Report urges central banks to work together on digital currency interoperability

International organizations are calling on central banks to consider interoperability early in the design of the Central Bank Digital Currency (CBDC).Bank for International Settlements (BIS) Payment and Market Infrastructure Commission, BIS Innovation Hub, International Monetary Fund, World Bank release In Monday’s report, we looked at three options for cross-border interoperability to address challenges such as high cost, slow speed, restricted access, and lack of transparency.

This publication was a response to the 2020 Payments and Market Infrastructure Commission’s report identifying 19 building blocks to enhance cross-border payments. So far, according to the author, most of the work on the CBDC has focused on domestic policy goals. They further investigated variables such as accessibility to wholesale and retail CBDCs by payment service providers (PSPs) and non-residents, and their interaction with non-CBDC infrastructure.

Three approaches to interoperability were considered. Compatibility, or adoption of common standards, makes it easier for PSPs to work between systems. Reciprocal links allow system participants to establish contractual agreements, technical links, standards, and operational components for executing transactions between systems. Reciprocal linking can be achieved through several models. Finally, a single technical system can host multiple CBDCs.

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Overcoming cross-border payment challenges requires international cooperation on CBDC design, and many CBDC design features remain undecided in many ongoing CBDC projects. As research is progressing rapidly, the report states that coordination opportunities should be seized while it remains. By adjusting the design features, the CBDC can avoid unexpected pitfalls and improve the general Know Your Customer / Anti-Money Laundering effort. The three approaches to interoperability described in the report are not mutually exclusive, but they all come with trade-offs, the report states.