It is clear that countries have sought to circumvent sanctions through contracts or agreements that are not denominated in dollars. Examples include the ‘rupee-rial’ mechanism introduced by India in 2012; the 2014 Russia-China trade agreement; Russia’s National Payment Card System to process domestic card payments; alternative financial messaging systems such as the Russian Financial Messaging Transfer System; or the China Cross-Border Interbank Payment System. These are, however, ad-hoc or limited in scope.
CBDC-based payment architecture
Will a CBDC-based cross-border payments agreement be immune from sanctions? Let’s first try to understand what this arrangement would look like and how it could be different from the current system. Some recent experiments by groups of countries have analyzed the feasibility of alternative designs for cross-border CBDCs. These experiments include the Dunbar project in Australia, Malaysia, Singapore and South Africa; mBridge project by Hong Kong, United Arab Emirates, Thailand and China; and the Jasper-Ubin project across Canada and Singapore. The aim of these experiments is to test alternative prototypes of CBDC-based arrangements in various countries within a digital sandbox.
All of these different prototypes, however, can be classified into two broad categories depending on whether they work on the basis of country-specific CBDCs issued by correspondent central banks or a universal CBDC issued by a global multilateral institution.
The first case, with country-specific CBDCs, can work in two ways. In the first arrangement, central banks allow these currencies to be transmitted and exchanged only within their jurisdictions. In order to allow the cross-border transfer of funds, central banks would have to agree to allow intermediaries (such as commercial banks, for example) from different countries to maintain an account with them denominated in the local CBDC. Entities that need to make payments to other countries can do so using these accounts.
In the second arrangement, central banks allow these currencies to be transmitted and exchanged even outside their jurisdiction. This works by allowing intermediaries in any country to hold an account with their central banks, but they can hold CBDCs from different countries in that account. Again, any entity can make payments to other countries using those countries’ CBDCs in these accounts.
Universal CBDCs, on the other hand, are not denominated in any local currency, but backed by a basket of currencies and accepted by all participating central banks. The conversion of local currencies in this universal CBDC will be based on an exchange rate fixed by central banks or on a CBDC exchange. Payments can be made by converting the payer’s local currencies into the universal CBDC and back into the payee’s local currency.