98 percent of the world's GDP, or 130 countries, was investigating central bank digital currencies (CBDCs) as of December 2023, according to the CBDC tracker maintained by the Atlantic Council. We set out to investigate the potential effects of centralized digital assets on the cross-border payments system, given the increasing number of governments pursuing these solutions.

Basic dangers associated with CBDC use

The fintech and regulatory partner at Paul Hastings, Nina Moffatt, observes that although CBDCs seem like a good alternative, issues like settlement times are keeping them from becoming widely used.

The potential of central bank digital currencies (CBDCs) to link digital payment systems makes them a more alluring choice for governments worldwide. According to reports, 98% of the world's economies are already investigating digital versions of their national currencies. CBDCs won't, nevertheless, be the magic solution for advancing and quickening cross-border payments.
 

"Using CBDCs carries certain inherent fundamental concerns. The industry will need to look at other options because these involve converting money values into digital form, guaranteeing settlement timeframes, and facilitating interoperability in payments.

Improved communication between banking systems
 

Although CBDCs have the ability to speed up transaction times, Ola Oyetayo, co-founder and CEO of Verto, a platform that simplifies payments, points out that they aren't the ideal answers for cross-border issues.

By expediting processes, CBDCs could lower the cost and duration required to accomplish cross-border payments. However, there will need to be substantial advancements in the cooperation and interoperability of various banking systems if this is to have a major effect on cross-border payments. Therefore, it seems improbable that CBDCs will have a significant effect by 2024.

Customers won't notice much changes.
 

When examining the effects of CBDCs from the standpoint of the customer, Anish Kapoor, CEO of AccessPay, a company that offers bank integration as a service, did not believe that consumers would experience a significant change.

It is expected that CBDCs will have an effect on cross-border payments in 2024, but more so on settlement delays than on the end-user proposition. Rather than changing the user experience, digital currencies are influencing the technical aspects of cross-border transactions.


CBDCs can shorten the time often required for international fund transfers, facilitating faster and more secure cross-border settlements. This technical optimization fits in with the larger financial industry trends toward cross-border transactions that are quicker, more dependable, and less expensive.

"While CBDCs are anticipated to be instrumental in transforming the backend operations of cross-border payments, end users' daily experiences might not see a significant shift,"
 

Different reactions will come from different economies.
 

According to David Sewell, a partner in Freshfields' financial services regulation unit, various economies will react to CBDCs in different ways. He believes the G7 economies would not be significantly damaged, even though developing economies could view them more favorably.

"The European Central Bank (ECB) created a stir in October of last year when it declared it will proceed to the next stage of its digital euro project. However, the decision to issue a digital euro looks far off, and this 'preparation' phase will take at least two years.
 

"There are obstacles in each nation, and the Federal Reserve, Bank of Canada, and Bank of England are all researching CBDCs. A recent report from the Bank of Canada revealed that the public is generally skeptical about a CBDC. The UK Parliament's Treasury Committee has voiced concerns despite the announcement by the UK authorities of a new phase of CDBC research. The Federal Reserve's leadership has expressed outspoken skepticism and pledged to proceed with the retail CBDC issue only after receiving congressional authorization.

Meanwhile, presidential contenders have turned opposition to a CBDC into a talking topic.
 

Other places are seeing better results with CBDCs, but there is still a lot of uncertainty. Although China is still pushing for the adoption of the digital yuan, very few cross-border transactions are currently made with it. Although retail CBDC pilot programs have been announced in other nations like South Korea and Singapore, their effects won't be realized until beyond 2024.