 2 omits the detail of foreign exchange market operations, which vary considerably.
For the major internationally traded currencies, in particular the 18 currencies9, whose
foreign exchange trades can be settled through CLS bank, there are many buyers andsellers with comparatively liquid markets for exchange against the dollar . A bank might need
two transactions in the two currencies, each against the dollar, to rebalance its foreignexchange exposures, but the low margins mean these foreign exchange transactions do notcontribute substantially to the costs of international payment.
At the opposite extreme are some very illiquid currencies, those of some small low-income
countries with little private foreign exchange trading. All foreign exchange transactions in orout of these currencies are instead conducted on the books of the central bank at central
bank determined exchange rates. For these currencies there can be limited current andcapital account liberalization, so foreign exchange transactions may also require first a
request with details of the transaction purpose, causing a delay until approval is given. The
foreign exchange risks of holding such currencies are much more substantial and much
more difficult to manage than those from holding actively traded international currencies,
especially if there are concerns about the economics and financial situation of the domestic
8 See (Casu and Wandhöfer, 2018; Rice, von Peter and Boar, 2020) for more detailed

discussion.
9 According to https://www.cls-group.com/products/settlement/clssettlement/currencies/:
Mexican peso, Canadian dollar, Pound sterling, Israeli shekel, Japanese Yen, Korean won,
Danish krone, euro, US dollar, Hong Kong dollar, Hungarian forint, Singapore dollar,
Norwegian krone, Australian dollar, New Zealand dollar, South African rand, Swedish krona,
Swiss franc.

15

economy. Hence the costs of conducting foreign exchange transactions and managing
foreign exchange risk add to the costs of international payments to and from thesecurrencies. Many other currencies are in an intermediate position, possibly with direct trading
but without having a deep and liquid foreign exchange market or settlement available
through CLS bank.
An April 2020 report of the Financial Stability Board for the G20 (FSB, 2020a) reviews thecauses of the high costs, low speed, limited access and insufficient transparency in crossborder payments. They summarise the underlying problems, all rooted in the complexities
illustrated by Figure 2, as follows: “… fragmented data standards or lack of interoperability;
complexities in meeting compliance requirements, including for anti-money laundering andcountering the financing of terrorism (AML/CFT), and data protection purposes; different
operating hours across different time zones; and outdated legacy technology platforms .”(p. 1).
Following this report: the BIS Committee on Payments and Markets Infrastructures
conducted a detailed analysis identifying 19 “building blocks” required for improving crossborder payments (CPMI, 2020); and the FSB then published in Oct 2020 (FSB, 2020c), a‘road map’ for reform followed by an FSB consultative document (FSB, 2021) that proposesmeasurable targets for monitoring progress.
FSB (FSB, 2020b) notes the rapid rise in all forms of cross-border payments over the past
decade, with increasing trade, travel and international migration; but at the same time a 20%
fall in the number of correspondent banking relationships between 2011 and 2018 leading tolimited choice and reduced competition in payments execution. In the case of remittances
average costs are still around of 6.38%.10 For other payments there are no standard
statistics on costs and timeliness of international payments. Still, a variety of anecdotal
evidence suggests that for many payment corridors and types of transaction substantial
frictions remain.
It would be incorrect to suggest that there has been no progress at all in addressing theconcerns over cost, timeliness, risk and opaqueness in international payments. Internet
communication has supported the emergence of a range of alternative foreign exchange
providers, unencumbered by legacy, competing with banks in retail international payments(this is discussed further in Section 3). The card schemes such as Visa and Mastercard areincreasingly accepted for international payments, supporting retail purchase and subsistence
and other traveller expenditures. Other payment service providers, notably PayPal and
AliPay, compete with the card schemes in making international online customer payments tomerchants. SWIFT has established their SWIFT gpi service, a new communication standard
for cross border payments across correspondent banking networks, developed to “meet theindustry’s needs for speed, traceability and transparency. It allows banks to provide theircustomers with a transformed payments experience, enabled through easy to use andsimple to set up digital tools.”11 While it is true that some international payments remain slow
and expensive, this is no longer true of the majority of these payments. For example, on
average, 91% of international payments take less than a day, albeit these are predominantly
from popular ‘corridors’ between developed financial markets. 1210 (World Bank, 2021)
11 For more information on SWIFT gpi see here: https://www.swift.com/our-solutions/swift-

gpi/about-swift-gpi.
12 See (CPMI, 2020) Box A, pg 6.

16

It would also be incorrect to suggest that all frictions in international payments are now being
adequately addressed. The FSB road map emphasises the benefits of a co-ordinatedimplementation of change to several aspects of international payments:(i) ensuring a consistent jurisdictional treatment of international payments with coordination of regulatory, supervisory and oversight frameworks, for example withmore consistent application of anti-money laundering and terrorist financing (AML/
CFT) rules(ii) enhancement of existing payment infrastructures, with greater use of payment versus
payment (PVP) to remove counterparty risk in payments settlement; reciprocalliquidity arrangements, extension and alignment of key payment systems andinterlinking of payment systems for cross-border payments(iii) adopting harmonised messaging and API standards with global unique supporting
identifiers. This report also emphasised the need for a shared vision of the future
development of cross-border payments and encouraged the adoption of newtechnologies such as multilateral platforms, stablecoins and issue of CBDCs tosupport and enhance cross-border payments.

2.2

CBDC design choices and international payments

This subsection reviews the key design choices in introducing CBDCs and how these are
relevant to international payments. As discussed in our introduction, we do not wish to limit
the scope of our inquiry. Thus, we define CBDC as any widely held electronically recorded
central bank liability available for transfer, whether on a distributed ledger or a moreconventional database. This broad definition of CBDC avoids being constrained by particulartechnical choices for recording and transferring of CBDC.
This definition also implies that there is no real distinction between CBDC and the wideningof access to accounts in central bank reserve money beyond domestic commercial banks.
CBDC and widening of reserve access are two different ways of describing the same thing.
Technicalities will though of course matter, especially for retail CBDC. No central bank will
wish to have responsibility for retail customer account management. So, the technical design
must allow third party account providers – which could be commercial banks but also nonbank payment service providers – to offer the customer interface. At the same time CBDC isalways a liability of the central bank, not a liability of the account provider, so the technicaldesign must also ensure that account holders are able to assert their rights as holders ofcentral bank liabilities. For example, in the event of the financial failure of the third -party
account provider CBDC account holders should get full and immediate access to theircentral bank money.
Keeping this definition of CBDC in mind we first summarise the growing interest in CBDC
and then discuss some of the key design choices. Appendix B summarises the CBDC workof central banks around the world, distinguishing two main phases of activity. The years
2013-2019 saw a number of technical experiments with CBDC by the Bank of Canada andthe Monetary Authority of Singapore, while the Swedish Riksbank also engaged in extensive
investigation of the possibility of a central bank issued digital substitute for cash (motivatedby the particularly marked fall in cash in circulation in Sweden).
Central bank interest has accelerated markedly in the past two years 2019 -2021, with theestablishment of the Bank for International Settlements (BIS) Innovation Hub and of thecentral bank CBDC working group, with administrative support from the BIS; co-ordinating
the work of the Bank of Canada, the Bank of England, the Bank of Japan, the European
Central Bank, the Sveriges Riksbank and the Swiss National Bank. Several central banks
have now published extensive reports on CBDC, addressing design choices but also issues

17such as implications for systemic risk, the supply of bank credit if monetary deposits moveout of commercial banks into CBDC and for monetary policy transmission.
Interest in CBDC is by no means restricted to these major central banks. Most central banks
worldwide are now working on CBDC. The BIS is monitoring developments worldwide, withregular surveys of central bank work on CBDC. 13 Some central banks have also recently
launched retail CBDC – notably the e-CYN project of the People’s Bank of China and the
Bahamian Sand Dollar, both summarised in our Appendix B. Other central banks in low andmiddle income countries have also announced that they intend to launch retail CBDC. At thesame time widespread holding of retail CBDC in the major countries still appears to be someyears distant.14
Particular attention has been paid in the technical work on CBDC, on multicurrency CBDC or‘m-CBDC’ with operational linkages that allow for the simultaneous transfe r, on a payment
versus payment basis so eliminating counterparty risk, of two different CBDCs. The mostrecent work of this kind are the ongoing Inthanon-Lionrock experiments, now referred to as
m-Bridge, most recently reported by (BIS Innovation Hub, 2021). What this proof of concept
demonstrates is the possibility of foreign exchange conversion of CBDC from one CBDC andalso CBDC exchange on a ‘payment versus payment’ PVP basis which would eliminate
counterparty risk. The foreign exchange rate is the best current available market rate (whatthey refer to as the FX Board Rate”) or an agreed rate.
(BIS Innovation Hub, 2021) also notes some related technical initiatives, for example directtransfer of CBDC (settlement money) between the Arab Emirates dinar (the AED) of theUnited Arab Emirates and the Saudi Riyal (the SAR) of Saudi Arabia, without any foreignexchange conversion. In terms of Figure 2, this is possible because both currencies are
firmly fixed against the US dollar, so the two central banks, at least for these limited
experiments, are willing to accept each others’ CBDC as final settlement in international
payments.
Turning to the key design choices, a central distinction is then between:••a widely held wholesale CBDC, held by domestic non-bank financial institutions(thus differentiating it from central bank reserves which are held only by banks), andpossibly also by foreign financial institutions and some large financial companies;
anda retail CBDC widely held by persons and non-financial companies, and potentiallyavailable globally to non-residents.

The implications of these two forms of CBDC for international payments are quite different. A
wholesale CBDC, especially if made available to international institutions, can support theexisting role of intermediaries in international payments. CBDC is settlement money. So, awholesale CBDC – if held cross border by the large bank in Figure 2 or by other competinginternational banks and non-bank payment providers – could make it unnecessary to use alocal correspondent to complete an international payment. Further systems development
would though still be required. As illustrated by Figure 2, interoperability would still be

13

The most recent survey Boar and Wehrli, 2021 found that 86% of central banks are actively researching CBDC
potential, 60% were experimenting with the technology and14% were deploying pilot projects. The BIS also
maintain a data base, updated every three mo nths, on central bank CBDC activities and publications (BIS, 2021).
There are several other useful sources of updated information on CBDC developments , for example, the lively
webpage “The Global Fintech Intelligencer” (Kiff and Dav, 2021).
14 For example the ECB, whose plans for CBDC are more advanced than those of most other central banks,
have not yet made a final decision to launch a ‘digital Euro’. If they go ahead this will not be until 2026 (Panetta,2021)).

18

needed with domestic payment schemes to route a payment from the wholesale CBDC
account to reach the small bank and the account of the foreign recipient.
Retail CBDC has different implications for international payments. It can help with some ofthe different payment scenarios discussed in Section 4 below. It can lower the cost of
person-to-person remittances payments, in cases where the recipient was previously
unbanked but now, through retail CBDC is able to hold digital money. It is then no longer
necessary to ‘cash out’, receiving payment in physical notes and coin from a local remittanceagent. Retail CBDC available to international visitors on a stored-value card or on a phoneapp could also offer low-cost payment execution for tourists and other international
travellers. But for other international account to account payments, retail CBDC may makelittle difference. The payment will have to be routed to a CBDC account rather than a bank ore-money account, but – assuming the architecture of international payments remains as
illustrated in Figure 2 – the operational processes involved are largely unchanged. There isthough a possibility of using retail CBDC to redesign the architecture of international
payments. We discuss this possibility in Section 5 below.
It is clear that any CBDC wholesale or retail will be ‘permissioned’ with most holding andtransactions by authorised users whose identities have been verified and are approved toopen account. Central banks will want to ensure that use of CBDC complies with all
regulatory requirements for know your customer (KYC), anti-money laundering (AML) andenforcement of political sanctions. One exception is likely, with limited usage subject to strictvalue limits without such identity linkage (for example this is an option for Bahamian Sand
Dollar and the e-CNY).
A further point, while quite obvious, deserves emphasis. It matters considerably forinternational payments who is able to hold CBDC. Suppose holding of CBDC is restricted towithin national boundaries, with only local regulated financial intermediaries and locallyincorporate companies allowed to hold wholesale CBDC and only residents and citizens
allowed to hold retail CBDC. The impact on international payments will be relatively limited.
The large bank in Figure 2 will not be able to hold wholesale CBDC and use this holding, butinstead still relying on a correspondent bank to complete an international payment – a similarcorrespondent banking issue as in current payment rails. There will be no possibility of direct
exchange of retail CBDC if these are not held outside national borders.
This point about national versus international held CBDC highlights the central challenges oftrust and regulation, which lie behind the costs and complexities of international payments
operations illustrated in Figure 2. Suppose central banks fully trusted overseas institutions
and allowed them unrestricted access to wholesale CBDC and to their domestic payment
schemes, in order to route payments to final recipients. This could address many of the
problems of international payments. Rather than relying on a local correspondent, the largebank of Figure 2 could hold local CBDC and directly remit to recipient accounts.
Central banks will not though allow overseas institutions unlimited and unrestricted access tocentral bank money and domestic payment schemes. Aside from anything else, they will beconcerned about prudential risk, that financial distress at these institutions might then disrupt
their payment systems. But central banks could consider more limited access – for example
without requiring a full local banking license they could offer CBDC and domestic payment
scheme assets to all international institutions through the establishment of a non-banksubsidiary as a local payment service provider, with all local currency monetary liabilities
including to the overseas parent, fully reserved in CBDC. Such ‘ring-fencing’ could eliminate
prudential concerns of overseas access with relatively light supervisory requirements.

19

A further design choice, which could impact the use of CBDC in international payments isthe extent to which a CBDC is interoperable with domestic payment schemes, especiallythose for interbank transfers. As indicated in Figure 2, a critical challenge in international
payments is the ability to route the payment through to the final recipient. For this to beprocessed automatically without manual intervention requires integration into a domestic
payment system. Under current arrangements of Figure 2, connecting to these systems is
the responsibility of the correspondent bank. If wholesale CBDC, as we argue, can replace
the need for using correspondent banks then holders of wholesale CBDC must be able toroute payments from their wholesale CBDC accounts to final recipients, using wholesale
CBDC for settlement.
Similar design choices about interoperability with domestic payment schemes arises forretail CBDC, thought this choice is less directly related to international payments. A retail
CBDC could be limited to payment to and from other CBDC accounts, plus the opportunity tomove funds in and out from a holder’s bank account i.e. much like most e-money operates
today; or it could offer all the functionality of a domestic bank account, with the possibility ofmaking and receiving payments through all domestic bank payment schemes including ATM
withdrawal. Where this principally matters in relation to international payments is whencrediting of the payment to the final recipient. Interoperability with domestic payment
schemes will make this easier, not requiring correspondent or overseas bank to use a further
CBDC payment system for payment routing. More broadly retail CBDC interoperability will
increase the demand for holding retail CBDC and enhance the prospects for its widespread
adoption, which will in turn facilitate its use in international payments.
Finally there is the possibility of interoperability of different CBDCs from different countries,
with the m-CBDC experiments exploring what may be possible. (BIS Innovation Hub, 2021)
claim that the m-bridge yields major benefits in terms of speed of execution cross-border
payments, reducing transactions times from 3-5 days to 2-10 seconds. This though, in termsof our Figure 2, is a somewhat misleading statement, comparing ‘apples’ (a transfer ofcentral bank money) with ‘oranges’ (the debiting of an account of one account a holder andthe crediting of an account of another account holder in a different jurisdiction). Applied to
Figure 2, the m-bridge would allow the large bank, when it rebalances its foreign exchange
position, to do so near instantaneously, rather than relying on the T+2 settlement through
CLS or potentially longer settlement times outside of the 18 CLS currencies.
It is unclear that using the m-bridge instead of CLS to settle foreign exchange transactions,would make much difference at all to the customer experience of payments, when executedusing the processes illustrated in Figure 2. In the arrangement shown there, based on trust
between the large bank and its correspondent, the correspondent bank will expect the largebank in the chain to maintain their account (at the correspondent bank) credited so that adebit is possible in order to make the onward payment to the payee (end customer ). In somecases, payments can be made onto the final recipient in anticipation of an eventual deferred
net settlement of the payment from the larger bank. In this scenario, the correspondent bank
may provide credit (sometimes intra-day sometimes longer), that will allow the otherinstitution to go overdrawn and fulfil the payment until they credit their account. The m-bridge
may shorten the timeline for an eventual deferred net settlement (between the large bankinstitution and corresponding bank) when it eventually takes place, but does not directly
affect the timing of the crediting of funds to the recipient’s account. The m-bridge would
though make a material difference if all international payments – both low value and highvalue – were to shift from deferred net settlement to real time gross settlement – one
possible radical redesign of international payments architecture that we consider below in
Section 5.

20

3 Competition and innovation in payments
This section is a summary of recent development in payments competition and innovation. It
draws on relevant work on both the economics of networks and on the economics of money,
as well as applied and policy studies on payments by consultants and competition
economists.15
Two main point are made here. CBDC is just one of many recent developments in payments
technologies. Arguably several of the benefits of CBDC, in terms of providing reliable andpredictable real time international payments at low cost, could also be achieved in otherways. For example: through greater global standardisation of payment schemes to reduce
the need for “exception processing” (manual intervention to deal with situations that cannot
be automatically processed); or through the development of widely accepted and ideally
globally accepted identity solutions for both corporates and individuals that can be used toautomate processes such AML reporting and also operational risks.
Secondly, while the technical innovations in payments have the potential to dramaticallyreduce costs and improve customer experience, in both domestic and international
payments, adoption of these innovations should not be taken for granted. There must be
incentives for individuals and for financial intermediaries to shift from existing arrangements
and replace them with new payment arrangements; and the incentives can be strong toremain with existing platforms that already have an existing installed base, i.e. senders andrecipients of payments already connected to these platforms, not to adopt the new approach.

3.1

A decade of change in payments technologies and regulation

Three major developments have impacted the payments landscape in recent years:
1) The continuing advances in communication technologies, supporting rapid growth ofmobile, online and faster payments and also the use of APIs to support open banking
2) The payments applications of public-key cryptography, notably in exploration of theuse of distributed ledgers to secure cryptocurrencies and stablecoins
3) The evolution of payments regulation and payments architectures in response tothese new technological developments.
Little more than a decade ago, payments services were almost exclusively provided byregulated commercial banks, through their roles in distributing and redepositing of banknotes; in operating domestic interbank payment schemes both retail and large value; and indeveloping and participating in the various domestic and international card associations.
These payments were made along three principal payments ‘rails’ (cash, bank transfers,card) which were all bank dominated. 16 International payments were also bank dominated,principally conducted through interbank payment transfer supported by SWIFT network
messaging and by the global card schemes.
These bank orientated payment arrangements are themselves the outcome of a half century
of evolution from paper-based to computerised banking, with developments including: (i)15 This section draws on the analysis provide in (Milne, 2018).
16 This division of retail payment schemes between interbank, cash and cards schemes is astandard one familiar one to all payments professions. The rules and operational process
differ in fundamental ways between the three. Careers are typically pursued wit hin one of thethree silos. (OXERA, 2020) provide an insightful review of developments in EU retailpayments, distinguishing these three traditional forms payment scheme and highlight the
recent challenge from non-bank e-payment schemes.

21

automated clearing arrangements to support batch payments, standing orders and d irect
debits; (ii) the rise of card based payments both at point of sale and in remote transactions,with accompanying security developments such as the chip and pin standard (iii) the
movement of large value payments to real time gross settlement subject to central bankoversight, in order to accommodate the major increase in volume and value of paymentsfrom capital, foreign exchange and money markets.
International payments have evolved along similar lines, with the adoption of computerised
and then internet-based processing (with SWIFT’s standards and secure communications
playing a central role) and the creation of the CLS bank to provide payment versus payment(PVP) functionality in foreign exchange settlement.
The application of communication technologies and of public-key cryptography and theaccompanying changes in payments regulation of the past decade have disrupted thislandscape. Four trends are critical to understanding the role of innovation in international
payments:
1. Changing expectations of customers and clients: Consumers are looking for
payments services that match their growing use of mobile and internet
communication and rising participation in virtual commerce, social media andinternational travel; with the convenience of a social media posting or private
message. Businesses are looking for transparency and near real-time transfers.
2. The emergence of many non-bank payment service providers offering services inboth person to person P2P and consumer to business C2B internet payments, in‘alternative’ foreign exchange, in emerging market mobile payments, in merchantservicing and other elements of payments processing.
3. The explosion in trading and market values of cryptocurrencies and other crypto
assets and the associated emergence of institution free ‘decentralised finance’ of
DeFi. It is too early to judge whether these will be a fundamental disruption of
conventional finance. They are though creating widespread awareness that thepayments status quo is far from the only possible architecture.
4. Increasing attention of policy makers and financial authorities to payments. As wellas the work of central banks on CBDC and the G20 and other initiatives oninternational payments, there are many further efforts supporting competition andinnovation in domestic payments:o dismantling barriers to entry (for example in the EU payment services
directives; and in the Bank of England’s widening of access to reserve
accounts to non-bank PSPs)o promoting ‘faster payments’ (the most recent being the FedNow in the US,
following similar initiatives in other countries)o the upgrading of domestic payments clearing and settlement to simplify andreduce costs of access (e.g. the Australian New Payments Architecture).
A theme running across these innovations is increasing interest in the possibility of holdingof money on a single platform – whether an e-money like MPesa, AliPay, Paypal or Wise; astable coin like the proposed Facebook Diem or a CBDC. These arrangements are in sharp
contrast to the holding of commercial bank money as developed over the past two centuries.
Commercial bank money is multiplatform, each supported by its own operationalarrangements and often hindered by inherited legacy infrastructures. Therefore, these new
single platform-based forms of money can potentially offer better operational performance
than bank based money. 17
17 The term ‘tokenisation’ is frequently used to refer to the recording the holding of assets ona single platform. In our opinion though this is a confusing terminology best avoided,

22

3.2

Platforms and network externalities as barriers to CBDC adoption

The dynamics of payment instruments are characterised by what economists refer to as
network externalities. The decision to adopt any form of payments depends on the adoption
decisions of others (their usefulness depends on others also adopting).
These ‘network externalities’ generate a number of well-known phenomena:a. The central importance to digital payments of ‘platforms’. The execution of digital
payments, whether more traditional bank transfers or card payments, or newer
innovations such as e-money, stablecoins and now CBDC – depend on payer andpayee being connected to the same platform. The business models of many of the
new payment service providers are based on providing platform connectivity.
b. Critical mass – with sufficient early adopters of a payment platform, adoption of a
new form of money or payment can then rise rapidly with new users attracting further
users; but if early adoption is insufficient then initial adoption can stall and theinnovation fail.
c. Tipping points – one competing form of money or payment can rapidly replace
another over a comparatively short period.
d. Network based market power – control over a platform access to a network can be asource of market power, resulting in economic inefficiency, either from pricing
substantially above marginal cost or by limiting competition in the supply of further
services (so called ‘downstream’ services) that rely on access to the network (socalled ‘upstream services’). A relevant payments example is market power based onaccess to central bank money for settlement of retail payments transactions.
e. Payment arrangements are often ‘two-sided’ platforms that need, in order to build
critical mass, to attract both senders of money (e.g. consumers paying merchants forcard schemes) and receivers of money (e.g. merchants selling goods and services
for card schemes). The history of credit card schemes provides a well-known
example, with the use of substantial financial and non-financial incentives topersuade card holders to use credit cards and build critical mass.
f. It is also though increasingly common in digital payments to observe ‘multihoming’,
especially when platform connectivity is provided through either a mobile app ordesktop or notebook software. It is then relatively easy to choose from a menu ofpossible payment instruments to execute a particular payment.
The distinctive role of money and payments, distinguishing them from other networks, aretheir roles in providing the standard monetary functions. As described in many textbooks,
these are: ‘unit of account’, ‘medium of exchange’ and a ‘stable store of value’.
The provisions of these functions are inseparably intertwined with the provision of credit andthe need for intermediaries such as banks:• In a theoretical world of complete trust and costless record keeping, there is noneed to for money. Nor is there any need for banks or for other payments andcredit intermediaries. All economic and financial exchanges can be financed using
interest bearing IOUs (denominated in the unit of account) between buyers andsellers.
because exactly same word is used with several different inconsistent meanings, also torefer to anonymous or pseudonymous holding of money or financial assets (for example
casino chips), for low value physical representations of money and also, mistakenly, tosuggest that tokenisation is inconsistent with holding money or financial assets in accountform. See (Milne, 2018; Garratt et al., 2020).

23

•

•

•

In practice money and intermediaries are crucial. Instead of bilateral IOUs, which
are only possible with a relationship of complete trust, buyers and sellers holddifferent forms of money (nowadays predominantly claims on financial
intermediaries or the central bank) along with arrangements to access debt fromintermediaries for payments. In consequence every buyer and seller must face a
trade-off between holding balances of liquid but idle money against the costs offacing binding limits on credit that constrain the ability to pay or the inconvenienceand cost of accessing short-term debt in order to complete payments.
Intermediary money requires settlement. As described above, in relation to
Figures 1 and 2, transferring money that is a claim on one financial intermediary,
to create a claim on another intermediary, requires a matching settlement with atransfer of a settlement asset, usually in the form of central bank money. Financial
intermediaries then face a similar trade-off as their customers, a trade-off betweena loss of income resulting from holding balances at the central bank instead ofhigher interest assets versus the potential costs of emergency access to money
through borrowing or asset sales. Commercial banks are able to use netting of
payments and short term intraday and overnight credit from the central bank tomaintain a much less liquid asset portfolio while still honouring payments
obligations for their customers.
The need for a matching settlement in turn requires a legal framework thatspecifies, unambiguously, when a payment is final, no longer relying on promisesof future payment or settlement. Payment finality is crucial for money received tothen be legally valid for use in a future payment. Finality is also crucial for dealing
with monetary claims, in the event that it is necessary to resolve a failing bank or
payments intermediary.

All this means, especially in the context of international payments as illustrated in Figure 2,
that a large number of institutions are involved both in in payment processing and in theprovision of supporting credit and liquidity to allow commercial bank money to pass from one
holder to another.
As noted, one of the promises of new technologies of money and payments, including
stablecoins, e-monies and CBDC, is simplifying these processes through disintermediationof commercial banks. Instead of holding money with commercial banks, all money holdings
could be recorded on a single shared ledger, an essentially single closed system with noneed for subsequent settlement when money is moved. This could be based on some formof distributed ledger technologies such as those emerged to support cryptocurrencies, but
could equally well be based on more traditional centralised ledgers such as those used in emoneys such as PayPal and Alipay.
Such a shift would be considerably simpler from an operational perspective than existingarrangements. In the context of using CBDC in international payments, all that would be
required is an efficient mechanism for connecting the different national ledgers i.e. a reform
along the lines discussed in Section 5 below with technical support of the kind explored in
the recent experiments with m-CBDC.
Adoption of such radical reform is though not straightforward, because of the reliance onintermediaries as well as the network externalities of money and payments.
1. The essential role of credit in payments. It is inefficient for everyone making
payments to pre-finance and hold sufficient balances to cover all possible payment
needs. Many senders of money – both companies and households making retailpayments and larger companies and financial institutions – may prefer to use credit

24

card and bank accounts supported by pre-committed credit (overdrafts or lines ofcredit) for them to make payments as and when they think they are necessary.18
2. The requirement for accompanying transaction information to support information
processing services. The potential for full automation of digital payments is notachieved just by holding money on single shared ledgers, it also requires integrationof the payment process with accompanying transaction information, allowing
integration into supporting business and accounting systems.
3. The need to establish identity, document transactions, prevent fraud and maintainsecurity. Banks have an essential role in payment systems in managing and verifying
identity, in combating fraud and in preventing unauthorised access to their systems,
as well as in providing account servicing information in the form of statements ofaccount positions and notifications where customers actions are required (forexample obtaining additional credit to complete payments) to manage accountbalances.
The key point is that these three aspects of payments – credit provision, the processing of
supporting information, and the management and verification of identity and accounts – areall built into existing bank payment arrangements. These arrangements are not standing still
either. The technical progress in payments of the past decade is leading gradually to greater
automation and improved payment services. Introducing direct holding of money in the formof CBDC requires replicating all these supporting services, otherwise the incentives to holdand use CBDC will be limited.
In short it is usually easier to adopt innovations which represent a relatively small
incremental change from existing operational arrangements. Radical innovation changing
the operational architecture requires a co-ordinated change which is much more difficult. In
the context of international payments, adoption of wholesale CBDC, if this can be held byoverseas banks and non-bank payment service providers is just such an incremental
change. It will support greater competition in the provision of international payment services.
If wholesale CBDC is also interoperable with domestic payment schemes and can be used
to make instantaneously settled domestic transfers of account money 19 then it will allow
international intermediaries to complete payments without relying on a correspondent bank.
Retail CBDC can also be a useful incremental innovation in some specific international
payment contexts, but its widespread adoption in international payments requires, as we
discuss further in Section 5 below, a co-ordinated change in payments architectures.

18 Some may point to a counter example, the emergence of new smart-contract based

mechanisms of decentralised credit without financial intermediaries that have emerged in the
Ethereum based ‘decentralised finance’ of DeFi, see (Schär, 2021). But these are always
secured credit, lending of the cryptocurrency Ether against tradeable crypto assets, with thesmart contracts fully determining payments of interest and principal with where necessary
sale of the collateral securing the debt. They are thus free of credit risk. In contrast, theprovision of credit for payments amongst firms and households in daily economic exchange
is inherently credit risky.
19 In this case, an institution would still need to hold a wallet in the domestic system (or awallet from which it could access the domestic infrastructure). This means that the institution
will have substituted an account with a correspondent for a wallet held at the central bank or
at a correspondent (alternatively, they could also be a member of the local system).

25

4 Four international payment scenarios: how CBDC can help improve
We now review the evidence collected from our interviews, and the extent to which thisbears out the analysis provided in Section 2 of the various opportunities for improving
international payments from the creation of CBDC. We then look at the impact these canhave on four specific examples of international payments, focussing on opportunities for
reducing costs, risks and delays in existing payment processes.

4.1

Overview

A first point of agreement across all our interviews is that there are several reason s for thehigh costs, occasional long processing times and uncertainties in international payments.
CBDC is certainly relevant. Wholesale CBDC could for example allow increased access offoreign banks and payment service providers to domestic central bank money, hence
removing dependence on domestic banks as correspondents. Other frictions though havelittle to do with access to central bank money, whether this is through retail or wholesale
CBDC. Efficient payments processing requires addressing basics like the adoption ofadequate agreed messaging formats. These formats must reflect the global trend toward senriched payment schemes, allowing the transmission of all the supporting informationaccompanying a payment.
Even with the ISO20022 standard increasingly being adopted and allowing payment
messages to carry all the required information in a standardised way, there is still residual
fragmentation, with variations of interpretation in different jurisdictions. Adoption ofISO20022 is also a major co-ordinated investment that will not happen across the world all at
once, making it inevitable that international payments have to cope with incompatible legacy
arrangements for years to come. The requirements of anti-money laundering and sanctions
screening are a further major impediment. These frictions then generate the further concerns
about lack of transparency of international payments processes, the inability of senders ofmoney to monitor the stages of processing and the lack of assurance to both senders andrecipients about when money will be received.
That said the actions of central banks are acknowledged to be of great importance. They
play a lead role in modernising domestic payments arrangements. This, alongside theinitiation of CBDC projects and established international collaboration between central banks
to promote globally co-ordinated responses can deal with a wide range of payment frictions.
A second point emerging from our interviews is that there is a divergence of professionalviews about the nature of the opportunity for international payments from the emergence of
CBDC. For most of those we interviewed, with an extensive professional background inpayments processing, the opportunities from the emergence of CBDC are principally about
gradual and incremental improvement in existing payment processes. A smaller number –two of the three independent payments consultants and one payment service provider –highlighted the opportunity for more fundamental change.
This division was anticipated in our interview design which we follow in this write up. We
focus in this subsection on the opportunities for incremental improvements and how thisrelates to CBDC design choices. The possibility of more fundamental change is discussed in
Section 5 below on the possibility of fundamental change in international payments
architecture.
A third point about design choice, is that for the large majority of our interviewees it is theintroduction of wholesale rather than of retail CBDC that has the most obvious direct impact
on international payments. Wholesale CBDC, by widening access to central bank accounts,

26

can make a substantial difference across a wide range of international payments. This
impact can arise in two different ways:••

First by overcoming the limitations on opening hours of existing RTGS systems.
Assuming wholesale CBDC can be transferred 24/7 it can allow banks to complete
the settlement of international payments in real time (a current constraint mentioned
by several of our interviewees as well as in the FSB report for the G30 (FSB, 2020a).
Second by lowering barriers to entry. Provided wholesale CBDC is integrated withdomestic large value payment systems, it can give foreign banks and payment
service providers access to central bank settlement, in turn allowing them to compete
in the final leg of domestic payment on a ‘level playing field’.

There are alternatives to wholesale CBDC for achieving these two outcomes. RTGS
systems could shift to 24/7 operation. Foreign banks and non-bank payment service
providers might join existing RTGS arrangements. Still, introducing a wholesale CBDC
operating in parallel with existing RTGS can be one way of achieving these two outcomes
without completely redesigning existing arrangements. In particular routing a payment from awholesale CBDC account through a domestic payment scheme should be possible because
CBDC is settlement money, hence even at night time and weekends it should be possible toexecute and settle a payment originating from a wholesale CBDC account.
Although retail CBDC is not so directly relevant to most international payments, discussion ofretail CBDC was still a major point of interest to our interviewees. To some, establishing a
retail CBDC means creating a state-owned competitor with existing private sector payment
solutions. As one experienced payments practitioner stated to us “A retail CBDC is basicallya central bank setting up an e-money system similar to those already created by private
players. It is a digital payments solution not a new f orm of money. Is the government goingto think about CBDC for five years then launch something that everyone is going to use in
preference to private sector payment solutions? If satisfactory private solutions already exist,
that seems unlikely to me.”This view oversimplifies because from the perspective of risk and regulation an e -money andretail CBDC are clearly not the same. As central banking discussions emphasise, a key
difference is the default risk of private sector e-money as well as potential competition
concerns connected to platform-based solutions. It is not an insured deposit and, as a result,
there is at least theoretically a risk of the provider failing with assets falling below deposits
and some customer balances being lost. Even without failure there could be a ‘run’ withcustomers withdrawing deposits because of the fear of failure. This is not a concern for retail
CBDC because it is held as safe central bank money, free of default risk. It is worth also
noting that a wholesale CBDC, used as an e-money reserve asset, would remove thetheoretical default risk and make e-money also equivalent to an insured bank deposit orretail CBDC.
Despite this oversimplification, this statement contains an important kernel of truth. Creatinga retail CBDC does not of itself change the arrangements for processing an international
payment. Whether the money comes from a bank account, an e-money account or a retail
CBDC account, under current processing arrangements an intermediary must still conduct
the foreign exchange, and once the foreign currency is acquired it must pass throughdomestic payments systems to reach an e-money, bank account or retail CBDC accountheld by the recipient (Figure 2). It is also unclear that customers are concerned about thedefault risk of private sector e-money. Solutions like Wise are widely used despite this risk.
Even if customers do recognise the default risk of private sector e-money, from their point ofview there is no obvious difference between an insured bank deposit and a retail CBDC.
They are both safe forms of money that can be easily used in most payment contexts,
including international transactions.

27

Introducing retail CBDC may still have indirect impacts on international payments:
(i)

(ii)

In low- and middle-income countries, where a large proportion of the population rely
on cash for income and payments, introducing retail CBDC can promote the holdingof account-based money. The resulting increase in financial inclusion may facilitate
the processing of some international payments because a digital payment can berouted directly to the recipient, not to a local agent for exchange into physical cash .
Many of those we interviewed highlighted identity, or more precisely the weaknessof existing digital identity solutions, as a central issue in improving the efficiency ofinternational payments. A fully functional retail CBDC, envisaged as somethinguseable in all payment situations including international transactions, might be alliedwith the development of such a comprehensive digital identity solution for citizens.
A globally recognised and comprehensive digital identity solution of this kind would
then in turn also remove many of the frictions involved in the sending and receivingof international payments. Bank and other payment service providers could moreeasily check that the payment instructions take the money to the correct recipient.
Comprehensive identity solutions could also substantially reduce the significant
costs for banks and payments service providers of complying with anti-money
laundering regulations and sanctions requirements.

In both these cases –promoting financial inclusion and developing a comprehensive digital
identity solution – the role of retail CBDC is indirect. These goals could be pursued
independently, without creating a retail CBDC at all. On the other hand, a retail CBDC
project might usefully promote both financial inclusion and comprehensive digital identity. A
possibility for which retail CBDC would be fundamental, as we discuss below in Section 5, isthat retail CBDC might form the basis for an entirely new architecture of international
payments with direct exchange of retail CBDCs issued by different countries and no need forinternational payments to be held on the balance sheets of commercial bank or non-bankpayment services providers at all. While this is certainly conceivable, our assessment thereis that this is not a realistic prospect in the foreseeable future.
As discussed in the next subsection, retail CBDC could also fill some specific gaps ininternational payments. One example is payments by an international visitor if their domesticbank cards are not accepted for all local transactions, requiring them to acquiring physicalcash which cannot be easily returned if unspent. Here though other solutions based on
private e-money or card payments might also suffice. These may even have advantages.
For example, refund arrangements are designed into card payment schemes. Retail CBDC
may need to set up similar arrangements with merchants to compete with card schemes.
A number of interviewees agreed that interoperability was important in order for a retail
CBDC such as the ‘digital Euro’ to have an impact on international payments. Interviewees
were not though of one mind as to what form of interoperability was required . Interoperability
between different retail CBDC systems, e.g. a co-ordinated exchange of digital Euros for
digital dollars between two holders, is technically feasible, as demonstrated by the m-CBDC
experiments of the BIS Innovation Hub. This though does not deal with the necessity foragreement on message formats and information exchange. As one of our interviewees
stated “you haven't got the message format, so there's a bigger set of technical requirementsthat have to be done because there's nobody unifying it, like there isn't a card network”.
Our questioning raised the separate aspect of interoperability, the possibility of using retail
CBDC in domestic bank payment ‘faster’ payment systems, a feature that may be includedin the design for the digital Euro. But none of our interviewees saw this as of general
relevance to current processing of international payments because it does not deal with theneed for foreign exchange.

28Some interviewees also emphasized the need for offline functionality, which can support
smooth 24/7 transaction and is particularly important for countries without stableinternet/electricity supply. However, such a feature imposes credit risk if there is a shortfall in
the payer’s account. This is something else already allowed for in existing card and bankretail payment schemes, that would have to be allowed for in the design of a retail CBDC.
Other design choices addressed in our interviews were between ‘direct’ and ‘indirect’architectures, whether access would be ‘permissioned’ or ‘permissionless’ and also whether
distributed ledger technologies were essential aspects of CBDC. There was consensus
amongst all interviewees that any retail CBDC would have to be held indirectly – no central
bank wants to be operating a retail banking service – and also that any CBDC whether retailor wholesale would also be permissioned. Only a few highlighted the role of decentralisation
using distributed ledger technologies, for most a centralised ledger could equally well be
used to provide either wholesale or retail CBDC. There was mention of the use of distributed
ledger technologies to facilitate automated payments processing through ‘smart contracts’.
Most importantly to our analysis, no interviewee identified any clear reasons why thesechoices would make any difference to international payments.
We now summarise the findings from our interview responses on the possible impact of
CBDC in four specific international payment scenarios: small business payments, larger
corporate transactions, international retail purchases and remittances.
Our interviews and bank websites reveal that the ‘cut off’ between small and larger corporate
businesses varies somewhat from one bank to another. In general, any firm with revenues inexcess of around $5mn per year could expect to be able to bargain for more favourable
treatment of international payment transactions with negotiated charges depending on thevolume and size of their payment transactions and the associated supporting services
provided.

4.2

Small business payments

There was extensive discussion of small business payments in our interviews. Our overall
understanding, from the interviews and other sources is as follows. Small businesspayments are generally of low value in the hundreds or thousands of dollars not hundreds ofthousands. Domestically, these small business payments are processed using the same
payment arrangements as retail household payments, as retail bank payments or sometimes
as card payments. Both cost and speed of payments are of particular importance for small
businesses. Typically, their operating margins are tight, so paying one or two percent for
payment processing has a substantial impact on their bottom line. Small business also often
have limited options for borrowing funds, meaning that delays and uncertainty about thetiming of payment receipts can cause them substantial problems in cash flow management.
These concerns of small businesses about high costs, timeliness and uncertainty of payment
receipts are particularly pronounced for international payments. Most payments tointernational suppliers are bank to bank payments, conducted as illustrated in our Figure 2.
There are increasingly alternative foreign exchange providers, competing with banks ininternational payments for small businesses as well as in international money transfers forhouseholds. Competition amongst banks and between banks and non-bank foreignexchange providers has lowered costs and provided greater transparency and predictability
for many international small business payments. Still, as discussed above in Section 2.2,
‘derisking’ and the resulting reduction in correspondent banking services because of theassociated regulatory risks limits the effectiveness of competition for many currency

29

corridors. As a result for some international payments by small businesses charges haverisen rather than fallen despite the increasing application of new payments technologies.
To remove their dependence on correspondent banks, international banks and payment
service providers need to be able to route payments into the account of the ultimate recipientof the international payment, i.e. to the payment recipient’s account in the foreign currency B
in the foreign ‘Small bank’ in Figure 2. This could be achieved with the wholesale CBDC thatis made available to non-domestic financial institutions designed with interoperability that
supports wholesale CBDC payment into existing domestic retail payments schemes. This
could be direct interoperability with existing domestic payment schemes. Or alternatively it
could be a tailored scheme for transfer wholesale CBDC B from Large bank to the foreign
Small bank, which then converts this central bank balance from wholesale CBDC B to
traditional central bank reserves and simultaneously credits the ultimate recipient’s account.
Wholesale CBDC thus offers the possibility to tackle high costs and poor service quality ininternational payments through greater market competition in correspondent banking service
provision. We expect the majority of central banks to be rather cautious about allowinginternational institutions direct access to their balance sheets. Concerns about financial
stability mean that they will discourage international institutions, without a domestic banking
license, from borrowing in domestic money markets or holding any illiquid assets such asloans using short term money market funding. Similarly, they will not want to extend intraday
credit for large value real time gross settlement RTGS payments to international institutions
as well as domestic banks. These are though not in our view compelling reasons for limiting
wholesale CBDC to domestic financial institutions. Provided that foreign banks and non-bankalternative foreign exchange providers are restricted to holding positive wholesale CBDC
balances and their customer obligations are fully reserved, then they will be able to provide
their customers with international payments execution, moving central bank money freely toother wholesale CBDC account holders, without creating financial stability risks.
What about the impact of retail CBDC on international payments by small businesses?
There was relatively little discussion in our interviews on this compared to the discussion of
how wholesale CBDC might affect the payments processing illustrated in Figure 2. Some
respondents suggested a simplification of international payments if both the domestic
customer (holding the ‘Currency A account’ in Figure 2) and the foreign recipient (holding the‘Currency account B’ in Figure 2) held retail CBDC accounts directly with their respective
central banks. This could remove their dependency on international banks and on acorrespondent bank with access to domestic payment schemes for routing international
payments into a domestically held bank account.
We address this possibility in Section 5 below. The key point is that having both payer andpayee holding a retail CBDC does not of itself change matters very much. There still needs
to be a foreign exchange transaction. There are currently no markets for direct exchange of
one retail CBDC against another, so the payer holding CBDC would still have to transfer
their CBDC to a large bank who participates in foreign exchange markets. Once exchanged
then the large bank still needs to find a way to route the payment to the retail CBDC holdingof the payee, which is little different from routing to a bank account. However, it isconceivable, as discussed in Section 5, that central banks could support the development ofa bilateral market in direct exchange of their two retail CBDCs. In this situation, which
requires more than just payer and payee holding retail CBDC, there could be much reduced
reliance on foreign banks and their correspondents for international payments. In ourjudgement this is a possibility, but it is still a decade or more away from practicalimplementation.
As highlighted by a couple of our interviewees, another way that retail CBDC could also
make a difference for small business payments is if the creation of retail CBDC is30

accompanied by the development of global identity standards. Including standard digital
identities in invoicing and payments would lower the costs of compliance with AML andsanctions reporting and also substantially reduce the delays that arise when there are
mistakes in payment instructions for example due to incorrect account numbers. The
established global Legal Entity Identifier (LEI) could potentially be developed to play this rolefor small business payments, especially if it provided standardised links to account datarequired for payments processing.

4.3

Larger corporate transactions

This scenario was discussed in less detail than the other three. One reason for this was theissues overlap with the case of small business payments, especially for smaller payments
moving from between large and smaller businesses. A chain of intermediaries can still be
required resulting in the same payment frictions. The arguments under Section 4.2.1 that
foreign banks and payment service providers having access to wholesale CBDC can lower
barriers to entry and hence costs and improve the service remain valid.
A second reason is that many international payments by large banks are larger value,
perhaps $100,000 or more. Fees are typically not a concern for these transactions. Banks
charge corporate clients a lower rate at near cost for these larger international transactions
because the value proposition of corporate clients for the bank is the entire corporate
relationship and the opportunity this offers for providing a range of banking services
including credit. The high cost of switching banking service provider reinforces these existing
corporate banking relationships and there is no need to seek to profit from each individualtransaction.
The final reason that this scenario attracted relatively little discussion is that for the verylargest corporate customers, the principal challenge is not so much international payments
as international liquidity management. They will keep balances in many currencies,
effectively internalising the role of Large bank from Figure 2 in exchanging and transferring
foreign currencies. On occasion they will need to balance liquidity, with a larger movement offunds from one currency to another, as determined by their cor porate treasury. However, thisdoes not affect the execution of individual payments to and from their international suppliersand customers. Possibly, the holding of wholesale CBDC extended to large non-financial
corporates could be of interest to some of these large businesses, especially if this eases
their ability to lend and borrow in wholesale money markets. Again, this is not of direct
relevance to the international payments arising in their day-to-day business.

4.4

International retail purchases

Our third scenario concerns cross-border retail purchases, either by international visitors
purchasing goods and services face to face, for example from a shop, hotel or restaurant; orfor purchases online from an overseas merchant. As we learned from our interviews, thesepayment needs are, currently, largely provided by the global card schemes such as Visa andMastercard, with the schemes offering guarantees of payment and crediting funds to therecipient some days after the initial transaction. The card schemes can impose substantial
merchant fees, a rate of 2.5% is quite usual for credit card payments. In return merchantsobtain substantial benefits: the ability to accept payments from customers who migh totherwise be turned away; second the insurance, knowing that if they follow scheme
procedures even if the payment turns out be fraudulent (for example a stolen card) they will
still get paid.
Card schemes have a penetration rate around the globe, offer ing great convenience tocardholders. One interviewee gave a striking example, that of a private plane refuelling at a31

remote airport somewhere in central Africa, using a Visa card and paying a 2.5% fee for apayment of several hundred dollars because this was the only acceptable medium of
exchange for this transaction. However, this example, in which the merchant fee was paid by
the purchaser, is the exception not the rule. For most card payments merchants choose notto pass on the merchant fee to the paying customer so that the payers are unaware of thistransaction cost of card payment.
Consider first the potential role of retail CBDC. Central banks tend to define retail CBDC as adigital equivalent of cash that incurs no transaction costs to retail customers. This low-costfeature, however, doesn’t distinguish retail CBDC much from card payments from the retailcustomers’ perspective because customers do not bear card payment costs in most cases.
Besides, customers also benefit from the opportunity in a card purchase of refund throughchargebacks (in the case of credit cards) additional transaction benefits from insurance
services in case of problems with the transaction as well as a period of interest freeborrowing and rewards. As a result, customers can have little incentive to shift from higher
cost cards to lower cost retail CBDC for making a merchant payment.
Merchants maybe more motivated to promote adoption of retail CBDC if the merchant fee issufficiently lower than those in card schemes. In principle, a retail CBDC could serve as a
low cost guaranteed form of payment in a domestic retail transaction. Like a card payment, a
CBDC payment provides to the merchant a guarantee they are getting good money. Unlike acard payment this does not require any institutional guarantee and so does not have acharge built into the merchant fee to compensate for the costs of providing this guarantee .
Such a low-cost guarantee based on domestic retail CBDC might also be possible ininternational payments if the payment provider handling the payment can acquire CBDC androute it to a domestic retail CBDC account. This though will be subject to central banks’discretion on whether and to what degree they are willing to open the central bank balance
sheet to foreign entities.
All these possibilities are conditional on retail CBDC achieving widespread adoption in thejurisdiction receiving the international payment. The strength of the ‘installed base’ in existing
card payment schemes suggest that retail CBDC may struggle in many countries to achievea critical mass of retail merchant transactions. The exception are countries where card
schemes have made little inroads in supplanting cash payments or in supporting online
payments, explaining why the push for retail CBDC is strongest amongst low- and middleincome countries. Even then retail CBDC could struggle, in jurisdictions where other emoney solutions have already established themselves, such as M-Pesa in Kenya or Grab or
GoJek Pay in South East Asia. An informative test case will be the competition in merchantpayments between the e-CNY and its e-money competitors AliPay and WeChat Pay in
China. As discussed in the Appendix, the e-CNY is being designed without any charge to theretail customer, hence giving it one advantage over these domestic e-monies.
Some of our interviewees referred to the rise of bank based alternatives to card scheme
payments, specifically the possibility of faster payment bank account to bank accountsolutions installed on smart phones and also the ‘European Payments Initiative’ 20 to provide
a “comprehensive payments solution for Europe”, not just for the Eurozone but also for other
non-Euro payments in the EU, which could provide low cost payments both in retailpurchase and for “peer to peer” transactions between individuals. In those jurisdictions
where these bank-based solutions become established, a retail CBDC could still establish a
toe-hold in retail merchant transactions, for example for customers who for various reasonsfind it difficult to open a bank account. However, this can happen only if retail CBDC isdesigned from the outset to be interoperable with these bank-based payments solutions, and20 https://www.epicompany.eu/

32can be used to initiate retail CBDC to bank account payments, in the same manner as bankaccount to bank account payments.
A scenario related to international retail purchases is a retail CBDC solution made available
to international travellers (as is happening with the China e-CNY experiment for the 2022
Winter Olympics). Though this is essentially a domestic transaction, it could fill a gap in
payment services, allowing small firms to accept payments from tourists and travellers as analternative to card payments. General usage of this kind will also be promoted byinteroperability with existing domestic bank payment schemes. As discussed in Section 5,
without a fundamental change in the architecture of international payment processing, direc t
exchange of one retail CBDC with another seems an unlikely development.

4.5

Remittances

Our interviewees with direct experience of providing international remittance services
confirmed that much of the cost is associated with ‘cashing out’, when recipients are paid bya remittance agent in cash rather than the payment going into a bank or e -money account.
The development of retail CBDC as a state supported e-money in low- and middle-income
countries can help remove this element of cost. Further costs can arise with ‘cashing in’when the senders of remittances wish to pay using cash rather than from a bank account.
AML and sanctions reporting require that remittance firms establish the identity both of thosemaking the payment and those receiving payment, particularly challenging for cash
payments. Where a payment originates from a bank or e-money account they can rely on
the bank’s identification of their customer. Some of our interviewees emphasised the needfor global identity solutions to facilitate digital transformation of international payments. Thissuggests that a more significant cost reduction in remittance payments could be achieved if
the creation of retail CBDC is supported by globally accepted identity solutions,
unambiguously identifying both the sender and recipient of an international remittancepayment and hence reducing the currently substantial burden of compliance with AML andsanctions of politically exposed individuals.
With respect to wholesale CBDC, our interviews suggest, if anything, more pronounced
impacts on the competitive landscape and hence costs of remittances than costs of small
business payments. Typically, in the main remittance ‘corridors’, i.e. for a particular currency
pair, e.g. US dollar to Mexican peso, the balance of flows is largely in one direction, from thecountry hosting international migrants to their country of origin. This means that a payment
service provider offering a remittance service needs more than just customer access. They
also need to conduct supporting foreign exchange transactions in order to acquire thedomestic currency. The barrier to entry and resulted additional markup costs from relianceon a commercial bank to conduct this foreign exchange transaction and provide domestic
can be reduced by payment service providers having access to Mexican wholesale CBDC,
albeit at the expense of having to prefund payments.

5 Using CBDC to redesign international payments architecture
Is our discussion so far missing the possibility of more transformative radical change?
The prospective issue of central bank digital currency has triggered an enormous volume ofcommentary. Some view CBDC as a transformative step, as important a monetary
development as the creation of the first coinage in Lydia (east Anatoli in modern Turkey) , thefirst European bank notes in the 17th and 18th centuries or the breakdown of metallic
monetary standards in the 20 th century.

33

The ‘vision’ is that of direct decentralised exchange of retail- CBDC, much as coins weredirectly exchanged in classical antiquity or in renaissance Europe. This is viewed as part of abroader global shift to decentralised peer-to-peer financial exchange, removing the role ofinstitutions and supporting a transformative revolution in domestic and international
payments. Specifically, it is claimed that “The use of CBDC in cross-border payments would
enable instantaneous payments irrespective of location.”21
Policy makers are seriously exploring the opportunity for such direct exchange in crossborder payments, as outlined in a recent BIS-IMF-World Bank stocktake.22 The most recent
report on central bank collaboration in the development of multiple -CBDC interoperability
finds that “The prototype demonstrates a substantial improvement in cross-bordertransfer speed from multiple days to seconds, as well as the potential to reduce severalof the core cost components of correspondent banking. It thereby demonstrates the potentialof faster and lower cost cross-border transfers for participating jurisdictions.”23
The large majority of our interviews were with payments professionals. Their views are in
sharp contrast to these radical visions. Is this lack of imagination, professionals who spent
their careers doing things in a certain way unable to envisage an alternative? Or is this anawareness of practical realities that these more visionary statements about the impact of
CBDC neglect?
Our desk research, and some of our interviews, suggest that an alternative outcome of much
more radical change is at least conceivable. A ‘new world’ with real time payments at both
domestic and global level based on central bank digital currency is possible. This thoughrequires a substantial shift in the role of banks and other intermediaries in international
payments arrangements, both in retail and large value transactions. The changes involved
are far more than just technology adoption, they are a fundamental redesign of theinstitutional architecture of international financial transactions.
Given the problems of high cost and poor quality of service in international payments,
profound changes certainly merit consideration. There will have to be extensive discussion
and elaboration before anything along these lines can be introduced and it is far from certain
whether such developments towards decentralised peer to peer exchange will work as wellin practice as their many proponents theorise. Our goal in this sub-section is to identify someof the issues involved.
Figure 3, below, suggests one such potential redesign of international payments. It can becontrasted with the existing arrangements illustrated in Figure 2 above.

21 (Accenture, 2019, page 11)
22 (BIS, IMF and World Bank, 2021, Section 2, pages 5-12).
23 (BIS Innovation Hub, 2021, pg 7).

34

Currency A

Central bank: A

Currency B

Forex
Market:True spot
Open 24-7

Central bank: B

Foreign CBDC
+20,000 less forex
brokerage fees

Domestic CBDC
€ -100

Domestic
sender(payer)

1 = 200
Domestic Foreign
jurisdiction jurisdiction
Payment flows
Settlement flows

Foreignrecipient(payee)Figure 3: A possible retail CBDC-based real-time international payments architectureThis figure illustrates arrangements that might, using retail CBDC, support near real-time
direct international transfers of value. Such near real-time transfer could potentially reducemuch of the complexity and hence the high costs of the current arrangements illustrated in
Figure 2.
Figure 3 assumes widespread retail adoption of CBDC in both the sending and receiving
country. The payer holds their ‘domestic’ CBDC which they wish to use for the international
payment while the payee is happy to receive payment in their own ‘foreign’ CBDC. As we
now discuss, even when sender and recipient both hold the CBDC of their own jurisdiction,
direct international transfer of CBDC is still a difficult challenge.
Having payer and payee hold their money as CBDC eliminates the need for settlement,
either in the domestic or foreign currency. It does not eliminate the need for theaccompanying foreign exchange transaction. The domestic CBDC must still be exchanged
for foreign CBDC transferred to the recipient. For this to be a near real-time direct exchange
requires payer and payee to have access to a market for CBDC foreign exchange, operating
continuously 24/7 with immediate settlement. It also requires supporting operational systems
for the simultaneous debiting of CBDC holdings of the payer (here −100) and crediting of
CBDC holdings of the payee (here +20,000.
How might access to the foreign exchange market, shown in Figure 3, work? There are arange of possibilities. Here are two polar cases:
Polar Case 1.

A fully liberalised market for exchange of CBDC, in which neither
country places any restrictions of any kind on who holds their CBDC;
and where there is substantial demand for small value transactions
between the two jurisdictions

Polar Case 2.

A fully controlled one-sided market for CBDC exchange, that of a small
country which limits holdings of CBDC to its own citizens and residents
and whose central bank acts as the market maker, offering two-way
exchange against an international CBDC at a posted exchange rate.

35

Other arrangements than these two polar cases can be envisaged, but these capture muchof what would be involved. 24 The market could be facilitated either through a liberalised
market with multiple participants or through exchange on central bank books. Some blend of
the two is also possible, with the central bank participating actively in a real-time market. We
suppose that much of the exchange would still be brokered, with banks or other non-bankforeign exchange service providers providing retail customers with CBDC accountconnectivity and transaction execution at best available market prices. Hence for most retailclients the 20,000 credited would have some brokerage fees deducted. There would though
be little or no barriers to entry in this form of brokerage so these fees would an order ofmagnitude smaller than the 5% of Figure 2, perhaps as low as 0.1%.
However it is implemented, this shift from indirect intermediated deferred international
payments (the current architecture of Figure 2) to direct near real-time international
payments (a new architecture as in Figure 3) must address the fundamental requirement ofliquidity provision. For the payer in the domestic country to access the foreign CBDC theymust find a counterparty to give them the foreign CBDC. It will be a matter of rare chancethat there is someone else arriving at the market with the foreign CBDC, at the exact sametime and requiring exactly the same amount of the domestic CBDC in order to complete apayment in the other direction.
The fundamental role of banks and payment intermediaries under the current architecture ofinternational payments (Figure 2) is not payments processing but the commitment of theirbalance sheets to provide liquidity, bridging these differences in both timing and amount in
the need for foreign exchange. Whenever a bank or a non-bank payment service company
takes a payment from an account in a domestic currency and passes it on to acorrespondent bank to make payment in a foreign currency, they are taking a foreignexchange position.
As discussed in Section 2, f or more active corridors of exchange with multiple payment flows
in both directions, this liquidity can be provided at low cost. The net aggregate exposure forpayments intermediaries is quite small compared to the value of transactions. Only
occasional rebalancing transactions in foreign exchange markets are then required to limit
foreign exchange risk. For other less active corridors supporting foreign exchangetransactions must take place more often and the costs of liquidity provision are higher.
Direct near real-time ‘peer to peer’ payments as in Figure 3 still require the provision ofliquidity – but this will have to be provided in quite a different way than in Figure 2: notthrough the commitment of intermediary balance sheets but through a liquid real-time market
in direct exchange of CBDC (Polar case 1), through a central bank using its balance sheet toensure immediate real time exchange (Polar case 2) or through some combination of thetwo. Moreover, for this liquidity provision to be effective, further supporting arrangements not
captured in Figure 3 will then be required. Possibilities include the following:•

A purely market-driven evolution. The provision of liquidity in a liberalised market for
CBDC exchange (polar case 1) requires trading intermediaries committing their

24 Our analysis remains very mainstream. The radical visionary response is to point to the software-

based provision of liquidity in the rapidly evolving world of decentralised finance or DeFi operating
on Ethereum and other blockchain platforms. For example Uniswap (https://uniswap.org/) andSushiswap (https://sushi.com/) provide liquidity pools for decentralised exchange between different
cryptocurrencies. We may be missing something here, but we have found no coherent explanation of
how mechanisms of these kind could provide liquidity for exchange of retail CBDCs. We therefore
believe that retail exchange must rely on the established mechanisms we refer to here of traders and/or a market maker posting to a limit order book.

36

•

•

•

capital to taking foreign exchange positions. If there are enough underlying retailbuyers and sellers for a particular currency pair, then the commercial incentives
could be sufficiently strong to lead to the emergence of trading platforms for direct
exchange of the two retail CBDCs and for sufficient participation of tradingintermediaries to ensure 24/7 liquidity. The role of central banks and regulators will
be limited to ensuring a supportive regulatory framework that allows this market toflourish.
When, as is likely, commercial incentives for private liquidity provision needreinforcing, then the central banks concerned might reach a bilateral agreement on
the creation of a real-time limit-order book for exchange between their two CBDCs,
licensing domestic intermediaries to act as market makers. These market makers
would be obliged to post sufficient limit orders to ensure retail holders can always
make immediate low value exchange at a current market.
In a controlled market (polar case 2) the central bank provides liquidity to support
retail transactions in their own CBDC. This will be comparatively straightforward forsmaller low and middle-income countries with fixed exchange rates. This though
does mean that these central banks will end up acquiring holdings in the CBDCs
issued by other central banks. Hence co-operation between central banks, allowing
central bank holding of each other’s CBDC, will be essential. This might be facilitatedthrough regional co-operation agreements, allowing central banks of neighbouring
countries to build up holdings in each other’s CBDCs. They will not though want tobecome major creditors of their neighbours, with the threat of financial losses in theevent that a fixed exchange rate regime collapses; nor will they be comfortable with alarge proportion of their domestic CBDC going to neighbouring countries with acorresponding requirement for monetary expansion to maintain domestic access to
CBDC.
Other low and middle-income countries, with managed floating exchange rates, mightalso introduce a controlled market in exchange of retail CBDC (polar case 2) but
limiting this market to exchange against the retail CBDC of major international
currencies. This largely removes concerns about excessive risk exposure fromholding the CBDS of other central banks; but it still leaves potential policy concerns,
unrestricted ability of citizens and residents to exchange domestic CBDC into aninternational CBDC could facilitate capital flight and dollarization of the local
economy. So, this exchange might be largely limited to inward CBDC payments.

Taking stock, what we have presented in Figure 3 is the possibility of a real-time direct
exchange of CBDC. The recent work undertaken by a number of central banks worldwide on‘m-CBDC’ i.e. operational bridges between multiple CBDC ledgers, addresses part of what isrequired for such a change in international payment architecture, the supporting operational
systems which would allow such real-time exchange and settlement. These experiments
assume that two counterparties have already agreed on how much CBDC to exchange andon the exchange rate or to use a current market exchange rate. They show that it is thenpossible to ensure that this exchange take place without counterparty risk, on asimultaneous “payment versus payment” or PvP basis. There are though massive remaining
challenges involved in a successful shift from existing arrangements based on bankintermediation (Figure 2) to direct international exchange of retail CBDC (Figure 3).
These m-CBDC bridges will require extensive supporting institutional arrangements, basedon some combination of regulated market intermediaries and central bank balance sheet
interventions to build the necessary trust between central banks, households, companies
and intermediaries that will allow real time direct exchange of CBDC to work in practice. The
existing arrangements for international payments, relying on bank balance sheets, while
costly and often slow and unpredictable, do at least work. They attract sufficient transaction
volumes to be viable. Who will jump to an untested and untried system, however37technologically impressive, if they are not confident that others are also using it ? Central
banks can be expected to continue making positive noises about transacting directly in the
CBDCs of other central banks (they will not be so rude as to express publicly any concerns),
but: they will be cautious about widening access to their own CBDC beyond their citizens
and residents, even to other central banks; and they will want to proceed very carefully when
acquiring CBDC exposures to other central banks. Building the required trust is a substantial
undertaking that will take some time.
We can though also envisage an intermediate stage of development, employing m-CBDC
operational linkages at a wholesale rather than at a retail level, to support real time
wholesale foreign exchange and settlement. This could allow a wide range of financial andnon-financial institutions– commercial and investment banks, non-bank payment service
providers, foreign exchange dealers, hedge funds and other trading intermediaries, andasset managers – along with larger corporates, to hold and exchange wholesale CBDC on areal-time immediate settlement basis.
This would be something of a ‘half -way house’ between the current arrangements of Figure
2 and the futuristic arrangements of Figure 3. Once again, the critical issue is nottechnological. The issue here is whether there is sufficient demand for such real-time settled
foreign exchange amongst financial intermediaries and larger corporates to create a viableliquid market for 24-7 real-time foreign exchange. Just as described above for direct
exchange of retail CBDC, commercial incentives may not be enough on their own for the
emergence of such a market (a related point raised by one of our interviewees is that the
CLS bank initiative “CLS-Now” to offer real-time settled foreign exchange transactions which
went live in July 2019 has attracted little trading volume). This could require central banks
who have issued wholesale CBDC, agreeing to support real-time bilateral limit-order books
for the true spot transactions.
There are range of potential benefits from such a true-spot market in foreign exchange, if itproves viable.
1. The existing foreign exchange dealers could continue offering wholesale foreignexchange to their clients. They would now though be able to do this in a different
way, as brokers providing best execution in the true spot market. As brokers theywould be operating in exactly the same way as investment banks currently act as
brokers for equity trades. They would transmit client orders for market execution, butwould not take any client positions on their own balance sheet. This substantiallyreduces their own capital needs. Other intermediaries, such as high frequency
traders, could instead absorb market risks.
2. Such brokered exchange with immediate real-time settlement removes theopaqueness allowed through the manipulation of global foreign exchange markets by
dealers at the expense of their clients. Trades would always be at an identified timeand price conducted on the client’s behalf. Clients and regulators would be able,
retrospectively, to analyse trading data to ensure brokers have met with their best
execution obligations.
3. A true spot market eliminated with real time settlement, supported by m-CBDC
linkage, removes counterparty risk. Funds must be available in advance, with no post
trade financing or settlement risks. This in turn makes it possible to open the true
spot market to a much wider range of participation than is possible in current T+2
settled markets. This reduction in entry barriers can in turn support greater
competition in international payments between both bank and non-bank payment
service providers and allow even relatively large transactions to be executed andsettled in retail time without the support of bank balance sheets.
4. Treasuries of banks, non-bank intermediaries and global corporations would beenabled to source large amounts of currency on short notice. For one of our38

interviewees, this would be a beneficial shift. This interviewee, who works for a nonbank international payment service provider, believes this would help them manage
their liquidity globally on a real time basis, moving funds in a 24-hour cycle: startingwith holding Asian currencies at the beginning of the day, to manage cross border
payment flows within Asia and from Asia to the rest of the world; then moving on to
hold European currencies in the middle of the day; and, after that, currencies fromthe Americas before then moving liquidity once again on to Asia. From theirperspective current arrangements are inefficient. Because of T+2 rather than
immediate real time settlement, liquidity is trapped within currencies.
The major question mark about such true spot exchange with real-time settlement is whether
there will be sufficient participation and sufficient liquidity to make a true spot market inforeign exchange viable. The arrangements for liquidity provision in global foreign exchange
rely on delayed T+2 settlement, allowing the dealers and other market participants who
provide market liquidity to freely buy and sell foreign exchange throughout the trading day,only having to settle a much smaller net position. The need to prefinance trading in the true
spot market will discourage traders taking positions and providing liquidity directly in thismarket.
What this suggests is the desirability of two parallel foreign exchange venues for large value
forex transactions, alongside the true spot market with immediate real-time settlement a
parallel market with T+2 settlement (what we currently call the spot market, but which is facta short-term forward market). The T+2 markets need not cover all bilateral currency pairs, itwould be enough for them all to operate against an accepted numeraire such as the US
dollar. Hedge funds and other trading intermediaries could then provide spot liquidity bytransacting simultaneously in the two markets. They would profit from their commitment of
capital and their understanding of economic and financial information order flow and theirimpact on the spot market over the two-day horizon between T and T+2.

39

6 Conclusions
This paper reports an investigation of the potential impact of central bank digital currencies
on international payments. This investigation was pursued through desk research, with adetailed review of both current policy initiatives and of the economic theory of competition
and innovation in money and payments, alongside interviews with twenty-two payments
practitioners.
We provide a review of the economics of competition and innovation in money andpayments, stressing the point that these are network goods and therefore greatly affected by‘network externalities’, i.e. that adoption and usage depends on the adoption decisions ofothers. The increasing importance of accompanying information flows in payment intensifies
these network externalities. There can be substantial and rapid switching of technologies but
also sometimes inertia with externalities discouraging the adoption of superior solutions.
Network externalities also generate concerns about barriers to entry and market power andcreate stubborn problems of technical compatibility which require overcoming challenges
both of co-ordinated change and sometimes overcoming vested interests if they are to beproperly addressed.
Building on these initial insights, our desk research and interviews support three further
broad sets of findings.
International payments processes are complex.
The first set of findings are about the complexity and role of various intermediaries
supporting the execution of international payments (as illustrated in Figure 2 of Section 2).
From a customer perspective, an international payment seems very simple. The sender’saccount is debited, and all going well, the recipient’s account is then credited net of any
charges and costs of foreign exchange. Underlying this apparent simplicity, are complex
operational processes conducted in successive stages.
As discussed in relation to Figure 2, digital payments today are all transfers of monetaryclaims, such as bank deposits or sometimes an e-money. This means that all international
payments require settlement in central bank money, not once but three times: in the initial
domestic stage of the payment taking money out of the senders account, in foreignexchange and in the final stage crediting money to the recipient’s account. For the
overwhelming majority of international payments, the value involved is relatively low andsettlements are delayed net settlements DNS, not real time. Many payments are netted
together and settled as a single ‘batch’. The required settlements take place some time after
the debiting of the sender’s account, with some settlement even after the crediting of therecipient’s accounts.
When it comes to the settlement of the foreign exchange leg of international payments (incontrast to the two domestic settlements) there is not even any fixed time period for this
delayed settlement. As illustrated in Figure 2, banks build up or run down their holdings offoreign exchange, transacting in foreign exchange markets only as required to rebalance
their foreign exchange exposures. This is a key fundamental role of large banks ininternational payments, using their balance sheets to provide supporting guarantees of
eventual final transfer of value in foreign exchange settlement, and in this way bridging gaps
in both the timing and quantity of international payments.
A further complication is that the supporting transfer arrangements (or payment schemes)
within each jurisdiction have developed independently. An international payment while also
digital is inherently problematic because it requires co-ordinating a transfer through two
different schemes, one for the jurisdiction of the sender, the other for the jurisdiction of the40

receiver of money. This in turn means that there is usually a reliance on a correspondentbank, to provide access to the payment schemes of the recipient jurisdiction and also toenable settlement on the banks of those jurisdictions central banks.
The introduction of CBDC, particularly wholesale CBDC, can support continuing gradualimprovement in international payments.
Our second set of findings are about the impact of technological innovation, including the
introduction of CBDC, on these operational processes and on customer outcomes, bothcosts and service quality. Our review of the economics of innovation in money and payments
and our interviews have both highlighted the importance of network externalities in digital
payments. We have well-established arrangements that already have critical mass. The
prospect is therefore for incremental improvement, not radical shaping of payment
processes, driven by a number of parallel developments.
We find that it is the introduction of wholesale CBDC, not retail CBDC, that will have themain impact on international payments. Wholesale CBDC, made available to foreignintermediaries including both international banks and competing payment service providers,will lower barriers to entry both in the provision of settlement in central bank money and inrouting of payments within the recipient jurisdiction. This reduction in barriers to entry will
come from: technical standardisation, reducing technical incompatibilities and hence
lowering the costs of connecting to local payment systems; and from facilitating 24/7 roundthe clock payments settlement. Barriers to entry will be reduced most fully with a wholesale
CBDC design that allows foreign intermediaries holding CBDC to initiate domestic payments
to retail accounts, ideally instant payments with immediate real time settlement.
Retail CBDC can also have an impact, but in more specific situations. One is in lowering
remittances costs by increasing financial inclusion. Another is offering a retail CBDC on
phone or card to international visitors, providing an alternative to existing payments basedon international card schemes that could be accepted at low cost by a wide range of small
merchants. A broader impact that may be associated with the introduction of retail CBDC
(but could also be pursued independently) would be establishing globally accepted digital
identity schemes, thus directly reducing the costs of compliance with AML and politicalsanctions reporting, which currently serve as substantial barriers to entry in international
payments services.
Technological developments will also, incrementally, address existing concerns about costand service quality in international payments. The upgrading of domestic payments
architectures and accompanying adoption of the ISO20022 global standards framework forpayment schemes is eroding technical incompatibilities between arrangements in different
jurisdictions. ISO20022 is also supporting much greater accompanying information flows
alongside payments instructions. This, together with the SWIFT gpi service for supportingtransparency of execution in international payments, is now offering the opportunity for
payment service providers to build better customer solutions with much improved oversightof payments processing, what has ‘happened’ to their payments and the required actions todeal with any processing delays. This can also support integration in business supply chain
and international trade operations and finance. Wholesale CBDC with direct holding ofcentral bank money by intermediaries will complement these developments, but
improvement can take place even where introduction of wholesale CBDC is delayed.
Radical change is possible but not inevitable.
Our third set of findings are about the possibilities of radical change in money and payments,
based on the emergence of new digital forms of money. Given the great excitement about
digital money and the impact of introducing CBDC, the view that emerges from our analyticalframework (Section 3, emphasising network externalities in payments) and from ourinterviews (Section 5) are strikingly conservative. We have ended up with a much more41

cautious view. Gradual incremental improvements in the cost and service quality ofinternational payments, based on access to CBDC and the adoption of other technology
innovations. This is very far from the dramatic picture of radical change in domestic andinternational payments expressed in many other discussions of the emergence of new digitalforms of money.
What explains this difference? Much of the expectation of radical change rests on anassumption that digital innovation will create opportunities for direct exchange of digitalcurrencies, replaying the existing complexities of both domestic and international paymentswith simple direct exchange. While this is not impossible, the expectation that all thisrequires is the creation of a new digital form of money is somewhat naïve. The central
importance of accompanying information mean that digital payments are, inherently, much
more than just a transfer of value. Digital payments based on bank and card payment
schemes, as well as those using new e-moneys, rely on established schemes or platforms
each with a with large installed user base. These connect payers and payees in particular
payment contexts. CBDC will not automatically attract users
Our analysis has distinguished two plausible variations on this theme. The first is that ofwidespread holding of retail CBDC, a direct money holding which when used in payments
just like a bank note needs no further settlement, and directly transferred whenever aninternational payment is made. Nothing in our desk research or our interviews suggested
that this is a realistic near-term prospect.
A more likely possibility is a radical simplification of wholesale transactions money andinternational foreign exchange markets, with large corporates, investment funds as well as
investment banks, domestic and international commercial banks and payment service
providers directly holding and exchanging wholesale CBDC. There could then be sufficientvalue from real time exchange of wholesale CBDC for the emergence of parallel foreignexchange venues, with a true spot market operating with immediate settlement alongside theexisting T+2 settled market that operates today. This could in turn facilitate real time global
liquidity management, with funds being transferred around the world in different currencies atdifferent times of the day according to when they are needed. Unsecured and secured money
market transactions could similarly use wholesale CBDC for immediate real time realisation ofmoney.
The evidence of our interviews though is that this would be a major and challenging change
to the existing infrastructure for international foreign exchange. It is therefore not going toemerge automatically, even with widespread access to wholesale CBDC. Existingarrangements with delayed settlement, currently T+2 in foreign exchange, are a market
preference. While foreign exchange markets might follow the lead of securities markets andpush for T+1 settlement, this is inherently different from near-real time immediate settlement.
The netting that is made possible by delayed settlement reduces substantially the liquidity thatmust be committed to supporting the final PvP exchange of foreign currencies. So, there is atrade-off in moving to near-real time settlement: greater simplicity and reduced risk exposure
v. greater liquidity requirements and also the costs of changing operational systems. There ismoreover a co-ordination problem. the two sides of the trade must agree on the same
settlement window. It is not enough if some institutions see commercial benefits in changing
their forex business model to near-real time settlement, all must change at the same time.
Global central banks may wish to promote a different outcome. Real time spot exchange ofwholesale CBDC incorporating near real-time spot settlement, i.e. a true spot market, might,
for example, help to reduce systemic risk exposure in short term secured and unsecured
money markets. It could promote greater competition in the services illustrated in our Figure
1, helping small banks better access to foreign exchange services. Such development though42needs careful assessment. A reworking of the entire infrastructure of international payments
is a far from trivial investment.
Such a radical redesign of international payment processing is relatively remote from theexperience of most customers. While an evolution of wholesale CBDC in this direction ofreal-time spot exchange with immediate settlement could help further reduce barriers toentry and promote competition in international payments, the most obvious ways to improvecustomer outcomes are as discussed at length in our paper through improved
interoperability and compatibility of processing systems, together with wider access tocentral bank money and comprehensive globally accepted identity solutions. This technicalnitty-gritty appears to matter more f or improving international payments than any grandredesign.

43

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http://jpkoning.blogspot.co.uk/2014/10/fedcoin.html.
Koning, J. (2016) “Fedcoin: A central bank-issued Cryptocurrency,” R3 Report, 15.
Linde, J. and Nessen, M. (eds) (2018) “Sveriges Riksbank Economic Review: Special issue
on the e-krona,” in. Stockholm.
Milne, A. (2018) Argument by False Analogy: The Mistaken Classification of Bitcoin as
Token Money. 3290325. Available at:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3290325.
Nessen, M. and Soderstrom, U. (eds) (2020) “Sveriges Riksbank Economic Review: Second
special issue on the e-krona,” in. Stockholm: Sveriges Riskbank. Available at:https://www.riksbank.se/globalassets/media/rapporter/pov/engelska/2020/economic-review2-2020.pdf.
OXERA (2020) The competitive landscape for payments: a European perspective. Available
at: https://www.oxera.com/publications/the-competitive-landscape-for-payments-a-europeanperspective/.
Panetta, F. (2021) “Preparing for the euro’s digital future,” The ECB Blog, 14 July. Available
at:https://www.ecb.europa.eu/press/blog/date/2021/html/ecb.blog210714~6bfc156386.en.html#f
ootnote.4.
Powell, J.H. (2021) Federal Reserve’s response to technological advances driving rapidchange in the global payments landscape, Board of Governors of the Federal Reserves
System, Speech. Available at:https://www.federalreserve.gov/newsevents/pressreleases/other20210520b.htm (Accessed:
June 4, 2021).
Project Jasper (2017) Phase 2: A Canadian Experiment with Distributed Ledger Technology
for Domestic Interbank Payments Settlement. Ottowa. Available at:https://www.payments.ca/industry-info/our-research/project-jasper.
Project Jasper (2018) Phase 3: A collaborative research initiative between Payments Canada,
the Bank of Canada and TMX group. Available at: https://www.payments.ca/industryinfo/our-research/project-jasper.
Project Ubin (2017a) Phase 1: SGD on Distributed Ledger. Singapore. Available at:https://www.mas.gov.sg/schemes-and-initiatives/Project-Ubin (Accessed: June 5, 2021).
Project Ubin (2017b) “Phase 2: Reimagining RTGS,” 14 November. Available at:https://www.mas.gov.sg/-/media/MAS/ProjectUbin/Project-Ubin-Phase-2-Reimagining-

45

RTGS.pdf?la=en&hash=02722F923D88DE83C35AF4D1346FDC2D42298AE0 (Accessed:
June 5, 2021).
Project Ubin (2018) Phase 3: Delivery versus Payment on Distributed Ledger Technologies.
Singapore. Available at: https://www.mas.gov.sg/schemes-and-initiatives/Project-Ubin(Accessed: June 5, 2021).
Rice, T., von Peter, G. and Boar, C. (2020) “On the global retreat of correspondent banks,”
BIS Quarterly Review, March [Preprint].
Riksbank (2017) The Riksbank’s e-krona project: Report 1. Stockholm. Available at:https://www.riksbank.se/en-gb/financial-stability/the-financial-system/payments/doessweden-need-an-e-krona/the-e-krona-projects-first-interim-report/.
Riksbank (2018) The Riksbank e-Krona project: Report 2. Stockholm. Available at:https://www.riksbank.se/en-gb/payments--cash/e-krona/e-krona-reports/e-krona-projectreport-2/.
Riksbank (2021) E-krona pilot phase 1. Available at: https://www.riksbank.se/engb/payments--cash/e-krona/e-krona-reports/e-krona-pilot-phase-1-report-3/ (Accessed: June4, 2021).
Schär, F. (2021) “Decentralized finance: On blockchain-and smart contract-based financial
markets,” FRB of St. Louis Review, 2021(Second Quarter), pp. 153–174. Available at:https://research.stlouisfed.org/publications/review/2021/02/05/decentralized-finance-onblockchain-and-smart-contract-based-financial-markets.
World Bank (2021) Remittance Prices Worldwide. Available at:https://remittanceprices.worldbank.org/en.

46

Appendix A. Interview design and interview questions.
It is difficult to use formal model building or statistical hypothesis testing in investigating theimpact of a novel form of money such as CBDC on an industry scenario as complex as
cross-border payments. Our research therefore employs qualitative research methods.
Specifically, we explored the understanding developed in our ‘desk analysis’ of Sections 2
and 3 with semi-structured interviews. Our goal was to test and develop the analyticalframework developed in our desk research, by obtaining the perspectives of professionals
with a wide range of experience in international payments and payments technologies.
The research method can be described as a “grounded theory” approach in which atheoretical framework is developed inductively from data and thus ‘grounded’ in qualitative
observations (Glaser and Strauss, 1967; Strauss and Corbin, 1990). Following this researchtradition, the analysis of Section 3 was used as a framework for understanding both
institutional and policy issues and interview data. The interview data were interpreted
through content analysis or “coding” that allowed us to label and categorise data. This
analytical process allowed us to refine our conceptualisation of the core issues around
CBDCs. While the researchers already had prior knowledge about the various issues anddiscussions about CBDC and international payments, as set out in Section 3, both interviews
as well as the coding process were performed with an ‘open mind’, so analysis andconclusions were shaped by the data, rather than forcing the results to fit within apreconceived framework.
The interviews conducted were designed to address three broad areas: 1) the CBDC design
choices available to issuers and policy makers, 2) the impact of CBDC issuance based on
specific international payments scenarios, and 3) broader monetary and economic issues
that CBDCs could introduce. All questions during the interviews (from the more narrow to themore open-ended) were asked from an interview guide that was circulated in advance to th einterviewees (see Appendix A.). Most interviews lasted between 50-60 minutes. All
participants gave permission for recording of the discussions. These recordings were used
to transcripts which were then returned to the interviewees for the record as well as to givethem the opportunity to provide any additional response. This allowed the research team tocapture the entirety of the discussions.
The data collection exercise lasted eight months, with desk analysis and interview design
beginning in November 2020, Interviews from Feb – June 2021 and a further four months(between July 2021 – Oct 2021) of data analysis and write up of the results and the paper.

47

7 The six page interview document
7.1

Introduction

This interview is one of a series conducted February - June 2021 with payments
professionals, regulators and central bankers. They form part of a research project
investigating the implications of the issue of CBDC on the operation of international
payments. This research is being conducted by Chusu He of University of Bath, Alistair
Milne of Loughborough University and Markos Zachariadis of Manchester University. It is
supported by the SWIFT Institute under grant agreement 2020-002. We expect the research
to be published as a SWIFT Institute Working Paper in the summer of 2021.
The interview has three parts. In Part A we ask about your understanding of the design
choices for CBDC, especially those that are likely to be most critical to use in internationaltransactions. In Part B we then ask your views about four different scenarios in which CBDC
might be adopted for international payments by households and corporates. In Part C, timeallowing, we ask some more open-ended questions about impact on international finance.
We would be grateful if you could read the following, describing the conduct of the interviews
and write up the research. We will ask at the beginning of the interview if you have any
concerns:• The interview will take between 45-60 minutes. We plan to spend around 5 minutes
on preliminaries, 15 minutes on part A, 30 minutes on part B and (assuming we keep
to time) 10 minutes on part C.
• With your permission (we will ask for confirmation) the interview will be audio
recorded and a transcript prepared. We will share the transcript with you, giving you
an opportunity to add to or correct anything you have said. If you cannot grant
permission for recording, for whatever reason, then the interview will be minuted(keep detailed notes) and we will share the minutes with you, again giving you an
opportunity to add to or correct our record of your responses.
• All audio recordings, transcripts and minutes will be stored securely, in encrypted
files. They will be seen only by the research team (three co-authors of the research)
Chusu He, Alistair Milne and Markos Zachariadis who will also conduct theinterviews.
• These files will be kept for a period of five years. This is to allow for the further
process of any peer reviewed publication. Subject to agreement from the SWIFT
Institute and all those we interview, we also plan to publish a more detailed interview
summary, which can in turn be referred to in further published research, by ourselves
or others. This is to make full use of the opportunity given by this work to sharedetailed professional understanding of international payments with researchers,
practitioners and policy makers.
• We are not asking for you to share any commercially confidential information or to
identify any statements you make with you as an individual or with your firm or
employer. Any quotations or attributions in the research paper will use pseudonyms
e.g. “Participant A.” We would like to include a list of interviewees and their affiliationsin the published paper; but if you prefer not to be included by name we can at yourrequest instead use a pseudonym “International payments manager B at internationalbank X”.
• We will share a draft of the final paper for your record and may ask you to kindly
provide feedback or make any suggestions on our analysis and conclusions before
publication.
• If you have any questions about the research, or the nature of your involvement ,please do not hesitate to ask us before or at the start of the interview.

48

The definition of CBDC used in our research
Debate on CBDCs is often marred by confusion about what CBDCs actually are; so it isimportant for the purposes of this research to offer a definition. For us, CBDCs are widely
held accounting liabilities of a central bank: (i) exchangeable one for one into other money
measured in the domestic unit of account; and (ii) with supporting digital transfer
arrangements. This implies that a CBDC transfer, like a transfer of a bank note, achieves
finality at the time of the transaction without any further process of settlement (they are “self settling” or provide “atomic settlement”). “Widely held” is employed to distinguish CBDC from
central bank reserves, which are normally held only by commercial banks. One for one
exchangeability in the unit of account distinguishes CBDC from equity or foreign currency
liabilities. The digital transfer arrangements distinguish CBDC from bank notes.
This is a broad definition that includes all various forms of CBDC featured in recent
discussions.
Having this in mind, one can envisage a variety of different forms of CBDC according toseveral further systems and design choices that we would like to discuss with you.

Part A. CBDC design choices and international payments
The design choices listed in this part of the interview are described more fully in our CBDC
typology, below. As you will see in the second part of the interview, we highlight three de sign
choices that we believe are critical to international payments. We need to establish if ourinterviewees agree with our assessment.
QA1. Do you agree that the following CBDC design choices are the critical choices for theiruse in international payments?
• Retail v. wholesale• Direct v. indirect architecture• Degree of interoperability
QA2. Do you agree that the following CBDC design choices are important to their use ininternational payments?
• Identity linked v. pseudonymous holding (e.g. how central is digital identity)• Level and permissions for data access and data mobility across different entities andjurisdictions• CBDC functionality (online/offline)
QA3. Are there any other CBDC design choices that are relevant to their use in international
payments? How important are they?
e.g. Degree of access (e.g. who has access to the systems and under what terms?);
Distributed (DLT) vs. Centralized ledgers; Interest bearing or non-interest bearing CBDCs

49

Part B. Scenarios of CBDC implementations for international payments
Scenarios. We now explore the impact of the issue of CBDC on four representative
payment scenarios. There is overlap e.g. small business payments (QB1) merge into thoseof larger businesses (QB2), but we distinguish because they are served by somewhat
different arrangements.
Our focus here is on the design choices for CBDC and how these might affect the impact of
CBDC on international payments. Depending on design choices this could involve: (i) direct
use of CBDC for the payment (ii) indirect use of CBDC by banks or non-bank payment
service providers (PSPs).
We ask you to both give your perspective on both current processing arrangements (howpayment operations are conducted, the ‘pain points’ in terms of speed, cost, transparency,
certainty etc.); and how these might be changed by access to CBDC.
The following table summarises our initial understanding of where CBDC issue may impact
on international payments, highlighting the wide range of possibilities dependin g on thedesign choices made.
Retail v. wholesale
What additional or
improvedinternational
payments services
are possible of (i) the
sender / recipient
hold CBDC
themselves, or (ii)either or both hold adeposit with a PSP orbank which itself
holds CBDC?

Direct v. indirectarchitecture
Is the impact ofholding of CBDC oninternational
payments
strengthened by third
party provision of
CBDC services?
e.g. a PSP might
facilitate direct PvP
exchange of two
CBDCs if it is able tooffer both sides of
the transaction,
sender and recipientor their banks, direct
CBDC holding inboth currencies.

50

Degree ofinteroperability
Is interoperability criticalto using CBDC ininternational payments?
e.g. allowing thepossibility of direct useof the CBDC for final
payment andsettlement, through thedomestic payment
scheme of therecipient’s jurisdiction,
so avoiding the need fora correspondent bankfor settlement?

Other CBDC
design choices,
Are other
design choices
critical orimportant touse of CBDC ininternational
payments
e.g. CBDC as adata carrier?

Part B (continued). Scenarios of CBDC implementations for international payments
Please answer the questions in Part B. The first four questions have the same two-partwording, for each of the four proposed scenarios considered; for the second part we ask you
to consider the design choices in the table on the previous page. The fifth and final question
is a catch all: have our discussion missed anything important?
QB1. A B2B payment by a smaller business to a supplier, cross-border and with currency
exchange. What about payments from a customer or an importer?
What are the concerns (cost, speed, etc.) for payers/payees under current arrangements?
How might these be improved/ transformed by access to CBDC, allowing for possible CBDC
design choices?
QB2. A B2B payment by a larger business (mid sized revenues €5mn to €20mn, larger
above this) to a commercial supplier or customer, cross border and with currency exc hange.
What are the concerns (cost, speed, etc.) for payers/payees under current arrangements?
How might these be improved/ transformed by access to CBDC, allowing for possible CBDC
design choices?
QB3. Payments by an individual cross-border and with currency exchange for the receipt ofgoods or services, distinguishing payer present and payer remote.
What are the concerns (cost, speed, etc.) for payers/payees under current arrangements?
How might these be improved/ transformed by access to CBDC, allowing for possible CBDC
design choices?
QB4. Remittance payments, from an individual cross border and with currency exchange, toanother individual with a bank or PSP e-money account, distinguishing different corridors as
appropriate.
What are the concerns (cost, speed, etc.) for payers/payees under current arrangements?
How might these be improved/ transformed by access to CBDC, allowing for possible CBDC
design choices?
QB5. Underlying all these scenarios is the possibility that CBDC issue might support radical
simplifications of the current complexity of international payments, disrupting the role ofincumbent intermediaries and other service providers and replacing them with more direct
exchange.
To what extent do you agree that this is a possibility? How does this depend on CBDC
design choices? Is there a greater or more limited role for smaller institutions?

51

Part C. General questions on the impact of CBDC on international financeWe complete the interview (time allowing) with some final questions about the more generalimpact of CBDC on international finance. We would like to take the opportunity to obtaininsight and clarifications into some of these broader issues/debates to have a more nuanced
view on the impact of CBDCs.
What impact do you think the issue of CBDC, by central banks in major economies and inother jurisdictions, might have in the following areas of international finance. Again, pleasecomment on how these outcomes might be affected by CBDC design choices
QC1. Dollarization (i.e. an international currency becoming widely used in domestictransactions across different jurisdictions). Could issue of CBDC, whether a digital version of
the US dollar or of other major currencies, facilitate ‘dollarization’ in cases where fiscal andmonetary instability leads to a collapse of confidence in a domestic currency?
QC2. On the ability of residents and non-residents to circumvent exchange and capital
controls applied in some low- and middle-income countries, so weakening the ability of thesecountries to regulate international transactions.

QC3. Transactions between clients and dealers in global foreign exchange markets (theclient could be a commercial bank, a non-bank payment service provider, a foreignexchange trader, an asset manager; it could also be a large non-financial company). Could
CBDC transform international financial markets?
QC4. “Offshore” money market and foreign exchange transactions, either: (i) by resident
financial institutions (including subsidiaries of non-resident financial institutions), in theoffshore market transacting in non-domestic currencies; or (ii) by non-resident institutions(including branches of non-resident financial institutions) transacting in either non-domestic
or domestic currency. An important part of international financial transactions, notably in
London, are offshore in a jurisdiction that can be different from that of either the legal
residence of two parties to the exchange or the currency in which it is denominated. Will theissue of CBDC promote or discourage offshore financial transactions?

52Typology of key design choices for CBDC
Those marked ** are those we consider most critical to international payments; and thosemarked * are those we consider important to international payments. An objective of part I of
the interview is to find out if our interviewees agree with these assessments.
•••** Retail v. wholesale – The distinction between retail and wholesale CBDCs has
been one of the most prevalent in the existing literature. While retail CBDCs aim
at providing access to the end customer (either consumers or businesses),
wholesale CBDCs will be exclusive to financial Services institutions, such as
banks and non-bank payment services providers, who will want to leverage theinfrastructure to increase efficiency (i.e. reduce counterparty liquidity and credit
risks and improve settlement efficiency) and provide better products and services.
In general terms, r-CBDCs are a popular option amongst emerging economies
who wish to increase financial inclusion, whereas, w-CBDCs are seen morefavourably in advanced economics that wish to simplify payment infrastructure(including international payments) and reduce the number of intermediaries
involved in the process. The distinction between r-CBDC and w-CBDC, however
is not a binary one and there can be a number of in-between combinations that
accommodate different groups or users.
** Direct v. indirect architecture. These design choices are confusing because oflack of established definitions in the literature and many extant works use suchterms to describe different things. Our take of the direct architecture is that the
CBDC will be a claim on the central bank who is the only responsible institution
for the issuance, redeeming of CBDC as well as data management of the system.
An indirect CBDC system is similar in terms of the claim on the central bank but
allows financial institutions (e.g. banks) to play a role in onboarding customers
and manage data access (e.g. secure authentication, checking of balances,initiate payments, etc.). This is a delegated management model similar to ‘hot
wallets’ provided by cryptocurrency service firms. It is also possible to distinguisha ‘synthetic’ arrangement, e.g. and Adrian and Griffoli-Mancini (2019) which
resembles the existing intermediation system where CBDC will be a claim on afinancial institution (but where this claim is ‘100% reserved’ i.e. fully backed bycentral bank liabilities). This will also manage onboarding and data (bothreference and transactional/payment). Similar distinctions are used elsewhere in
the literature but with different terminology and definitions – for example Auer and
Böhme (2020) describes our synthetic definition as ‘indirect’, collapse our direct
and indirect into one level and introduces a further ‘hybrid’ level which isintermediate between our indirect and synthetic, with CBDC held on multiple
ledgers.
** Degree of interoperability – Depending on their architecture andimplementation CBDCs tend to be seen as separate channels of value transfer ofpayment rails. However, most often the success of new infrastructures depends
on their ability to integrate and interoperate with existing, more establishedsystems. Similarly, CBDC’s interoperability can be assessed based on theirintegration with a) domestic bank payment rails (e.g. PayUK schemes, CHAPS,
etc. in the UK), b) existing card network rails and related systems (e.g.
Mastercard, VISA, AMEX and relevant technologies such as terminals, gateways,etc.), and c) large value payment systems. Relevant to this discussion is CBDC
interoperability with domestic and cross border infrastructures (single currency
payments) and whether CBDC would be able to interface with foreign CBDCbased (or not) currencies on a multicurrency basis. In case of the later, questions
regarding liquidity management and exchange rates will need to be resolved.
This becomes even more complicated if one considers the various processes andsystems involved in cross-border payments. For example, for large value

53

•

•

•

•

•

payment systems a payment-versus-payment process is commonly used which isturn would require a pre-funding arrangement (with pre-funded accounts).
Additional steps in the payment chain would be complying with AML rules,
sanctions, etc.
* Identity linked v. pseudonymous holding – One of the potential advantages of
having a CBDC as a ‘bearer asset’ is the feature of ‘anonymity’. Thus far, this has
been a popular characteristic among DLT-based cryptocurrencies but is quite
unlikely it will be incorporated in CBDC solutions in the same way, albeit, some
privacy in lawful exchange can be secured. In any case, a distinction between
identity-linked and pseudonymous holding of a digital asset begs the questionsof: how does one enter the system? What will be the KYC process to onboard
users? Who will control this and will it be push (user initiating the registration) or
pull (an intermediary issuing a digital wallet or smart card)? Answers to thesequestions will also influence or depend on the chosen design and architecture of
a CBDC.
* Level and permissions for data access – As open finance is catching on aroundthe world, there has been a need to address customer data access and portability
across many banking services including payments. Implementation of open
banking frameworks (regulated or not) have been quite challenging (seeZachariadis and Ozcan, 2017 and Ozcan and Zachariadis, 2020) due to thecomplexity of systems and protocols used internationally. It is evident that more
integrated systems will be easier to manage and control access to data and so
CBDCs would offer a possibility to implement open payments more systematicallyand successfully. The level of data access and permission (depending on thearchitecture of choice) can happen either at the central bank (issuing a direct API
to consumer’s balances and transactional information) or at the level of theintermediary.
* CBDC functionality (online/offline) – As digital ‘bearer’ instruments may often
rely on near-real time settlement that takes place across a network of settlement
agents/nodes, access to the internet has been a key concern. Various models
have been proposed to solve this issue including technologies that would allow
the exchange of CBDC on an off -line basis between phones that can support‘hardware money’ (with a chip or smartphone ‘secure element’ built-into thesmartphone to prevent double spending).
Distributed (DLT) vs. Centralized ledgers – To deal with issues aroundtransparency, privacy, double-spending, and security, the idea to implement
CBDC using blockchain-based on DLT-related innovations has been proposed.
While the use of such technologies has been quite successful in the context ofprivately-issued cryptocurrencies available to the wider public, it is not necessary
or straightforward that these will be ideal for the issuance of CBDCs going
forward. In any case, one can easily see their relevance and there is a goodamount of literature that advocates or criticises their use in this context.
Interest bearing or non-interest bearing CBDCs – This distinction is mainly
important from the point of monetary policy and financial stability. If CBDCs areinterest-bearing and can be held without limits, this could affect holdings byinstitutional investors of other liquid, low-risk instruments (such as short-term
government bills and repos backed by sovereign collateral). An interest-bearing
CBDC could make monetary policy more effective as the pass-through of interest
rate changes by the central bank would be more direct. On the other hand, if
CBDC offers a direct alternative for deposits, banks would have less ability to
independently set deposit interest rates. In case of a non-interest bearing CBDC
like banknotes, this would not directly transmit changes in the key interest rate toholders, nor would it be likely to have large effects on money market interest
rates.

54

Appendix B. Central bank work on CBDC
This Appendix summaries the phases of central bank work on CBDC over the past decade.
The first phase focused on initial technical experimentation, exploring the possibilities for
CBDC in a number of ‘proof of concept’ projects. This work was encouraged by the
emergence in 2013 of widespread trading of Bitcoin and the first discussion of central bankdigital currency using distributed ledger technologies (Koning, 2014, 2016; Andolfatto, 2015).
Singapore and Canada embarked on a series of technical experiment, the Monetary
Authority of Singapore’s Project Ubin in 2016 https://www.mas.gov.sg/schemes-andinitiatives/Project-Ubin and the Payments Canada and the Bank of Canada collaboration on‘Project Jasper’ https://www.payments.ca/industry-info/our-research/project-jasper. Thesedemonstrated the technical feasibility of operating large value payments on a ‘distributed
ledger’ without a central operator (Project Jasper, 2017; Project Ubin, 2017a, 2017b); andexplored an integrated system for settling securities and payments (Project Jasper, 2018;
Project Ubin, 2018).
In parallel with these technical experiments, the Swedish Riksbank launched its e -Kronaproject exploring the use case for CBDC as a cash substitute https://www.riksbank.se/engb/payments--cash/e-krona/ , with the rather different motivation from other central banks of
Sweden’s experience of rapidly falling values of cash in circulation. This is reported in(Riksbank, 2017, 2018) with further analysis in two special issues of their economic review(Linde and Nessen, 2018; Nessen and Soderstrom, 2020). Recently they have embarked
on phase 1 of a pilot investigation with more detailed examination of the legal and technicalrequirements (Riksbank, 2021)
The second phase of increased central bank interest can be associated with increasing
mainstream adoption of cryptocurrency technologies, including the potential issue of private‘stablecoins’ competing with central bank money. 25 Their interest in digital payments has
been further catalysed by the global pandemic and the major stimulus this has provided todigital commerce of all kinds. Notable developments in this second phase of widespreadinterest include:- Sept 2019: the establishment of the BIS innovation hub to foster international
collaboration on innovative financial technology amongst central banks(https://www.bis.org/about/bisih/about.htm ).26
- January 2020: the Bank of Canada, the Bank of England, the Bank of Japan, theEuropean Central Bank, the Sveriges Riksbank and the Swiss National Bank,
together with the Bank for International Settlements (BIS) established a central bank
CBDC working group to co-ordinate their work (BIS, 2020). They released a first
overview of the issues in Oct 2020 (CBDC Working Group, 2020).

25 (Kavuri and Milne, 2020) review many of these developments, including the June 2019 announcement byFacebook of the ‘Libra’ stablecoin, now repositioned as Diem, alongside the growing interest in the possibilities ofusing distributed ledger technologies to record and exchange holdings of money and securities. . Notabledevelopments include: the June 2019 creation of Fnality https://www.fnality.org/home , owned now by 15 majorinternational banks, which expects to launch its first services in late 2021, offering its bank users 24/7 rea l time
settlement in central bank money for liquidity management (Fnality Global Payments, 2021). Another initiative
has been the 2020 announcement by SIX, the Swiss securities exchange, of the SIX digital exchange
https://www.sdx.com/ working with Hyperledger, Ethereum, R3 and others to create the world’s first regulated
digital market infrastructure.
26

In 2020 they co-operated with SIX in Project Helvetia https://www.bis.org/about/bisih/topics/cbdc/helvetia.htm
demonstrating the ‘functional feasibility and legal robustness’ of settling securities transactions in central bankmoney held on a permissioned distributed ledger (BISIH Swiss Centre, SNB and SIX, 2020)

55

-

-

-

-

-

March, 2020: the issue of a consultation document by the Bank of England (Bank ofEngland, 2020): followed by subsequent April, 2021 announcement of theestablishing a HMT-Bank of England taskforce on issuing CBDC
https://www.bankofengland.co.uk/news/2021/april/bank-of-england-statement-oncentral-bank-digital-currency.27
October 2020: the Bank of Japan announcement of a three-phase program of workon CBDC to begin in 2021, beginning with the technical proof of concept experimentson the design of a general purpose retail CBDC, which could be followed up with apilot development program (Bank of Japan, 2020).
October 2020: the publication of the ECB task force report on a digital Euro (ECB,2020), followed by a public consultation reported in (ECB, 2021). In July of 2021 the
ECB then began two year investigative project to prepared possible issuancehttps://www.ecb.europa.eu/paym/digital_euro/html/index.en.html
May 2021: A commitment by the US Federal Reserve, announced in speeches by
Chair Jerome Powell (Powell, 2021) and Governor Lael Brainard (Brainard, 2021), to
examine closely the policy issues arising with new emerging forms of digital money –both the regulation and oversight of private digital money and the potential issue of a
US dollar CBDC - and also to collaborate closely internationally on policy towards
digital payments and CBDC. A range of policy work is now taking place across theFederal Reserve System, with a discussion paper to be published later in 2021
followed by a public consultation. A private sector consortium, the ‘digital dollar
project’ is also investigating the potential issue of digital version of the US dollar.
The first examples of ‘live’ retail CBDC available for use in day-to-day payments:
including the Chinese e-CNY and the Bahamian ‘Sand Dollar’ (these projects are
summarised below).

27

Accompanied by a further announcement that non -bank payments service providers will be able to apply forholding so called ‘omnibus accounts’ at the Bank of England (BoE, 2021) . This will offer an alternative form
access to central bank money for settlement alongside the established CHAPS RTGS scheme; an opportunity
which Fnality plan to exploit for the launch of their first services in Sterling later in 2021

56

57

Some leading CBDC initiatives
Background

Retail v.
wholesale

Direct v.
indirectarchitecture

Chinese CBDC experiments
In 2014, the People’s Bank of China (PBOC) formed a study group to
analyse digital currency, which then evolved into a digital currency
research institute affiliated to PBOC in 2016. This institute is responsible
to research under the project of Digital Currency Electronic Payment(DC/EP), to explore the design and development of Chinese CBDC,
which is known as e-CNY.

Bahamian Sand Dollar
Defined as the digital version of legal tender(cash) and piloted in 2019, Bahamian Sand
Dollar was officially launched by the Central
Bank of The Bahamas as the world’s first fully
deployed CBDC in 20 October 2020, available
to all (393 thousand) residents in the country.

While e-CNY is technically ready for cross-border payment, its present
main use case is for domestic retail small value payment, considering
complicated issues over monetary sovereignty, FX policies andarrangements, regulatory and compliance requirements etc. (PBOC,
2021). However, PBOC is open to investigation and collaboration on
CBDC cross-border payment (PBOC, 2021).

Bahamas has a 90% penetration for mobile
devices.28 The Bahamian dollar is pegged to the
US dollar on a one-to-one basis.

China has carried out e-CNY pilots in more than 10 major cities/regions
across the country and plans to put it in use for the 2022 Beijing WinterOlympics. ‘As of June 30, 2021, e-CNY has been applied in over 1.32
million scenarios, covering utility payment, catering service,transportation, shopping, and government services. More than 20.87
million personal wallets and over 3.51 million corporate wallets had been
opened, with transaction volume totalling 70.75 million and transaction
value approximating RMB34.5 billion.’ (PBOC, 2021) China smart phoneinternet users constitute 69.8% of the population. (CNNIC, 2021)
E-CNY mainly serves domestic retail payments, but it differentiates
personal and corporate wallets. Personal wallets are designed for natural
persons and self-employed individuals, while corporate wallets are forlegal persons and unincorporate institutions (PBOC, 2021). Because
transaction and balance limits vary and the functions of wallets can becustomized, there may be room for realizing some wholesale functions
using e-CNY, though wholesale is not its main purpose.
E-CNY adopts two-tier operation (i.e. indirect architecture), where PBOC
issues e-CNY and authorized operators manage exchange andcirculation. To encourage innovation in secure and effective operation,authorized operators are entitled to develop their own digital wallets tomeet different use cases. Only commercial banks can possibly befranchised as authorized operators (PBOC, 2021).

Cambodian Bakong Project
The National Bank of Cambodia (NBC)started exploring the use of blockchain and
DLT in payment system in 2016 andsubsequently tested and officially launched
the Bakong Project, a DLT-based interbank
payment system, in 2018 and 28 October
2020. By July 2021, 25 banks and payment
service institutions (PSIs) have participatedin the network. The system is designed as analternative to small value cash transactions.
According to a report in 2020 by
SORAMITSU29, a main contributor of thesystem, Bakong has 50 thousand users and
20 million dollars value in the system. The
country has large unbanked population(78%), a large yet costly remittance market
and very few credit cards and digital payment
facilitates. Internet penetration in Cambodia
stood at 52.6% in January 2021.30

Retail and wholesale31 for domestic use only.
Most public information is on retail Sand Dollar,
which is hence the focus of this summary
hereafter.

RetailSand dollar adopts the indirect architecture, apartnership with the central bank as the sponsor
playing a multi-purpose role (currency issuance,
monitoring of holdings and sponsoring acentralised KYC/identity infrastructure). Its
financial partners include four money

Bakong uses a two tier (indirect) architecture,
where the central bank provides an interbank
ledger of all transactions and eachcommercial bank and PSI provides access totransact on the platform to their users.

28

https://www.forbes.com/sites/vipinbharathan/2020/10/21/central-bank-digital-currency-the-first-nationwide-cbdc-in-the-world-has-been-launched-by-the-bahamas/?sh=9779a65506eb
https://wiki.hyperledger.org/download/attachments/41589339/Bakong.pdf?version=1&modificationDate=1610634325000&api=v2
30
https://datareportal.com/reports/digital-2021-cambodia
31
https://www.sanddollar.bs/about
29

58

transmission businesses (MTBS) and three
payment service providers (PSPs) 32 offering
their own version of mobile wallets, and clearing
banks and credit unions to support customer
due diligence regime interoperability. The
partnership also involves strategic andtechnology partners.
Degree ofinteroperability

The e-CNY system supports interoperability with traditional banking
systems and digital wallets of different operators. People can transfer
funds from a digital wallet to a bank accoun t or another digital wallet(PBOC, 2021).
PBOC does not charge authorized operators for exchange andcirculation services, and the operators do not charge individual clients forthe exchange of e-CNY either. This removes the friction from thetransaction fee perspective and is in contrast to PSP (e.g. AliPay and
WeChat Pay) e-money.33

Identity linkedv.
pseudonymous
holding

In developing CBDC cross-border payment, PBOC will follow the
principle of interconnectivity ‘to enable interoperability between CBDC
systems of different jurisdictions as well as between CBDC systems andincumbent payment systems’ (PBOC, 2021).
Authorized operators are entitled to develop ‘different types of digitalwallets for customers based on the strength of customer personal
information identification’ and p rovide corresponding e-CNY exchange
services (PBOC, 2021). Wallets verified with stronger identity information
are allowed higher per-transaction and daily limit values and a higher
maximum balance. PBOC (2021) says e-CNY follows the principle of‘anonymity for small value and traceable for high value’.
Rather than ‘anonymity’, ‘managed anonymity’ may more genuinely
describe e-CNY. According to PBOC (2021), users can open leastprivileged wallets without providing identities. It is said the leastprivileged wallet can be opened with a mobile number.34 However, it iscompulsory in China to register mobile numbers under real identities, so
the real identities are traceable. Other possible identity verification
measures include uploading photos of ID card and bank cards and, moresenior, in-person interview at a bank branch.

Transactions are initially limited to between
wallets from the same operator. In the future
wallet providers will be required to allow
transactions between all Sand dollar wallets.
Clearing banks and credit unions to facilitate
interoperability between bank accounts andSand dollar wallets and enable foreignexchange transactions via bank accounts.
Sand Dollar charges a low merchant fee (lower
than other electronic payments) to business
users and no fee for personal wallet

Users can use cash to top up their Bakong
account at a branch of a bank participant.
Bakong allows money transfer between
registered users in the system and withdraw
money from a Bakong account to any bankaccount with a core banking ISO 20022
message.

The wallets are segregated into three tiers
depending on the strength of identity and legal
status:1. Business wallet (balance limit S8,000 $1 million): must be tied to bankaccount and providing valid businesslicense
2. Personal wallet I (balance limit $500):
for unbanked/non-residents/visitors;
identification not required; cannot belinked to a bank account
3. Personal wallet II (balanced limit$8000): government-issued
identification as a requisite forenrolment; can be linked to a bankaccount

All users must register with a phone number
and provide selfie and ID card photo.

32

https://www.sanddollar.bs/keyplayers
Using PSP e-monies, merchants are charged a fee ranging from 0.6% to 1.2% of the payment value received; each individual person is bounded by a lifetime limit on the value that can betransferred out from the PSP system for free (0.1% of the transferred value exceeding this limit is charged as a service fee) .
34
http://www.xinhuanet.com/fortune/2020-04/20/c_1125878094.htm
3359

Minors can access Sand Dollar subject to theirguardians’ permission.
Level andpermissions fordata accessand data
mobility(across
different
entities andjurisdictions)

E-CNY related information is protected by a firewall set by PBOC and are
not allowed to be disclosed to third parties or other government agencies
unless stipulated by laws and regulations (PBOC, 2021). Information will
be used for anti-money laundering and countering the financing ofterrorism (AML/CFT).

The central bank aims to promote KYC
documentation sharing by commercial banks to
PSPs.
Transaction data may be shared to support
micro-loan application
The central bank monitors transaction volume
and frequency to detect personal wallets forbusiness use.
Wallet owners can access the full history of
their transaction data, which is encryption
protected by wallet providers. Transaction
details are not available to back-office
operators.
The penalty for confidentiality breaches bywallet providers or others is $50,000 or up to
three years in prison, or both.35
Sand Dollar supports offline transaction within a
pre-set dollar value, which will be synchronizedwhen devices are connected to internet. This isa critical feature because Bahamas Islands areprone to hurricanes which causes powersuspension and damages of banks and ATMs.36

Only NBC has access to all transactions;commercial banks can only monitor thetransactions of their own users.

CBDC
functionality(online/offline)

E-CNY will be designed to meet online and offline applications in all
scenarios.

Distributed(DLT) vs.
Centralized
ledgers

The e-CNY system uses distributed ledger technologies in the circulation
layer to support collaboration between PBOC and authorized operators.
It adopts a centralized structure in the transaction layer and all cross operators transactions are transferred directly through PBOC.37

Media describe Sand Dollar as blockchainbased 38 because its technology partners are
specialized in blockchain. Sand Dollar official
website discloses no information whether thecurrency is pure blockchain based.

The system is based on a permissioned
distributed ledger.39

Interest
bearing or not
Other functions

E-CNY is defined as a substitute for M0 and pays no interest (PBOC,
2021).
E-CNY supports software wallet (based on mobile payment apps) andhardware wallet (e.g. prepaid IC cards, mobile phones, wearable
objects).
E-CNY allows setting payment caps and payment conditions (including
programmable smart contracts).

Sand Dollar doesn’t accrue interest.

No official sources have mentioned this.

Sand dollar supports software wallet(Android/iOS app) and hardware wallet (prepaid
Sand Dollar Card).

Bakong is applicable for Mobile Phone andTablet (Android and IOS), and Desktop
application.

A user can open sub-wallets under the main wallet to manage funds fordifferent purposes and better privacy protection.

35

https://www.ledgerinsights.com/central-bank-of-bahamas-makes-progress-with-sand-dollar-cbdc/
https://www.mastercard.com/news/perspectives/2021/the-bahamas-is-disaster-proofing-payments-with-its-first-ever-digital-currency/37
http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/4294165/index.html
38https://www.reuters.com/article/us-cenbanks-digital-analysis-idUSKBN28S0KT
39
https://bakong.nbc.org.kh/download/NBC_BAKONG_White_Paper.pdf
3660

No official sources have mentioned theoffline functionality.