The digital euro seems to be well on its way. The study phase initiated in 2021 by the European Central Bank is expected to be completed in October 2023, leading to a test phase later that year. The ECB’s ongoing study was discussed at the Eurogroup meeting on 11 July, which addressed the impact of the future European virtual currency on the financial system and the use of cash.

On its website, the ECB states that the digital euro should benefit payments in Europe. These specificities are highlighted in a report by the Bank of International Settlement, also published on 11 July. The BIS, commonly known as the bank of banks, is based in Basel and is responsible for supporting central banks in their respective missions of monetary and financial stability.

The BIS study is part of the roadmap, approved by the G20 in October 2020, to improve the cross-border payments market, which faces many challenges. While, like the digital euro, various central banks are busy developing their own digital currencies, BIS has been looking at how these new currencies, also known as central bank digital currencies (CBDCs), can overcome the obstacles of cross-border payments.

Now or never

In doing so, BIS identified four challenges to international payments: high cost, low speed, limited access and low transparency. According to the study, these challenges are the result of “a range of frictions”, such as fragmented and truncated data formats, complex compliance processing, limited business hours, outdated technology platforms, long transaction chains, high funding costs and low competition.

Based on the existing financial system, BIS believes that it would be costly and difficult to make the necessary changes to the infrastructure and regulatory, supervisory and legislative frameworks. Therefore, like any new system, currencies developed by central banks offer “the opportunity to start with a ‘clean slate’.”

With most centralised digital currencies still in the design stage, there is still time for central banks to adapt their specificities to the constraints of international payments. “For example, CBDC infrastructures could be made available 24/7, allowing for instant cross-border settlement and overcoming mismatches of operating hours between different jurisdictions,” according to the , “Options for access to and interoperability of CBDCs for cross-border payments”.

A direct debt from central banks

Moreover, the fact that the major central banks are simultaneously developing their own solutions should allow them to agree on “interoperability” between the different digital currencies, taking into account their cross-border dimension. The BIS called on central banks to take advantage of this opportunity, stating: “Interoperability of CBDC systems could facilitate cross-border CBDC payments between financial institutions, corporates and consumers by reducing the costs for [payment service providers] and shortening transaction chains, which might eventually result in a higher transaction speed and lower end user fees. Achieving interoperability once systems have been fully designed and employed can be more complicated.”

Beyond the technical specifics, centralised digital currencies would naturally improve the security of cross-border payments, “because payments are made using a direct liability of the central bank, which is the safest and most liquid settlement asset (especially when compared to stablecoins and other cryptoassets).”

Finally, BIS noted that, as centralised digital currencies are a direct responsibility of central banks, payment service providers should no longer provide liquidity. That favours an increase in the number of PSPs. “An increased number of PSPs and direct access to central bank money could then shorten cross-border transaction chains, simplify processes and address current frictions in cross-border funding arrangements.”

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