Research on the Opportunity and Development of Fiat Digital

Currency in Cross-Border Payment

Zhenao Huang

, Jiayuan Wang*

and Jiahao Zhang

Qingteng Alcanta International College, Guangzhou, 510000, China

School of Economics, Huazhong University of Science and Technology, Wuhan, 430074, China

Sanya Fenghe School, Sanya 572000, China

Keywords: Cross-Border Payment of Legal Digital Currency, Interactive Mode, International Finance.

Abstract: The rapid development of the digital economy has provided a strong impetus for the rise of cross-border e-

commerce, and has also accelerated the process of global cross-border trade's transformation to digitalization.

Against this background, the cross-border payment industry's growing demand for legal digital currency has

become a hot topic of concern in the industry. This article will deeply analyze the development of legal digital

currency in the field of cross-border payments (CBP), and explore its advantages and challenges in practical

applications, in order to provide a useful reference for related research and practice. This paper concluded

that central bank digital currencies (CBDC) has three different interaction modes in cross-border payment:

compatible mode, interconnection mode, and single platform mode. CBP has some potential in improving

payment efficiency, reducing transaction costs, enhancing process transparency and ensuring transaction

security. This paper points out the technical challenges, international cooperation and governance issues, and

monetary policy and financial stability challenges of CBP in cross-border payment, and makes suggestions

for improvement. It is hoped that these suggestions can provide reference and inspiration for promoting

innovation and development in the field CBP.

1 INTRODUCTION

In recent years, global cross-border trade has grown

rapidly. From 2011 to 2021, global commodity trade

exports and commercial services exports have

increased by 22% and 36%, respectively (Song,

2023). The rapid rise of digital economy has

promoted the vigorous development of cross-border

e-commerce, promoted the digital transformation of

global cross-border trade, and significantly improved

trade efficiency. As a key link of international trade

and investment, cross-border payment (CBP) is a

bridge between the supplier of goods, the demanders

of goods and the settlement and payment

intermediary (Feng et al., 2022).

The robust development of the global economy

relies heavily on the efficiency and security of CBP.

Currently, existing CBP systems mainly rely on the

agent banking model, which has problems such as

https://orcid.org/0009-0005-3112-8730

https://orcid.org/0009-0002-1549-6830

https://orcid.org/0009-0008-4742-6419

higher costs, longer processing times, and lower

transparency. In the context of the increasing

integration of the global economy, the demand for

legal digital currencies in the field of CBPs is rising

(Zhu, 2024). As an emerging financial infrastructure

for CBPs, legal digital currency is expected to

significantly improve the security and efficiency of

CBPs through technological innovation (Zhang et al.

2021). CBP also has the characteristics of

convenience and privacy, and on the basis of the

existing electronic payment, it can make offline

payments.

Compared with the development and practice of

CBP system, the theoretical research on CBDC of

CBP system is still in its infancy. Du (2020) believes

that central banks' indecision on interoperability

(interoperability) has limited the development of CBP

systems. Inozymtsev and Inozemlsev & Nektov

(2022) proposed that existing banking laws, antitrust

Huang, Z., Wang, J. and Zhang, J.

Research on the Opportunity and Development of Fiat Digital Currency in Cross-Border Payment.

DOI: 10.5220/0013264500004568

In Proceedings of the 1st International Conference on E-commerce and Artiﬁcial Intelligence (ECAI 2024), pages 417-422

ISBN: 978-989-758-726-9

417

laws and personal data protection systems restrict the

development of CBP systems. Domestic scholars'

research on CBP mainly focuses on discussing the

gain of CBP and its CBP system to the international

payment system from the macro level (Shen , 2023),

and analyzing the difficulties encountered by CBP

from the micro level. Among them, the recognition of

monetary sovereignty contradiction and

extraterritorial effectiveness, the lack of systematic

rules and standards in the international monetary

system (Yang, 2023), and the lack of innovation of

international regulatory rules and coordination

mechanisms (Yuan, 2022) are considered as the main

reasons restricting the construction of CBP system. In

general, although foreign scholars have realized the

benefits and functions of building a CBP system

(Rainer, 2020) However, most foreign studies on

CBP system can only be analyzed from a single

perspective. Compared with foreign research,

domestic research lacks more necessary summary of

the development progress of CBP system, and also

lacks detailed exploration and effective response to

the challenges faced in the construction of CBP

system.

This study aims to explore the application

prospect of CBP in CBP and analyze its potential in

improving payment efficiency, reducing transaction

costs, enhancing process transparency and ensuring

transaction security. Reviewing the international

multilateral CBP experimental project, this paper

further discusses the realization of digital RMB CBP

in China. This paper aims to provide reference and

inspiration for promoting the innovation and

development in the field of CBP.

2 THE RISE AND

DEVELOPMENT OF CENTRAL

BANK DIGITAL CURRENCY

(CBP)

2.1 Basic Concepts and Classification

of CBDC

Legal digital currency is a currency issued by the

central bank based on national credit and with legal

payment ability. It represents the encrypted digital

string of the specific amount, with the national credit

as the endorsement, is the digital form of paper

money, and undertakes the market circulation

obligation of money. Functionally, the CBP

application of CBDC is divided into three categories:

first, as a supplement to small cross-border

transactions for local currency; second, widely

replacing some countries to become the payment

means of cross-border trade and accounting unit, and

may even replace the domestic currency; third, it may

become a multi-polar international currency, which

will serve global transactions and become a common

legal digital currency. Monetary internationalization

is influenced by economic weight and geopolitics,

and the network effect strengthens its international

status and is widely recognized to promote more

adoption. From the perspective of issuing objects and

usage scenarios, there are two categories for CBDC:

retail and wholesale. Retail CBDC (rCBDC) is

mainly for the general public and merchants, and it

wants to replace cash in many small-scale retail

transactions on a daily basis. It provides a convenient

and efficient means of payment, and can help to

promote financial inclusion and reduce transaction

costs. Wholesale CBDC (wCBDC). Different from

retail CBDC, wholesale CBDC is mainly oriented to

commercial banks, financial institutions and some

chartered institutions. It is mainly used for large

payments and settlement, aiming to lower systemic

risk and enhance the financial system's security and

efficiency.

In terms of regulation, the management of retail

CBDC is relatively complex because a suitable

balance must be found between regulatory

requirements for anti-money laundering and counter-

terrorist financing and user privacy protection. The

central bank needs to formulate strict regulatory

policies to ensure the legal and compliant use of retail

CBDC. Wholesale CBDC is different from retail

type. Because wholesale CBDC is mainly oriented to

financial institutions, its supervision difficulty is

relatively low. Financial institutions usually have

higher compliance awareness and risk management

capabilities, so the central bank can more centrally

monitor the use of wholesale CBDC to ensure that

they meet the requirements of financial stability and

security.

2.2 Global CBDC Research and

Development Status and Trends

By the end of 2022,93% of the central banks had

participated in CBDC research, 75% had studied

wholesale and retail types, which were progressing

even faster, and 25% had been piloted, twice that of

the wholesale pilot banks. Emerging economies

outpace advanced economies with 29% pilot retail

and 16% pilot wholesale; 18% and 10% respectively.

The BIS Innovation Center supports the project of

exploring CBDC of CBP applications. The BIS

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418

Singapore Innovation Center is in charge of the

Dunbar project, which focuses on designing the

digital currency platform for multilateral central

banks. The central banks of many countries initiated

the m-CBDC Bridge project. From August to

September 2022, it has successfully carried out the

first pilot transaction in a real environment, involving

20 banks, completed more than 160 cross-border

businesses, and completed the settlement of more

than 22 million US dollars.

3 ADVANTAGES OF CBDC IN

CBP

3.1 CBDC

Compatibility mode realizes the interoperability

among the digital currency systems of various central

banks through unified international standards. These

standards include formats for information

transmission, encryption techniques, and

requirements for information protection, and so on.

Independent digital currency infrastructures for

central banks will be established by various countries

and regions and achieve interoperability through

agent banks while adhering to unified standards. This

mode is mainly focused on upgrading the domestic

payment system in each country digitally, and

basically does not involve the construction of new

CBP infrastructure or the modification of the CBP

process.

Interconnected mode refers to the information,

money directly on different block chain platform,

different CBP system can be realized through sharing

technology interface system direct interconnection,

and determine the system settlement final agreement,

make the central bank closer connection between

digital currency platform. Hash time lock contract

technology (HTLC) is a technology that is both

mature and common when it comes to cross-chain

interaction. The advantage of this model lies in

ensuring timeliness and mutual trust, but there are

some limitations of low scalability and low

compatibility. The interconnection mode necessitates

hundreds of thousands of transaction channels

secured with hash time locks, and it demands that

both blockchains adhere to the same hashing

algorithm, with each party maintaining a transaction

account on the identical blockchain

The single platform model refers to a method in

which central banks of various countries directly

implement CBP by collaboratively participating in

the same blockchain platform. This model applies the

concept of a multilateral payment platform to cross-

border payments of CBDC, enabling countries to

directly hold and trade CBDC through a unified

payment platform (Liu, 2023).

The core features of this model are multi-center

monetary control and distributed operation

architecture. Specifically, the central bank maintains

specific nodes on the blockchain to facilitate

supervision of the issuance, redemption and

circulation of CBDC within its jurisdiction. At the

same time, commercial banks still bear the actual

operation and operation of CBP. The main advantage

of this single platform model is that it avoids cross-

chain problems and saves the time and cost required

to involve different blockchain intermediaries,

thereby performing well in economic efficiency and

compatibility.

In summary, the single platform model not only

provides an efficient and controllable solution for

cross-border payments, but also improves the

flexibility and reliability of the entire payment system

through a combination of centralized management

and distributed operations. This enables countries to

enjoy the convenience brought by the digital

economy while maintaining monetary sovereignty.

3.2 CBDC Mechanisms to Improve the

Efficiency of CBP

CBDC adopts a centralized management mode,

which is under the direct supervision of national

institutions, which significantly improves the

transaction speed of CBDC in CBP. Traditional CBP

involve multiple intermediary agencies, including

banks, clearing houses and so on, resulting in a

complex and time-consuming transaction process.

CBDC can conduct transactions directly between

sender and receiver, directly between central banks or

between central banks and commercial banks,

without going through multiple intermediaries, that

is, supporting peer-to-peer payments. Peer-to-peer

transactions shorten the payment chain as a whole,

reduce unnecessary costs and capital circulation time,

thus simplifying the process, and accelerating the

speed of capital transfer (Zhong, 2023). This payment

method greatly reduces the transaction time, allowing

CBP to be paid in seconds. At the same time, the

CBDC of CBP system can rely on decentralized

trusted verifiers to complete the settlement, who

ensure the accuracy and imtamability of transactions

through the consensus mechanism (Wang , 2023). In

this way, CBDC can have "24 hours 7 days" access,

which not only improves the clearing efficiency, but

Research on the Opportunity and Development of Fiat Digital Currency in Cross-Border Payment

419

also reduces the dependence on a single centralized

clearing institution, and enhances the stability and

risk resistance of the system..

3.3 CBDC Ways to Reduce the Cost of

CBP

The peer-to-peer payment mentioned above not only

improves efficiency, but also greatly reduces the

number of agent banks and the overall settlement

cycle in the process of cross-border transactions, thus

reducing the cost of cross-border transaction

settlement (Zhang, 2023). This design makes CBP

more economical and efficient, especially for small

cross-border transactions, which can significantly

reduce fees. Due to the CBDC of CBP system can

reduce the dependence on external accounts, and

trade account deposit funds is the main part of the

CBP costs, CBDC help Banks one implementation

with other Banks, can significantly reduce the number

of foreign trade accounts and required money, the

current account of liquidity costs is further reduced

(Wang, 2023). Concurrently, the cross-border

usability of fiat digital currencies can lower the

expenses associated with acquiring, storing, and

transacting in foreign currencies (Pan, 2022).

3.4 CBP's Potential to Enhance the

Security and Transparency of

Payment Systems

CBDC of CBP systems widely adopt blockchain

technologies and encryption technologies, and the

application of these technologies greatly improves the

security of payment systems. The immutability of

blockchain and the security mechanism of encryption

technology ensure the security of transactions and the

integrity of data. Since all transaction records are

stored on the blockchain, the transparency of CBDC

of CBP has been significantly improved, and anyone

can query and verify them. Related practice shows

that in a single platform mode of multilateral central

bank digital currency system, the central bank digital

currency system can through a higher degree of

interoperability to improve the traditional CBP

model, information flow and capital flow included in

the same system, expand the operating time and

access scope, for different countries or regions do not

match, lack of timeliness, transparency, has a

significant improvement effect (Song, 2022). The

direct supervision of state institutions controls the

digital currency of the central bank, the operation

process is smooth, the openness and neutrality, the

liquidity risk is greatly reduced, the security is

guaranteed, and the reserve force is strong (Zhang,

2022). By enhancing transparency and security, CBP

not only enhances users' trust but also provides

effective regulatory tools for regulators. Legal digital

currencies show unique advantages in CBP, such as

supporting the principles of anti-money laundering,

anti-terrorist financing and anti-tax evasion, to ensure

the stability and sustainability of the payment system

(Zhang, 2021).

With the progress of the multilateral central bank

Digital Currency Bridge project (m-CBDCBridge)

mentioned above, the advantages of CBDC in CBP

have been reflected. According to the 2021 Bank for

International Settlements report, the multilateral

bridge project is more efficient in cross-border trade,

with CBP operations completed within 10s, which

will save 50% of cross-border fees (Liang, 2022).

4 EXISTING CHALLENGES AND

PROBLEMS OF CBDC OF CBP

Based on CBDC of CBP system research and

development practice and trend, CBDC of CBP

system construction process will face some countries

forced monopoly and refused to cooperate, lack of

international standards lead to the lack of system

interoperability, domestic regulatory system

difference system friction, lack of system governance

rules, advanced technology, affect the international

social and economic stability and other challenges.

4.1 Technical Challenges

The debate and game of international standards has

gradually risen from the technical to the strategic

level, and from the institutional to the national level

(Liu, 2021]). The upgrading of the scope and level of

the game has led to further increased difficulty in

formulating and implementing international

standards.

Digital technology presents the characteristics of

rapid iteration, dynamic upgrade, the longer the

international technical standards, the more likely to

appear for the old technology standard has not

generated but new technology has appeared, the

international standards cannot effectively respond to

the CBDC of CBP system construction and

development requirements.

In addition, blockchain technology, as a

decentralized infrastructure and distributed

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420

computing model, integrates multiple technological

innovations such as distributed ledger technology,

asymmetric encryption technology, and smart

contracts (Guo, 2020 ). At present, blockchain

technology is increasingly used in CBDC in cross-

border payment systems. However, in the future,

hackers may exploit digital technology or loopholes

in the CBDC of the CBP system to package CBDC

and exchange counterfeit currency for real currency,

thereby causing the assets of participants on the chain

to depreciate. This warning shows that the potential

blockchain technology risks of CBDC in the CBP

system in the future mainly come from security risks

caused by technical loopholes.

4.2 International Cooperation and

Governance

The imperfect financial data exit and user privacy

protection systems in various countries restrict the

circulation of data in CBDC and CBP systems. Cross-

border monetary payment is bound to lead to the

cross-border flow of financial data, but the current

debate about the localization of financial data and the

exit of financial data in various countries has not been

properly resolved. In terms of international

cooperation and governance, strict restrictions on the

cross-border flow of financial data, while protecting

privacy, have hindered the globalization of the CBDC

system (Wen, 2021). In addition, the SWIFT system

under the current international system may restrict the

CBP of the non-US dollar system because to its deep

binding to the United States and the US dollar (Shen

et al., 2022).

4.2 Monetary Policy and Financial

Stability

Cross-border use of fiat digital currencies may pose

macro-financial risks. Countries' concerns about

CBDC of CBP mainly come from the possibility that

CBDC may undermine domestic monetary liquidity

while disrupting the independence of currency

issuing countries' monetary policy. Because in the

traditional CBP transactions, strong currency has a

"currency substitution effect" on weak currencies. In

countries with high inflation and large exchange rate

fluctuations, their own currency may be replaced by

the legal digital currency of other countries, forming

currency substitution, thus partially losing the

independent monetary policy (Feng et al. 2022).

5 CONCLUSIONS

This paper mainly discusses the application prospects

of CBDC in CBP. This paper concluded that CBDC

faced technical and policy challenges in CBP. Its

cross-border application should deal with different

monetary policies, foreign trade policies, foreign

exchange regulatory requirements, cross-border

settlement mode and living habits of different

countries. In addition, despite the potential of

distributed ledger technology, its large daily volume

of transaction processing requires high storage and

computing capabilities, and no unified technology

architecture has been developed around the world,

affecting the wide application of CBDC. The

application of digital technology may also lead to

changes in the financial infrastructure, changing the

form of risk. In traditional financial cross-border

services, the desynchronization of clearing and

settlement may cause risks, which also exist in the

CBP system of CBDC.

In order to promote the development of CBDC of

CBP, this paper suggests establishing a perfect legal

framework, clarifying the legal status and application

scope of digital RMB, and strengthening transaction

security, privacy protection and traceability of funds.

At the same time, it can enhance the adaptability of

digital RMB in the existing CBP network, and

improve its efficiency in CBP by analyzing and

improving its design framework. Finally, the

international competitiveness of CBDC can be

enhanced by reducing intermediate links, reducing

costs and improving transparency. Use blockchain

and smart contract technology to improve system

security, and strengthen international cooperation, to

explore the application scenarios of CBDC.

AUTHORS CONTRIBUTION

All the authors contributed equally and their names

were listed in alphabetical order.

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