When it comes to digitalizing the international payments ecosystem, it’s hard to imagine a development with as much transformative potential as the widespread implementation of central bank digital currencies (CBDCs). Between dramatically enhancing the speed, efficiency, and security of cross-border transactions and accelerating efforts toward financial inclusion, CBDCs could very well end up radically changing global finance as we know it.

Although mainstream adoption is still far from a reality, there are now 130 countries actively exploring the implementation of a CBDC, with China’s digital yuan and the European Central Bank’s digital euro already in advanced stages of development. Moreover, research from Volante’s strategic partners has projected that CBDCs could dominate the financial services sector in the next few years.

In this blog, we’ll take a brief look at the evolving world of CBDCs, focusing on their integration into existing payment systems, relevant technological advancements, and the implications of their adoption from a regulatory perspective.

CBDC integration

For any CBDC to be truly viable, it will need to integrate seamlessly with existing infrastructure and payment systems. Universal interoperability is central to the CBDC concept and will be necessary to obtain the perceived benefits of increased efficiency, security, and financial inclusion.

Achieving interoperability between CBDCs and payments infrastructure will be no easy feat and require careful and coordinated standardization. Fortunately, the underlying data model of existing messaging standards, such as ISO 20022 can be instructive for central banks as they explore integration strategies. While payment service providers (PSPs) operating in most countries don’t currently have a timeline regarding CBDC implementation, it would be wise to accelerate payments modernization efforts across systems to ensure readiness.

Technological advancements

CBDCs would not be possible if not for considerable technological advancements in the digital payments space. The growing familiarity and popularity among consumers regarding digital payment tools like virtual cards and mobile wallets should, in theory, help ensure a healthy rate of adoption.

However, issues like data privacy and security remain a significant hurdle, which is why many central banks are looking to tap into advanced solutions like blockchain and distributed ledger technology (DLT). Most commonly associated with cryptocurrencies like Bitcoin, blockchain, and DLT are designed to facilitate transactions in an entirely transparent digital environment, vastly improving the ability to trace payments and protect consumers and organizations against fraud.

Additionally, CBDC developers have the opportunity to leverage blockchain-adjacent technologies, such as smart contracts, which could create virtually endless possibilities for innovation. More specifically, because smart contracts are programmed to self-execute on the underlying terms of an agreement, their integration with CBDCs could lead to breakthroughs like the automation of settlements and conditional payments and even allow central banks to automatically adjust interest rates associated with CBDC holdings.

Finally, the introduction and widespread adoption of CBDCs across the global financial landscape would have significant regulatory implications, both domestically and internationally, and require considerable coordination between governments.

Regulatory implications

For one thing, CBDC transactions will need to abide by relevant privacy standards as well as anti-money laundering and anti-terrorism policies. This could create several challenges, particularly in the realm of cross-border payments, as automated payment systems used in different countries will need to remain efficient while respecting the legislative criteria of foreign governments around CBDCs, which in most cases have yet to be clearly defined.

Additionally, regulatory institutions will need to establish a detailed set of consumer protections related to a wide range of issues, from basic account and transaction security to consumer access and financial inclusion. In the future, PSPs should be proactively seeking guidance and following all developments within their respective jurisdictions, regardless of the current state of implementation.

For more on CBDCs, stream the “How ISO 20022, FedNow, and CBDCs Will Transform US Payments” webinar. Interested in speaking with one of our payments experts? Contact us today.