CBDCs in the World Trading System1. What Are CBDCs?
A CBDC is a digital form of legal tender issued by a country’s central bank. It is:
Sovereign-backed
Regulated and stable
A digital liability of the central bank
Designed for domestic and international use
CBDCs generally come in two forms:
Retail CBDCs – used by the general public for everyday transactions.
Wholesale CBDCs – used by financial institutions for large-value payments and settlements.
In the context of world trade, wholesale CBDCs hold greater significance due to their ability to streamline international payments and reduce reliance on intermediary banking systems.
2. Current Problems in the World Trading and Payment System
Before understanding the value of CBDCs, it's important to consider the limitations of the existing trading and settlement framework:
a. High Cost of Cross-Border Payments
International transactions often involve multiple banks, SWIFT messaging, and correspondent banking networks. This leads to:
Expensive transfer fees
Slow processing times
Reliance on intermediaries
b. Dollar-Dominated Global Trade
Over 80% of global trade is invoiced in USD. This creates:
Dependency on US monetary policy
Currency risk for emerging markets
High demand for dollar liquidity
c. Slow Settlement Processes
Cross-border trade can take days to settle due to:
Time zone differences
Compliance checks
Lack of common settlement rails
d. Fragmented Financial Infrastructure
Different countries use incompatible regulations, payment systems, and messaging formats, making interoperability difficult.
CBDCs are considered a strategic solution to all these challenges.
3. How CBDCs Can Transform the World Trading System
CBDCs have the potential to reshape global trade in multiple ways.
a. Instant and Low-Cost Cross-Border Settlements
CBDCs can enable near-instant settlements by connecting central bank systems directly through digital ledger technology (DLT).
Benefits:
Reduced transaction fees
Faster trade finance processes
Lower counterparty and settlement risk
b. Reduced Dependence on Intermediaries
Traditional cross-border payments rely on correspondent banks. CBDCs, however, enable:
Direct central bank-to-central bank transactions
Fewer intermediaries
Reduced complexity in the payments chain
This leads to greater efficiency and transparency.
c. Enhanced Transparency and Anti-Fraud Controls
CBDCs allow full traceability. This is advantageous for global trade because:
Money laundering can be detected easily
Fraud and trade-based financial crimes reduce
Compliance becomes more automated
With programmable features, central banks can embed smart compliance rules into the currency itself.
d. Strengthening of Local Currencies in Trade
If CBDCs become interoperable, nations may settle trades in their own currency instead of relying on USD.
This will help countries:
Reduce dollar exposure
Stabilize local exchange rates
Enhance monetary sovereignty
China’s Digital Yuan (e-CNY) is already being tested for cross-border trade to promote Yuan internationalization.
e. Programmability in Trade Finance
CBDCs can support programmable smart contracts, enabling automated trade functions such as:
Conditional payments
Automated customs clearance
Real-time shipment tracking linked to payment triggers
Smart invoices and escrow systems
This reduces human error, delays, and contract disputes.
4. CBDCs and Global Trade Networks
a. Interoperability Projects
Many global initiatives aim to connect CBDCs across borders:
mBridge (Hong Kong, China, UAE, Thailand, BIS)
Project Dunbar (Australia, Malaysia, Singapore, South Africa)
Project Icebreaker (BIS, Sweden, Norway, Israel)
These projects test how CBDCs can settle international trade without SWIFT.
b. Digital Trade Corridors
CBDC-enabled digital trade corridors can make it easier for regions to conduct business without dependency on legacy systems. They also facilitate:
Bilateral and multilateral trade agreements
Currency swap arrangements
Real-time settlement layers
c. Impact on SWIFT and Correspondent Banking
CBDCs could reduce global reliance on SWIFT. Although SWIFT is adapting through digital integration, CBDCs bypass many of SWIFT’s limitations.
5. Challenges and Risks of CBDCs in World Trade
Despite their potential, CBDCs face significant challenges.
a. Lack of Global Standards
Without common frameworks for:
Cybersecurity
Privacy
Settlement rules
Regulatory alignment
interoperability will be limited.
b. Cybersecurity Concerns
CBDCs increase vulnerability to:
Cross-border cyber-attacks
Systemic risk if central bank networks fail
State-sponsored digital warfare
c. Geopolitical Competition
Countries may use CBDCs to:
Avoid sanctions
Reduce dependence on dominant currencies
Create regional trade blocs
This could reshape global power balances.
d. Privacy Concerns
Governments may monitor transactions too closely, raising:
Data security issues
User privacy concerns
Risks of misuse of financial information
e. Impact on Commercial Banks
If businesses prefer using CBDCs for trade:
Commercial banks may lose transaction revenue
Deposits could shift away from banks
Banks may face funding pressure
Central banks must balance innovation without destabilizing financial institutions.
6. Future of CBDCs in the World Trading System
CBDCs are still in their experimental stage, but global momentum is strong:
Over 130 countries are exploring CBDCs
Over 20 countries are in pilot or launch phases
Major economies like China, India, UAE, and the EU are leading adoption
CBDCs will likely become a core settlement infrastructure in global trade within the next decade.
Future expectations:
CBDC-based trade hubs in Asia and the Middle East
Digital currencies replacing letters of credit (LCs)
Automation of global supply chain finance
Programmable trade contracts integrated into logistics systems
Rise of multi-CBDC platforms creating a unified digital trade layer
Conclusion
CBDCs represent a revolutionary step in the evolution of the world trading system. By providing a faster, cheaper, and more transparent method of cross-border settlement, CBDCs have the power to significantly reduce inefficiencies in global trade. They also promote monetary sovereignty, reduce dependence on the US dollar, and enable programmable trade finance. Although challenges such as cybersecurity, privacy, and geopolitical tensions persist, the direction of global finance clearly indicates that CBDCs will play a major role in shaping the future of international commerce.
