A new Bank for International Settlements (BIS) study has shown that almost a third of central banks surveyed are considering making central bank digital currencies (CBDCs) interoperable by forming multiple-CBDC (m-CBDC) arrangements. More central banks leaning in this direction will open yet another window for a few economies e.g. China, which has so far made their intentions to participate in a m-CBDC arrangement known in the past, to build on its edge as a major economy at the forefront of the global CBDC race. 

According to the BIS, m-CBDC arrangements focus squarely on designing national CBDCs with access frameworks and interlinkage options to facilitate efficient cross-currency payments. “This could support the broader global efforts to improve cross-border payments of which such arrangements would form one part,” BIS says, instead of having to create a new unit of account that competes with domestic currencies. It adds that some central banks are already collaborating with one another on projects and studies on the use of CBDCs to facilitate cross-border payments.

How CBDCs are likely to work across borders has been an issue of contention so far among countries with several factors such as data privacy and foreign exchange being major concerns. No harmonized guideline has been introduced on CBDCs thus far on a global level even though the likes of China seems to be ahead of several other countries in terms of the digital currency issuance. 

Just recently, the G7 group met to indicate that they want CBDCs, among other things, to be able to “enhance cross-border payments” and “operate within appropriate privacy frameworks and minimise spillovers” hence plan to come up with common principles for state-backed digital currencies. Also, the BIS study shows that central banks are concerned about currency substitution by a foreign CBDC considering risks from facilitation of tax avoidance and loss of oversight by domestic authorities. 

“They are actively considering the tools that are available to limit the risks that the domestic currency might be displaced by a global stablecoin or foreign CBDC,” it states, though pointing out that while “a number of central banks are open to allowing tourists and other non-residents to use CBDCs within their own jurisdiction, fewer central banks want usage of their CBDC by non-residents abroad. 

China has been exploring the m-CBDC option with its February 2021 participation in the m-CBDC Bridge Project as initiated by the Hong Kong Monetary Authority and the Bank of Thailand in 2019. The m-CBDC Bridge is a multicurrency CBDC platform on which participating central banks from several jurisdictions can analyse business use cases such as international trade settlement and capital market transactions. 

China joining the initiative which seeks “to improve wholesale cross-border payments with a streamlined intermediation model, real-time transfers and atomic Payment-versus-Payment (PvP) settlements” aligns with its perceived agenda to globalize its digital yuan. 

The m-CBDC Bridge, supported by the BIS Innovation Hub Centre in Hong Kong, aims to “transcend all borders”. It is still adopted by a few states but its underlying proposition. “Third, we show that central banks are considering a variety of multi-CBDC (m-CBDC) arrangements, with some even contemplating multiple CBDCs run on a single system,” the BIS notes, adding that m-CBDC arrangements could help to mitigate cross-border and cross currency risks and frictions.