Monetary Sovereignty and Central Bank Digital Currencies: Competing Models for Future Cross-Border Payment Platforms

Abstract

As central banks move to adopt digital currencies (CBDCs), two issues arise: the implications for monetary sovereignty and the potential efficiencies from cross-border interoperability. The former is particularly a concern for emerging market central banks, while the latter affects all states. Emerging markets have used capital flow management (CFM) tools to control capital flows that may overheat and destabilize the macroeconomy. The effectiveness of CFM implementation depends on how CBDCs carry out cross-border payments. This article discusses how CFM tools would function under different models of interoperability. While there are three broad models of cross-border CBDC payments, the key debate centers on two alternatives: the hub-and-spoke model and the common-platform model. Three ongoing projects, in which the Bank of International Settlement and central banks are participating, test these two models. This article compares the differences in these projects on a delegation to private intermediaries and notes the common platform model's demonstrated capacity for implementing jurisdiction-specific capital flow measures. It concludes with a case analysis of the Chinese e-CNY and capital flow tools. States should consider the interests of emerging markets in joining cross-border platforms that allow them to interact with their trading and investment partners while avoiding destabilizing cross-border flows.