As central banks continue exploring digital innovations, their enthusiasm for central bank digital currencies (CBDCs) appears to be waning. According to the Official Monetary and Financial Institutions Forum (OMFIF) in its annual Future of Payments survey, many central banks now prefer interlinked instant payment systems over blockchain-based solutions for cross-border transactions.
Instant Payment Systems Dominate
Legacy instant payment systems, such as the recently launched FedNow in the United States, remain the top choice among central banks for improving cross-border payments. Nearly half (47%) of surveyed central banks favored this option, a marginal increase from the previous year.
In contrast, CBDC interest has dropped significantly. While 31% of central banks viewed CBDCs favorably in 2023, that figure plummeted to just 13% in 2024. Stablecoins, on the other hand, received no support for the second consecutive year.
Challenges to CBDC Adoption
The decline in CBDC enthusiasm may be influenced by geopolitical factors and concerns over compliance. For example, the Bank for International Settlements (BIS) recently withdrew from Project mBridge, a cross-border CBDC initiative led by China and other countries less aligned with Western powers. This move, while officially not political, highlighted concerns over the potential misuse of CBDCs to circumvent international sanctions.
Meanwhile, the dominance of the US dollar as the global settlement currency remains unchallenged. Only 11% of central banks reported reducing their reliance on the dollar, citing its appeal as a safe haven during times of geopolitical tension.
Tokenization Gains Momentum
While blockchain-based solutions for cross-border payments face hurdles, tokenization is gaining traction as an alternative. More than 40% of central banks in developed markets view tokenization as a promising avenue to enhance compliance processes and reduce costs.
Projects like the BIS’s Project Agora involve central banks from nations including France, Japan, South Korea, and the US, exploring tokenized transfers using wholesale CBDCs. However, these efforts focus more on domestic and institutional use cases rather than retail adoption.
TradFi Remains Resilient
Traditional finance (TradFi) systems, such as correspondent banking, continue to face challenges, including rising costs from Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance. The delayed adoption of the ISO 20022 messaging standard further complicates efforts to modernize these systems.
To address these issues, the BIS is working on Project Nexus, which aims to create a common platform for instant payment systems. By leveraging the ISO 20022 standard, the project seeks to streamline cross-border payments without relying on blockchain.
The preference for legacy instant payment systems over blockchain-based solutions signals that cross-border payments are likely to remain off the blockchain for the foreseeable future. Innovations like tokenization and initiatives such as Project Nexus may complement traditional systems without fully replacing them.
