Since several central banks are exploring CBDcs, there is a focus on domestic needs. The Bank for International Settlements(BIS) recently published a paper on central bank digital currencies (CBDC). The BIS is planning to encourage the banks to examine cross-border payments. 

These days, cross-border payments have become highly demanded, and that is due to two reasons. 

First, there has been a reduction in the number of correspondent banks, which plays a vital role in international payments. These banks provide a service so that banks do not have destination accounts where money can be sent. For example, due to contraction in Central and South America, there was a 30% decrease between 2012 and 2018. 

Secondly, the consumers were aware of the issues since the use of foreign currencies had grown drastically. And that too in majorly e-commerce, travel, and migrant labor laws. 

Due to this, Facebook founded Diem (initially known as Libra) project plans to be inscribed. The project received multiple mentions in the paper. 

Current cross-border payments issues include unclear foreign exchange rates (FX), unforeseeable fees, and different opening hours across various regions. There is a vast number of intermediaries and high compliance costs. And other types of communication standards are used throughout. 

For #CBDC to improve cross-border payments, central banks must decide on foreign access and cross-jurisdictional connections. The BIS Committee on Payments and Market Infrastructures, #BISInnovationHub, IMF and @WorldBank explain why in this new report https://t.co/iGnrv7U4j5 pic.twitter.com/trYCCV4rZ0

— Bank for International Settlements (@BIS_org) July 11, 2022

Three Basic Models 

The first model plans to create a compatible CBDC system with common standards for technical areas. The rollout of ISO 20022 gives the spotlight to such challenges and aligns the legal framework. But, it has been said that there is hope that CBDC will offer a clean chit. 

However, an essential portion of current research focuses on two-tier systems, with private entities taking on the consumer-facing role for CBDC distribution. Hence, there is a risk that this could repeat the same issues, and large banks would dominate. 

The second model interlinked domestic CBDC systems, which was done to connect water pipes with different flow rates. This route requires a clearing system, either centralized or decentralized. It is also seen as high risk and involves coordination.