Countries have of course sought to circumvent the sanctions through contracts or arrangements that are not denominated in dollars. Examples include the “rupee-rial” mechanism introduced by India in 2012; the 2014 Russia-China swap deal; Russia’s National Payment Card System to process domestic card payments; alternative financial messaging systems such as the Russian Financial Message Transfer System; or China’s cross-border interbank payment system. However, these are specific or limited in their scope.

Payment architecture based on the CBDC

Will a cross-border payment agreement based on a CBDC be safe from sanctions? Let’s first try to understand what such an arrangement might look like and how it might be different from the current system. Some recent experiments by groups of countries have examined the feasibility of alternative designs for cross-border CBDCs. These experiences include the Dunbar Project by Australia, Malaysia, Singapore and South Africa; the mBridge project in Hong Kong, United Arab Emirates, Thailand and China; and the Jasper-Ubin project by Canada and Singapore. The goal of these experiments is to test alternative prototype arrangements based on multi-country CBDCs in a digital sandbox.

All of these different prototypes can, however, be classified into two broad categories, depending on whether they operate on the basis of country-specific CBDCs issued by corresponding central banks, or a universal CBDC issued by a global multilateral institution.

The first case, with country-specific CBDCs, could work in two ways. In the first case, central banks only authorize the transmission and exchange of these currencies within their jurisdiction. To enable the cross-border transfer of funds, central banks should agree to allow intermediaries (like commercial banks for example) from different countries to hold 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 case, central banks authorize the transmission and exchange of these currencies even beyond their jurisdiction. It works by allowing intermediaries from any country to hold an account with their central bank, but they can hold CBDCs from different countries in that account. Again, any entity can make payments to other countries using the CBDCs of those countries in those 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 into this universal CBDC will be based on an exchange rate either set 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 recipient’s local currency.