The adoption and implementation of central bank digital currencies (CBDCs) could potentially lead to unintended consequences of global financial fragmentation and changes in the dynamics of cross-border payments and trade. While previous technological innovations in capital markets have generally improved efficiency and integration, the unique nature of CBDCs and their potential cross-border implications raises concerns about the future landscape of international finance.
Currently, several countries have actively launched CBDCs, and others are in pilot stages. CBDCs are not merely technological innovations; they have the potential to reshape cross-border financial systems and the global economy. In particular, the emergence of CBDCs could challenge the dominance of the US dollar in global payments and transactions.
One concern is that cross-border CBDC arrangements might lead to the creation of parallel and fragmented financial systems, with each country’s CBDC having its own specific attributes and limitations. Instead of harmonizing global financial systems, cross-border CBDCs could introduce new hurdles and complexities to international capital transactions.
The geopolitical context of the 21st century has prompted certain countries to develop alternative payment networks to reduce dependence on the US dollar and existing global financial systems. CBDCs could potentially accelerate this trend, giving rise to new financial architectures and networks.
There are several potential models for cross-border CBDC arrangements. One model involves a neutral supranational entity facilitating cross-border payments, similar to the current role of Swift. Another model envisions a digital infrastructure connecting participating countries’ CBDCs, functioning like a digital rail network. The third model would entail a shared CBDC with shared governance among integrated nations.
However, there are concerns associated with these models. The adoption of cross-border CBDCs could lead to increased financial fragmentation rather than greater integration. The preferences of major powers like the US and China could influence the choice of models, potentially exacerbating global financial divisions.
Ultimately, the success of cross-border CBDC mechanisms will depend on their ability to reduce trading costs, enhance efficiency, ensure transaction security, and comply with regulatory standards. The adoption and impact of cross-border CBDCs will have implications for trade currencies, the use of the US dollar in international transactions, and the future configuration of the global financial system.
