The world of international trade is changing fast, and one of the biggest game-changers on the horizon is Central Bank Digital Currencies (CBDCs). These digital versions of national currencies are becoming the new focus for many countries’ central banks, with around 94% of central banks now looking into them, according to a report from the Bank for International Settlements (BIS). As of mid-2023, around 130 countries, representing 98% of global GDP, were actively exploring CBDCs. Why all the fuss? Well, CBDCs have the power to solve some big problems in international trade, like reducing high transaction costs, speeding up payment times, and making it easier to do business across borders.
Essentially, the most compelling aspect is the potential of CBDCs to cut down transaction costs and delays. Imagine the clunky systems of today’s international trade, where multiple intermediaries often cause friction. Now, think of a seamless, digital transaction flow — CBDCs offer just that.
Traditional trade payments can be slow and expensive because they often pass through several middlemen, like banks. CBDCs could change all of that by letting businesses send money directly to one another. That means fewer fees and quicker transactions. In fact, a report by the International Monetary Fund (IMF) from 2023 says that CBDCs could slash cross-border payment costs by up to significantly, saving businesses a ton of money each year.
Tobias Adrian, the IMF’s Financial Counsellor and Director of the Monetary and Capital Markets Department, noted in a speech in Rabat last year that “The cost, sluggishness, and opacity of cross-border payments come from limited infrastructure […],” and improvements, such as CBDCs, could streamline the process.
A prime example is China’s digital yuan (renminbi), also known as the e-CNY, which is already shaking things up across Asia’s trade corridors.
So, what exactly does the future look like with CBDCs in the mix? Let’s find out more.
Reducing Transaction Costs and Delays
Right now, international trade transactions are bogged down by the need for multiple banks to handle payments. This adds time and, of course, fees. With CBDCs, those intermediaries can be cut out, allowing for peer-to-peer (P2P) transactions. This would shrink the transaction time from days to just seconds. Imagine a business in France paying a supplier in China instantly, even if it’s the middle of the night in one of those countries.
In a letter from December 2021, Lagarde emphasized the potential of CBDCs to enhance cross-border payments, saying, “International cooperation on design, cross-border use, and interoperability will be key to reaping the potential benefits of central bank digital currencies (CBDCs) for cross-border payments and to addressing risks to the international financial system.”
The more accessible and affordable payments become, the easier it will be for businesses of all sizes to participate in the global market.
Several countries, like Hong Kong and Singapore, are already testing out CBDCs in pilot programs aimed at reducing these costs. These trade hubs are looking for ways to stay competitive in the fast-paced world of international trade by slashing payment delays and fees.
Case Study: China’s Digital Yuan Leading the Way
One of the most advanced examples of a CBDC in action is China’s digital renminbi (RMB) or yuan, also known as the e-CNY. Launched in 2020, the digital yuan started as a domestic project and has been undergoing trials for potential use in international trade since April 2021. By the end of 2021, over 260 million people had registered e-CNY wallets, with further growth expected in 2024.
China has been pushing for its use in cross-border transactions, particularly through pilot programs in Hong Kong and select international initiatives. Should the digital yuan see wider adoption, particularly through regional initiatives, it could influence how trade is conducted in Asia, given China’s economic repertoire.
The People’s Republic is working with countries like Hong Kong, Thailand, and the UAE to pilot CBDC projects that bypass the traditional reliance on the U.S. dollar for international trade. For example, a trade deal between Hong Kong and China that used to take days to process can now be settled in seconds using the digital yuan.
By integrating e-CNY into its trade networks, China aims to cut transaction times and reduce costs, particularly in projects linked to the Belt and Road Initiative (BRI) — an ambitious infrastructure project, that started in 2013, and spans over 140 countries, involves complex trade deals and massive amounts of capital flow across infrastructure, energy, and digital projects. Thus, this efficiency, which cuts costs and time, equally helps China maintain a strong presence in Asia’s trade corridors.
According to various reports and expert analyses, the e-CNY aims to reduce transaction costs by eliminating intermediaries, though no specific percentage of cost reduction has been officially confirmed.
Yi Gang, Governor of the People’s Bank of China, says, “E-CNY is China’s version of CBDC. It is mainly positioned as cash. For China, e-CNY is mainly to meet the needs of domestic retail payment, enhance the development level of inclusive finance, and improve the efficiency of the currency and payment system;” and, true to it, the pilot programs have demonstrated promising results in streamlining transactions and reducing friction.
This streamlining extends to other industries as well. Think of the shipping industry, where goods are stuck in limbo waiting for payments to clear. CBDCs could ensure that as soon as a container is loaded onto a ship, the payment is automatically triggered, clearing customs faster and reducing the time goods spend in transit. For many businesses, this would translate into lower costs and fewer risks. “If payments can be executed in real-time, the trade will become much more fluid, allowing companies to optimize their supply chains,” commented a supply chain expert from the World Trade Organization.
Enhancing Trade Transparency and Trust, and Smaller Economies
Another big selling point for CBDCs is the transparency they bring. Many CBDCs are expected to utilize distributed ledger technology (DLT), for transparency and security, depending on the design choices of individual central banks, which makes every transaction traceable and verifiable. The Bangko Sentral ng Pilipinas in September last year, for instance, announced the DLT for its wholesale CBDC pilot dubbed Project Agila. This added layer of transparency could reduce issues like fraud or corruption in trade deals.
By using blockchain technology, trade agreements can be programmed to execute automatically when certain conditions are met. That means fewer disputes and less time wasted trying to resolve them.
Jerome Powell, Chair of the Federal Reserve, explains, “We think it is important that any potential CBDC could serve as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar, such as deposits at commercial banks.”
CBDCs aren’t just for the major global players. Smaller economies are looking at these digital currencies as a way to get a leg up in the world of trade. Countries like Nigeria with its eNaira and The Bahamas with the Sand Dollar are exploring CBDCs as a way to boost financial inclusion and make it easier for businesses to trade internationally.
In developing economies, trade is often held back by costly and slow payment processes. Dollar-based payments can involve expensive conversion fees and lengthy transaction times, but CBDCs could wipe away those barriers. For small businesses, this means they can participate in global supply chains with much less hassle.
John Rolle, Governor of the Central Bank of The Bahamas, shared that the Sand Dollar has been beneficial in enhancing financial inclusion and providing a secure payment system. It also has the potential to facilitate easier and faster transactions, which can indirectly benefit sectors such as tourism.
Moreover, a small company in Nigeria might have struggled in the past to pay suppliers in Europe or Asia. With CBDCs, that company could send payments instantly, without worrying about exchange rates or hidden fees. This could open up more opportunities for developing nations to engage with larger global markets.
Wholesale CBDCs: The Next Frontier
While most people think of CBDCs as something consumers will use, the real potential could be in wholesale CBDCs. These are digital currencies designed for use between financial institutions, like banks, rather than everyday people. Wholesale CBDCs could make a huge difference in trade finance, which involves things like paying for big shipments of goods or securing loans.
As reported in the Atlantic Council GeoEconomics Center’s tracker, the US is now participating in a cross-border wholesale CBDC project, Project Agorá, with 6 other major central banks, France and Switzerland inclusive, using them to settle cross-border securities transactions in real-time. In this scenario, banks can move money faster and more securely, reducing the risks that come with holding funds in limbo during international trades. No more waiting days or even weeks for large transactions to clear; with wholesale CBDCs, it can happen in seconds.
An official from the Central Bank of France said: “We are paving the way for CBDCs to become integral in global trade finance, simplifying back-end operations.”
As money continues to go wherever trade goes, CBDCs seem properly positioned to reshape how international trade is done. Major economies like the European Central Bank (ECB) and the U.S. Federal Reserve are already deep into their research and pilot programs for CBDCs. By improving transaction efficiency, lowering costs, increasing transparency, and making it easier for smaller economies to join the global market, CBDCs could become a foundational part of how trade is conducted by the end of the decade.
In a new report, Switzerland-based international organization, the World Economic Forum (WEF), predicts that there could be up to 24 live CBDCs by 2030.
That said, challenges remain.
According to Kristalina Georgieva, Managing Director of the International Monetary Fund, “There is a pressing need for CBDCs to facilitate cross-border payments, which remain expensive, slow and inaccessible. We must ensure that countries do not get stuck on the wrong side of the digital divide.”
Regulatory issues, technological hurdles, and international cooperation will be key to making CBDCs a seamless part of global trade. However, it’s clear that the potential for change is massive.
CBDCs are the next evolution of trade efficiency, and nations that fall in line quickly will most probably see the greatest benefits in time.
Author: Richardson Chinonyerem
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