Cross-Border Payment Innovations: CBDCs and Instant Rails

Cross-border payments are transactions in which the payer and payee are located in different jurisdictions. Today, these transfers are being reshaped by CBDCs, instant payment rails and stablecoins, all aimed at faster settlement, lower cost and better transparency.

Traditional cross-border payments still depend heavily on correspondent banking, which adds intermediaries, fees and delay. New digital architectures seek to reduce these frictions by linking payment systems directly or by using tokenised forms of money and settlement assets.

How Traditional Cross-Border Banking Works

International payments usually move through correspondent banks using Nostro and Vostro accounts. SWIFT provides the messaging layer for these transfers, but it does not settle funds directly.

• Multiple intermediaries: Where direct bilateral banking ties do not exist, transactions pass through several banks before reaching the beneficiary.
• High transaction costs: Routing fees, foreign exchange mark-ups and processing charges make small remittances especially expensive.
• Delayed settlement: Transfers are slowed by time zones, national holidays and local RTGS cut-off times.
• Counterparty risk: Longer settlement cycles increase credit and liquidity risk among intermediaries.
• Limited transparency: Senders often cannot track transaction status or intermediary deductions in real time.

CBDCs and Cross-Border Settlement Models

Central Bank Digital Currencies (CBDCs) are emerging as a major tool for cross-border settlement. Multi-CBDC or mCBDC models can be structured in different ways:

1. Compatible standards: Central banks keep separate domestic CBDC systems but harmonise technical standards and regulatory rules to ease exchange.
2. Interlinked systems: Domestic CBDC platforms connect directly through shared interfaces or a common messaging hub.
3. Single shared platform: Multiple national CBDCs are issued and settled on one unified, multi-currency distributed ledger platform.

Project mBridge reached the Minimum Viable Product stage in 2024.

Fast Payment Linkages and Multilateral Hubs

Fast payment rails allow instant, round-the-clock transfers directly between bank accounts or digital wallets. Bilateral linkages connect two sovereign real-time retail systems without correspondent banking layers.

• G20 Roadmap: The G20 Roadmap for Enhancing Cross-Border Payments prioritises linking national fast payment systems to reduce remittance costs.
• UPI-PayNow linkage: Launched in February 2023 between India and Singapore, enabling instant cross-border remittances using mobile numbers or Virtual Payment Addresses.
• NPCI International Payments Limited: Expands UPI cross-border acceptance and interlinkages with partner countries, including the UAE, Bhutan, Nepal, Sri Lanka and Mauritius.
• Project Nexus: Developed by the BIS Innovation Hub to connect multiple domestic fast payment systems into a single multilateral network for cross-border retail payments.
• Project Mandala: Explores automated policy and regulatory compliance across cross-border payment flows using embedded architecture.

Stablecoins and Tokenised Assets

Stablecoins are digital tokens designed to maintain price stability. They are increasingly discussed as another cross-border payment rail, though they carry distinct regulatory and stability concerns.

• Fiat-collateralised stablecoins: Backed by reserve assets such as cash and short-term government treasury bills; examples include USDT and USDC.
• Crypto-collateralised stablecoins: Backed by excess cryptocurrency collateral locked in smart contracts; example: DAI.
• Algorithmic stablecoins: Use automated supply-adjusting mechanisms and may be uncollateralised or partially collateralised.

Key Risks, Compliance and Policy Issues

Digital cross-border payment systems offer speed, but they also raise compliance and stability questions that governments and central banks must manage carefully.

• AML/CFT compliance: Cross-border digital asset transfers must follow FATF standards, including the Travel Rule for originator and beneficiary information sharing.
• Foreign exchange controls: Instant transfers still need checks under domestic exchange management frameworks, such as India’s Liberalised Remittance Scheme (LRS).
• Data sovereignty: Networks must balance data localisation rules with cross-border monitoring requirements.
• Financial stability: Unregulated stablecoins can encourage currency substitution in economies with weaker domestic currencies.
• Capital flight risk: 24/7 digital channels can accelerate outflows during periods of financial stress.

Comparison of Cross-Border Payment Rails

Key Prelims Takeaways

• Correspondent banking remains the dominant traditional channel for cross-border transfers, but it is slow and costly.
• SWIFT only provides messaging; settlement happens separately through banking networks.
• CBDCs can support cross-border payments through compatible, interlinked or shared-platform mCBDC models.
• Project mBridge, Project Dunbar, Project Agorá and Project Mariana are important BIS-backed experiments in this space.
• UPI-PayNow is a key example of a bilateral instant payment linkage for retail remittances.
• Project Nexus aims at a multilateral network connecting domestic fast payment systems.
• Stablecoins may improve speed, but they raise concerns related to compliance, reserve backing and financial stability.