A New P2P CBDC Forex and Cross Border Payments Architecture
A New Bretton Woods Moment: The Path of Intermediated Wholesale versus Dis-intermediated P2P
The Bretton Woods conference of 1944 was a seminal decision point in the shaping of a new post war international monetary system, which established the evolutionary path towards the one we have today. But the path indeed could have been very different, in that, set forth at Bretton Woods were two quite different visions of a post war monetary system. One proposed by arguably the greatest economist, John Maynard Keynes of the UK and the other by Harry Dexter White of the US. Ultimately, the US vision won out, since the US was largely financing the post war reconstruction of Europe. ‘The Economist’ at the time observed, “the world would bitterly regret” not having adopted Keynes’s vision and indeed some economists argue today, the failure of globalisation and current global wealth inequalities are the result of not having opted for Keynes' vision at Bretton Woods.
Today, the international monetary system, as a result of the digitalisation of money, stands at a new crossroads akin Bretton Woods, where the path opted for will shape the world for decades to come. And this crossroads is whether to follow the build out of CBDC Forex valuation and cross border payments through the pre-internet structure of intermediated wholesale or aspire to that of the new post internet world of dis-intermediated P2P.
And this to determine whether the status quo of financial institution control over Forex market valuation and cross border payments is preserved, which at its core would be primarily founded on the same methodologies and principles of the existing fiat structure, leading once again to systemic risk, friction points and costs, or alternatively where financial institutions are divested of control, to transition to a new more efficient 21st Century methodology and dis-intermediated structure, which has no systemic risk, is frictionless, instant and zero cost.
It might be argued, all existing financial institution oriented and BIS (Bank of International Settlements) promoted CBDC Forex and cross border payments investigations, and in all of their failed wholesale approaches to develop a structurally viable, seamless and frictionless platform for what is ultimately a 21st Century P2P money, is the manifestation of an attempt to preserve an antiquated 20th Century institutional control over global Forex markets and cross border payments, in all of its manifested failings and imperfections.
This is all indicative of an increasingly post Bretton Woods, neo-classical economic system, which dislocated from the realities of an evolving global structural landscape, is seeking, through financial self interest and to the cost of society and the global economic system, to re-impose itself on a new CBDC world to which it is structurally unsuited, dated and unable to accommodate. Not only is it now a dated Fiat system, the translated economic failings of which ever more and now daily manifested, but ultimately, an inexorable driver towards global economic instability, political and social upheaval and unrest.
Set out below, the correct future evolutionary path for CBDC Forex and cross border payments, which not only provides for natural structural compatibilities, but also the means by which to reset the global monetary system, where financial institutions no longer monopolise the landscape, and consequently also the basis by which to ensure the future world of digital CBDCs also structurally provide for, and lead towards a new more efficient and egalitarian global economic system.
Institutional Control over Forex and Cross Border Payments: No Economic or Financial Benefit to Society
If for purpose, the inclusion of 'wholesale' CBDCs are to ensure Central Banks do not cannibalise on the essential domestic financial role of banks, then this is not the case in the instance of CBDC Forex valuation and cross border payments.
Indeed, the only economic service of financial institutions to society through their control over global currency valuation and cross border payments, is to facilitate it. They have evolved into this role, as a result of having been advantageously positioned as the sole pre-internet conduits and means by which currencies could be valued against each other and money moved cross border.
And indeed, global economic integration leading to the consequent exponential increase in the value of global Forex and cross border money flowing through financial institutions, has also lead to a concurrent increase in systemic risk.
There is, as a consequence, no systemic banking or economic downside to financial institutions being divested of their control over global currency valuation and cross border monetary flows. Only new world upsides!
retail CBDCs: A 'Route 1' cross border build out with natural structural compatibilities
Since domestic retail CBDC (rCBDC) accounts are Central Bank liability held and balance recorded, they provide for a simpler, yet more efficient international CBDC monetary system, where a 'route 1' build out directly between rCBDC Central Bank infrastructures (ledgers) is developed.
Individual rCBDC accounts have a natural structural compatibility with the new Forex and cross border payments architecture, in that it operates on a P2P or individual rCBDC-to-rCBDC basis. And from this structural compatibility, can a seamless architectural build out, vastly simpler, yet also vastly more efficient be implemented over that of the inter-institutional wholesale CBDC route.
Furthermore, whereas the new fiat ‘Perfect Market Equilibrium’ cross border architecture novelly directly links up domestic payment systems, under CBDC even more advantageously, it directly links up Central Bank ledgers and consequently individual rCBDC accounts to further eliminate banking system points for an even greater systemic streamlining and consequent efficiency.
It is impossible to arrange the unilateral global exchange of 'fiat' cash money on a one-to-one or P2P basis, other than meeting up in person, which is physically impractical to arrange. This has lead to the indispensable role of banks and their inter-institutional wholesale OTC Forex and 'account to account' cross border payments construct.
Central Bank recorded digital 'cash' is by contrast quite different, in that it does indeed provide for a unilateral global exchange of 'cash' and its cross border payment on a new technologically enhanced P2P basis over the internet. This is its natural structural compatibility with post internet dis-intermediated P2P, and therefore the most logical and preferable build out route over wholesale CBDCs, thus far unrealised, as a result of all espoused pre-internet wholesale approaches.
To pursue the path of wholesale CBDCs is to not only take an indirect and convoluted one, but to create and encounter system point complexities, resulting in friction inefficiencies, as all wholesale CBDC cross border projects are finding out. Vast amounts of money and time are being unilaterally ploughed into inter-institutional wholesale projects, all of which are not only structurally at odds with the inherent nature of digital money, but furthermore, which as a path, resurrects the deficiencies of an inter-bank wholesale settlement system, Central Banks themselves lament.
In this regard, CBDC digital cash, not only provides for a new instant, frictionless and zero cost world of domestic payments, if correctly configured, but also in that of the international monetary system, where the rational and raison d’etre of digital money has an even greater application. In substantiation of this, a report by Atlantic Council analysts, state; 'International payment systems have not kept up with the size of cross-border financial flows in an increasingly open world. The systems used are costly, slow and complex. Lipsky and Kumar (2023) note that US $23.5 trillion were transferred across borders in 2020, which cost US $120 billion, the equivalent of one year of Morocco’s GDP.' The Geopolitics of Central Bank Digital Currencies, Lipsky Demertzis
But for this new instant, frictionless and zero cost world of CBDC cross-border payments to be realised, they do in fact have to be genuinely P2P, i.e, a value payment directly from the remitters rCBDC account to the beneficiary’s rCBDC account in another country, without a wholesale assembly (FX or cross-border), nor an intermediary performing these services.
The underlying approach of nearly all cross border CBDC projects thus far undertaken, are fundamentally wholesale and intermediated in one form or another, either as wholesale CBDCs themselves or wholesale interbank connected and settled. Cross border CBDC payment platforms, such as China’s M-Bridge’s claims to be P2P, are definitionally misleading! To quote lawfairmedia.org in their analysis of China’s M-Bridge; ‘The peer-to-peer feature mentioned here is for banks. These transactions are “wholesale” payments between large financial institutions rather than retail payments involving individual consumers’.
If the newly afforded opportunities digital CBDCs present are to be fully realised and a new progressive global monetary system acceded to, then the path cannot be wholesale CBDC, nor antiquated intermediated inter-bank wholesale, but has to be rCBDC dis-intermediated P2P!
configurational and Interoperability Issues of Wholesale CBDC Projects
The many different cross border wholesale CBDC projects, currently standing at 13, per the Atlantic Council's GeoEconomics Centre, if rolled out, present a future scenario, once again of a disjointed and fragmented global cross border architecture, akin to the existing correspondent model.
‘...Governors of the U.S. Federal Reserve observed that central banks are reluctant to allow central bank money to circulate on platforms they do not control.' Ledger Insights. And since a major currency denomination country such as the US, has already stated they are unlikely to relinquish settlement control of their eventual CBDC to, for instance, China’s M-Bridge platform, further points to an almost certain globally fragmented cross border CBDC payments architecture.
This looming systemic issue of CBDC platform interoperability is already being commented on by CBDC experts, notably in The Fintech Times, where they state; ‘there will need to be significant developments in terms of the interoperability and cooperation between different banking systems.’
So, even if, in the unlikely eventuality, all complexities of re-routing CBDC money via a wholesale cross border format were to be eventually overcome in a restricted and regressively preserved institutional format, there remains the further issue down the line of cross border platform interoperability. And with platform interoperability, invariably also comes further friction points! In light of this, CBDC experts are beginning to opine, again per The Fintech Times, that ‘the industry will need to consider alternative solutions’.
Despite concerted Central Bank efforts to develop and roll out CBDCs, if ultimately there are multiple obstacles and friction points to their unilateral cross border exchange and movement, then they cannot meet the requirements of an integrated global economy, nor displace the systemic destabilising effects of Cryptocurrencies.
Cryptocurrencies, ungrounded in nation state economic fundamentals, are fully speculatively wayward and non representative of individual nation state economic performance, interest rates or global trade balances impacting their currency valuation. And therein the disruption and negation of the all important global economic exchange rate (price) signals between nation states and their currencies under the prevailing global floating exchange rate mechanism. Cryptos thus pose, despite their disruptive universal frictionless payments capability, a deep global systemic economic threat!
And again, the Forex trading and exchange rate generation of CBDCs, if built out via financial institutions, are going to hit the very same interoperability hindrances and constraints of conventional cross border payments. Whilst there are broadly sketched ideas of inter-bank wholesale CBDC Forex market and cross border payments, their detailed architecture and manner of implementation, across eventual differently competing nation state platforms, are a very long way off tractional realisation and implementation.
And to evidence the fact that the institutional wholesale route of CBDC Forex trading, valuation and cross border payments is structurally not the natural path to take, is that Crypto currency trading is neither wholesale constructed, nor conducted through financial institutions, but rather through 21st Century digital online exchange platforms. Financial institutions neither value this market, nor control it!
As the father means to tractionally overall assume and accommodate this new market structure, the new integrated and consolidated 'Perfect Market Equilibrium' CBDC Forex and Cross Border payments architecture is fully 21st Century online, digital and P2P.
Thus, if the new world of Central Bank CBDCs are ultimately to assert themselves over the aspirational frictionless global dominance of Cryptos, such as Bitcoin and Ethereum, then there can be no CBDC Forex valuation or cross border methodological or architectural misconfigurations resulting in structural friction points, which overall the existing wholesale approach appears to be fully unconvincing on.
The New P2P CBDC Forex and Cross Border Payments Architecture: Consolidated, Seamless and frictionless!
That the new 'Perfect Market Equilibrium' P2P CBDC Forex trading, valuation and cross border payments architecture, at once perfectly self clears all trades as they are executed, and further consolidated with a perfect CBDC Ledger netting of cross border payments, means it simultaneously resolves both wholesale CBDC Forex and cross border payments configurational and interoperability issues at their core. And this all the while transitioning to a new more efficient and risk free structure. This is the new alternative solution CBDC experts are calling for!
As a new perfectly cleared and netted platform, which has neither FX, nor cross border payments settlement, it can consequently apply a new satellite architecture to the different CBDC money platform technologies, to seamlessly FX and cross border payments link them, without the need for technological interoperability. And this premised on the new 'Perfect Market Equilibrium' tenets and principles, where a middleman’s intermediated liquidity is no longer required for valuation or performance, and cross border wholesale 'vostro nostro' account settlement no longer exists. Without settlement, there is no technological crossover of systems or platforms, and therefore no requirement of interoperability. Whilst seamlessly globally interlinked, each CBDC platform technologically stands alone.
Thus, whereas the wholesale approach is mired in the interoperable complexities of having to straddle both FX and cross border payments settlement across multiple platform technologies, where thousands of banks are once again incorporated, all of this simply falls away under this new architecture, as a seamlessly consolidated and integrated sovereign currency FX and cross border payments construct.
And as with its fiat application, directly linking domestic payment systems without the need for Swift, an FX trade or individual remitting payment on each country’s particular CBDC money technology platform, is instantly redirected and re-allocated as a beneficiary one, within its own domestic rCBDC Ledger at an instantly system factored real time exchange rate. It is consequently instant and frictionless on the point of both FX trading and cross border payments, with CBDC Ledgers between all currency pairings always perfectly balancing to zero.
The institutional approach can never aspire to this higher state for many reasons, but primarily that as wholesale and intermediated, the purity of market force transmission between individual FX trading parties and counterparties is destroyed with the ability to identify individual party and counterparties involved in P2P trades lost. And similarly the direct cross border STP payment link between remitters and beneficiaries, interrupted. Furthermore, that conventional FX trading and cross border payments are two separate processes, rather than consolidated, renders it impossible to instantly and seamlessly factor exchange rates into instantly redirected value calibrated payments within any given Central Bank rCBDC platform.
CBDC projects such the nordic Project 'Icebreaker', which do attempt to approach the cross border issue from a retail perspective, with a built in CBDC FX capability, immediately encounter compatibility and friction point issues, for the reasons set out above. And this notably, that they espouse institutional FX service providers, again in the manner of the BIS project Nexus, which firstly has settlement, leading to technological crossover and secondly, the structural incompatibility of attempting to reconcile a wholesale FX with individual rCBDC payments.
They themselves conclude, 'there are a lot of questions that need to be investigated further'.
A 'bolt on' assimilation of all rCBDC infrastructures under a new nation state stakeholder construct
The new fully process consolidated and integrated P2P CBDC FX trading, valuation and cross border payments architecture, devoid of the complexities of settlement and due to P2P compatibility simplicity, not only elevates the international monetary system to a higher state of efficiency, but which can also be globally built out at a fraction of the cost and realisation timeframes of all existing wholesale projects. This provides for the accelerated roll out of CBDCs, in that configurational and implementation issues surrounding CBDC FX and cross border payments are resolved.
And that it seamlessly accommodates different CBDC platform technologies without interoperability, means it can be architecturally built out on a 'bolt on' basis as respective nation state CBDCs are launched and according to their preferred CBDC technology of choice.
Furthermore, there is no relinquishment of settlement control of one country's CBDC and its technology to another country's or regionally controlled platform, in that whilst globally inter-linked and interconnected, there is no settlement. Thus, in conjunction to addressing core configurational and interoperability issues, notably by dispensing with settlement, it further allays sovereignty money control concerns and averts the prospect of regionally fragmented CBDC FX and cross border platforms competing against each other for supremacy. And this where the overall efficiency attributes and potential of CBDCs in their unified capacity as a new digital international monetary system are no longer compromised.
That under the higher state of Perfect Market Equilibrium, Forex market creation and cross border payments are novelly fully de-risked, provides for a new Nation State stakeholder participatory architecture, not only in the platform build out of cross border CBDC payments, but novelly in CBDC Forex valuation as well.
This can be implemented under any number of formats, either exclusively as a Nation State stakeholder construct in both FX and cross border payments or a combination of both public and private money, again according to a given number of FX and cross border ownership permutations.
The objective of this Nation State stakeholder construct, is to prevent the eventuality of competing platforms and a fragmented CBDC monetary architecture, where efficiency and frictionless opportunities are compromised, if not entirely lost.
Under the 'Perfect Market Equilibrium' Nation State stakeholder construct, the Dollar's Bretton Woods established hegemony would be dismantled, an eventuality in any case envisaged by The Geopolitics of Central Bank Digital Currencies report. In that the power and role of intermediated liquidity is dismantled and negated, so it applies to the Dollars depth of liquidity, as a global currency of settlement!
Under this new stakeholder construct, each Nation State would automatically have a right to assume its place, as an equitable stakeholder partner as they rolled out their CBDC and assumed their stakeholder place along with full voting rights. Consequently, no one country's platform, such as China's M-Bridge’s aspirational global dominance would be positioned to eventually assume control of the new CBDC international monetary system and neither would any one country's currency dominate cross border payments.
And from this new CBDC Bretton Woods moment, the creation of a new international money system which equitably worked for all, whilst promoting global prosperity. No one Nation State's currency or platform would dominate or control. There would be no 'corridor' cost payment disparities, nor financial centre control over Forex market valuation, in that it is devolved to the global community.
The missed Bretton Woods opportunity of 1944 would be atoned for, this time by taking the correct natural and linear path of dis-intermediated P2P.