The Block: BIS researchers argue for collaboration to harness the potential of CBDCs to enhance cross-border payments

A group of researchers writing for the Bank of International Settlements released a paper last week that explores the implications of central bank digital currencies (CBDCs) and how varying approaches to these emerging technological applications could improve conditions for cross-border payments.

To be sure, the paper comes as the majority of central banks hold an R&amp;D-centric posture when it comes to CBDCs. But widening tests in China and the launch of the so-called Sand Dollar in the Bahamas last October are signals that such initiatives are likely to continue to grow in number.

The paper -- "Multi-CBDC arrangements and the future of crossborder payments" -- digs into the wonky details of how CBDC systems, especially those involving multiple currencies within a single framework -- could ease some of the long-standing issues around cross-border payments, including AML/KYC regulations, slow processing times, and outdated technology.

Notably, the paper's authors position such approaches against the emergence of stablecoins -- private digital currencies pegged to fiat currencies like the U.S. dollar -- writing that "[m]ulti-CBDC arrangements are preferable to proposals that involve the creation of a global private sector global stablecoin. Instead, they look to foster a diversity of convertible national currencies and strengthen monetary sovereignty in the digital age."

But in order for any benefits from a multi-currency CBDC system to be realized, central banks will need to collaborate, per the report's authors.

Once again, such collaboration is positioned in the context of competition with stablecoins. As the authors note:

"Coordinating early and openly can help central banks in identifying unintended barriers. This will aid efficiency. Yet for those central banks aiming to avoid competition from global stablecoins, it is a question of safety. A positive way to prevent widespread use of private global currencies is by fostering an efficient and convenient way to convert currencies."

"A CBDC, compatible with others and benefiting from a diverse and competitive market for services, would be a real public good. To achieve this, central banks will need to collaborate," the report concludes.