In the era of growing economic sovereignty, geopolitical turbulence, and reliance on intermediaries, businesses and governments need solutions for faster, more reliable, cost-effective cross-border payments. Traditional systems and intermediary banking networks are often criticized for their high costs, slow processing times, limited accessibility, and lack of transparency.
In this setting, central bank digital currencies (CBDCs) can potentially help improve the efficiency of cross-border payment services, streamline transactions, and support global trade amid economic shifts.
This is especially important for the dynamic economies of the Gulf Cooperation Council (GCC) countries. With CBDCs that the whole region is actively researching and testing, GCC countries can overcome frictions like varying procedures and complex compliance. This article will explore how CBDCs can help countries reinvent cross-border payments, simplify international trade, enhance financial inclusion, and reduce transaction costs. We will also shed light on initiatives already launched in various parts of the world, including the Middle East.
The benefits of CBDCs in cross-border payments
CBDCs offer several key advantages over traditional payment systems.
Efficiency. One of the standout benefits of CBDCs is their ability to streamline payment processes by eliminating intermediaries like correspondent banks or SWIFT. This significantly reduces transaction costs and shortens processing times, enabling near-instant transfers. Such efficiency is especially valuable for international trade, where delays and high fees often hinder business operations.
Transparency. CBDCs inherently provide full visibility into every transaction. By embedding marking and tracking mechanisms directly into the currency, opportunities for fraud and misuse of funds come close to zero. This transparency is invaluable for regulatory bodies, as it ensures compliance with financial laws and offers a powerful supervisory tool, particularly in sectors prone to corruption or inefficiencies.
Market expansion. With CBDCs, businesses can conduct direct transactions without relying on extensive intermediary networks, allowing them to enter new markets more quickly. CBDCs reduce the friction often associated with cross-border payments, fostering stronger partnerships with foreign entities and opening new opportunities for growth in global trade.
The risks of using CBDCs in cross-border transactions
However, implementing CBDCs requires careful consideration of risks.
Firstly, policymakers must incorporate thoughtful design features into CBDCs that balance their benefits with the stability of the financial ecosystem. Additionally, implementing CBDCs should align with robust regulatory and supervisory measures. Policymakers must ensure that a sound legal framework is in place to govern CBDC issuance and use.
Secondly, CBDC development is only possible with deep digitalization and advanced technological infrastructure. This includes robust digital payment platforms, secure communication networks, and widespread access to digital financial tools for all stakeholders. Designing and implementing these new digital systems requires trusted technological partners with hands-on experience in launching CBDC projects, such as Axellect, which is currently deeply involved in the Digital Tenge issuance.
There is yet another challenge: the need for substantial infrastructure investment. Central banks and governments must allocate resources to develop the necessary technological frameworks, establish cybersecurity measures to protect against potential threats, and train personnel to manage and operate the new systems.
Real-world examples of cross-border CBDC platforms
Currently, over 70% of cross-border payments are conducted in just two major global currencies, creating exchange rate volatility risks for national economies. Using CBDCs for cross-border transactions in domestic fiat currencies can enhance economic sovereignty.
Several countries have already launched pilot projects to test cross-border CBDCs.
Among these are:
- Inthanon-LionRock: A joint initiative by the Bank of Thailand and the Hong Kong Monetary Authority, this project focuses on creating a shared platform for cross-border CBDC transactions in Southeast Asia.
- Project Jasper: Managed by the Bank of Canada and the Reserve Bank of Australia, it explores experimental payment systems for cross-border transactions.
- Project Dunbar: Led by the Bank for International Settlements (BIS) Innovation Hub in partnership with the Reserve Bank of Australia, Central Bank of Malaysia, Monetary Authority of Singapore, and South African Reserve Bank, the initiative is aimed at exploring how multiple CBDCs could enable faster, cheaper, and safer cross-border transactions.
- BRICS Bridge: A newly announced initiative to create a digital payment platform to facilitate transactions between the BRICS members, which currently include nine countries in the Middle East, Asia, Africa, and Latin America.
mBridge: A leading cross-border CBDC project
One of the largest and most advanced CBDC projects to date is the mBridge platform. Launched in 2021 by the monetary authorities of China, Hong Kong, Thailand, and the UAE in collaboration with the BIS (although the latter left the project in 2024), mBridge has been gaining traction. In June 2024, the Saudi Central Bank (SAMA) announced its full membership in the project. By the middle of 2024, project mBridge reached the minimum viable product (MVP) stage.
mBridge positions itself as an innovative solution, aiming to act as a bridge and financial platform for central banks, integrating their digital currencies into a unified digital environment. With the capability for direct CBDC transfers between mBridge members via the HotStuff+ consensus mechanism, the platform optimizes and simplifies cross-border transactions for counterparties.
The architecture of mBridge is based on distributed ledger technology (DLT), ensuring central banks have equal access to the cross-border payment system while achieving high transparency in financial operations. The ledger records are immutable, guaranteeing data integrity and accuracy.
According to BIS, during the launch preparations, mBridge members conducted more than 160 test international CBDC transactions totaling over $22 million. The first cross-border transfer of 50 million dirhams ($13.6 million) occurred in January 2024 between the Central Bank of the UAE and the National Bank of China.
Participants and observers of the mBridge project highlight several key drivers for adopting cross-border wholesale digital currencies. These include:
- the availability of a unified platform for transactions between countries;
- the absence of a central governing authority;
- low susceptibility to sanctions and political pressure;
- low transaction costs;
- platform scalability;
- high processing speeds;
- robust protection against unauthorized access and data manipulation.
To sum up
CBDC initiatives are still undergoing rigorous testing and remain far from full-scale industrial implementation. However, they have an evident potential to foster global trade, attract investment, and strengthen economic resilience by offering an innovative alternative for international transactions.
With CBDCs, the future of cross-border payments may be shaped by national digital currencies. Still, their success will depend on international cooperation and a shared vision for a new financial ecosystem.