CBDCs: The gamechanger of International Trade and Supply Chain Finance
Central Bank digital currencies (CBDCs), are the source of countless innovations in the continually digitising world. Under the influence of growing digitalization across the world, these digital currencies tend to have an influential effect on international trade and supply chain finance.
The immense potential of CBDCs is discussed in this article with real instances to understand their influence and dwell deeper into the subject of CBDCs being the game-changer of international finance and supply chain finance.
What are CBDCs?
CBDCs, central bank digital currencies are the digital currencies issued by the central banks. The value of the digital currency is directly linked to the issuing country’s official currency. The sudden rise in the increment of the digital world during and post the covid pandemic opened gateways for digital currency across the globe. The then concern of hygiene and safety has now resulted in the shift of audience from cash to digital transactions.
Cryptocurrencies and Blockchain technology, the digital disruptions that made waves in the financial services sector are part of the same story as Digital currencies. But unlike the first two, CBDCs are a digital form of currency issued by the government. These are issued by central banks whose role is to support the financial services of a nation’s government, and its commercial-banking system, set monetary policy, and issue currency. These digital currencies are not decentralized instead they are state-issued and operated.
CBDCs can be used by the general public, businesses, and government agencies.
The motivation behind the ideation of CBDC
The purpose of the ideation of digital currencies was to make a more efficient and secure form of money especially designed for digital transactions. This can be utilized for various purposes including payments, remittances, and settling international trade agreements.
The use of CBDCs has allowed the buyer and seller to conduct a trade transaction such that the buyer’s currency automatically gets converted into the seller’s currency at the current exchange rate. This instance from the world of supply chain finance determines the ability of digital currencies to facilitate faster and more secure transactions making it convenient for counterparties to transact across the value chain.
There was a time when this was considered to be a far-off dream of digital currency enthusiasts but as growth and evolution are taking place this seems to be a grounded reality.
The white paper recently launched by Standard Chartered and PwC China, “Co-creating the future ecosystem of banking with Central Bank digital currencies” explored the commercial usage of CBDCs and their potential in retail finance.
“Greater collaboration between industry bodies and regulators across jurisdictions will be critical to validating CBDC use cases and creating a programmable banking ecosystem that fulfills the potential of CBDCs,” a statement given by James Lee, partner of advisor digital, at PwC China.
Central banks are motivated to develop CBDCs as they have the potential for greater financial inclusion, improved accuracy, security, and faster payments.
CBDC: Improving cross-border payments
CBDCs when compared with existing payment systems such as SWIFT and correspondent banks, there are several features to be considered for understanding their differences.
First and foremost, CBDCs offer increased speed and efficiency in processing transactions. The transactions through traditional payment methods require several days to clear whereas the transaction through CBDCs is completed in a matter of seconds.
Secondly, They offer increased security along with the transparency of payment procedures when compared to traditional payment methods. The digital tokens issued and regulated by the central banks thus, ensure greater accountability and oversight compared to the traditional payment systems.
Another advantage of CBDC over traditional payment methods is that it is more accessible to individuals and businesses who might not have access to traditional payment services.
CBDCs allow anyone with a smartphone and internet access to participate in the global economy, regardless of their location or financial status.
Well-established organisations like Standard Chartered and PwC China believe that CBDCs would be instrumental in overcoming the barriers in the field of trade finance.
Traditional payment systems like SWIFT and correspondent banking have served the international trade space well over time and have lower chances of disappearing but there’s a possibility of them being joined by the CBDCs. This is a welcome addition for small and medium-sized enterprises (SMEs) who are struggling to access the financial system in the current scenario.
Improving the digital depth of supply chain finance
Supply chain finance programs, a network of suppliers to major corporate partners use these connections to obtain the financing required by them. It has helped them to achieve an amplitude of financing since their prevalence.
The benefits of these supply chain finance markets do not dwell deeper into the different tiers of the supply chain instead they tend to benefit only the buyers and suppliers that already have prominent credit ratings. This results in barriers for SMEs while seeking access to financing solutions due to their lack of scale, collateral, or credit history.
This scenario can be changed by programmed CBDCs it will allow benefits to be passed more easily to the tiers below as well. The SMEs will be able to benefit from the fact that the goods they produce will ultimately be sold to financially reliable global corporations.
These programmed CBDCs can ease the process of payments by streamlining the process and giving the chance to those who are at the bottom of the chain to access the much-needed financing. A CBDC could be programmed to initiate a payment from the buyer directly to the SME after the successful receiving and verification of the goods.
Considering an instance, where the flagship corporate passes a programmed CBDC to the supplier who further uses the token to pay deeper-tier suppliers who further can use it as collateral or financing. This combination of trade and payment information can be used in programming the CBDC based on the payment conditions such that it becomes a new form of trade finance instrument.
CBDCs, the new face of international trade and supply chain finance can surpass a lot of factors and improve the growth of all the tiers in the sector.