CBDCs in the World Trading System

1. What Are CBDCs?

A CBDC is a digital form of legal tender issued by a country’s central bank. It is:

Sovereign-backed

Regulated and stable

A digital liability of the central bank

Designed for domestic and international use

CBDCs generally come in two forms:

Retail CBDCs – used by the general public for everyday transactions.

Wholesale CBDCs – used by financial institutions for large-value payments and settlements.

In the context of world trade, wholesale CBDCs hold greater significance due to their ability to streamline international payments and reduce reliance on intermediary banking systems.

2. Current Problems in the World Trading and Payment System

Before understanding the value of CBDCs, it's important to consider the limitations of the existing trading and settlement framework:

a. High Cost of Cross-Border Payments

International transactions often involve multiple banks, SWIFT messaging, and correspondent banking networks. This leads to:

Expensive transfer fees

Slow processing times

Reliance on intermediaries

b. Dollar-Dominated Global Trade

Over 80% of global trade is invoiced in USD. This creates:

Dependency on US monetary policy

Currency risk for emerging markets

High demand for dollar liquidity

c. Slow Settlement Processes

Cross-border trade can take days to settle due to:

Time zone differences

Compliance checks

Lack of common settlement rails

d. Fragmented Financial Infrastructure

Different countries use incompatible regulations, payment systems, and messaging formats, making interoperability difficult.

CBDCs are considered a strategic solution to all these challenges.

3. How CBDCs Can Transform the World Trading System

CBDCs have the potential to reshape global trade in multiple ways.

a. Instant and Low-Cost Cross-Border Settlements

CBDCs can enable near-instant settlements by connecting central bank systems directly through digital ledger technology (DLT).

Benefits:

Reduced transaction fees

Faster trade finance processes

Lower counterparty and settlement risk

b. Reduced Dependence on Intermediaries

Traditional cross-border payments rely on correspondent banks. CBDCs, however, enable:

Direct central bank-to-central bank transactions

Fewer intermediaries

Reduced complexity in the payments chain

This leads to greater efficiency and transparency.

c. Enhanced Transparency and Anti-Fraud Controls

CBDCs allow full traceability. This is advantageous for global trade because:

Money laundering can be detected easily

Fraud and trade-based financial crimes reduce

Compliance becomes more automated

With programmable features, central banks can embed smart compliance rules into the currency itself.

d. Strengthening of Local Currencies in Trade

If CBDCs become interoperable, nations may settle trades in their own currency instead of relying on USD.

This will help countries:

Reduce dollar exposure

Stabilize local exchange rates

Enhance monetary sovereignty

China’s Digital Yuan (e-CNY) is already being tested for cross-border trade to promote Yuan internationalization.

e. Programmability in Trade Finance

CBDCs can support programmable smart contracts, enabling automated trade functions such as:

Conditional payments

Automated customs clearance

Real-time shipment tracking linked to payment triggers

Smart invoices and escrow systems

This reduces human error, delays, and contract disputes.

4. CBDCs and Global Trade Networks
a. Interoperability Projects

Many global initiatives aim to connect CBDCs across borders:

mBridge (Hong Kong, China, UAE, Thailand, BIS)

Project Dunbar (Australia, Malaysia, Singapore, South Africa)

Project Icebreaker (BIS, Sweden, Norway, Israel)

These projects test how CBDCs can settle international trade without SWIFT.

b. Digital Trade Corridors

CBDC-enabled digital trade corridors can make it easier for regions to conduct business without dependency on legacy systems. They also facilitate:

Bilateral and multilateral trade agreements

Currency swap arrangements

Real-time settlement layers

c. Impact on SWIFT and Correspondent Banking

CBDCs could reduce global reliance on SWIFT. Although SWIFT is adapting through digital integration, CBDCs bypass many of SWIFT’s limitations.

5. Challenges and Risks of CBDCs in World Trade

Despite their potential, CBDCs face significant challenges.

a. Lack of Global Standards

Without common frameworks for:

Cybersecurity

Privacy

Settlement rules

Regulatory alignment

interoperability will be limited.

b. Cybersecurity Concerns

CBDCs increase vulnerability to:

Cross-border cyber-attacks

Systemic risk if central bank networks fail

State-sponsored digital warfare

c. Geopolitical Competition

Countries may use CBDCs to:

Avoid sanctions

Reduce dependence on dominant currencies

Create regional trade blocs

This could reshape global power balances.

d. Privacy Concerns

Governments may monitor transactions too closely, raising:

Data security issues

User privacy concerns

Risks of misuse of financial information

e. Impact on Commercial Banks

If businesses prefer using CBDCs for trade:

Commercial banks may lose transaction revenue

Deposits could shift away from banks

Banks may face funding pressure

Central banks must balance innovation without destabilizing financial institutions.

6. Future of CBDCs in the World Trading System

CBDCs are still in their experimental stage, but global momentum is strong:

Over 130 countries are exploring CBDCs

Over 20 countries are in pilot or launch phases

Major economies like China, India, UAE, and the EU are leading adoption

CBDCs will likely become a core settlement infrastructure in global trade within the next decade.

Future expectations:

CBDC-based trade hubs in Asia and the Middle East

Digital currencies replacing letters of credit (LCs)

Automation of global supply chain finance

Programmable trade contracts integrated into logistics systems

Rise of multi-CBDC platforms creating a unified digital trade layer

Conclusion

CBDCs represent a revolutionary step in the evolution of the world trading system. By providing a faster, cheaper, and more transparent method of cross-border settlement, CBDCs have the power to significantly reduce inefficiencies in global trade. They also promote monetary sovereignty, reduce dependence on the US dollar, and enable programmable trade finance. Although challenges such as cybersecurity, privacy, and geopolitical tensions persist, the direction of global finance clearly indicates that CBDCs will play a major role in shaping the future of international commerce.