The author is a partner in the commercial and financial area of Hogan Lovells.
I could assure you that all of us who work in cross-border operations have faced the problem of cross-border payments and the delay in their confirmation. On multiple occasions I have had the opportunity to participate in transactions that require an international transfer of funds – for example, financing from a foreign bank to a Mexican company, or the sale of a Mexican company to a foreigner – and we have had to resolve with creativity or sometimes with patience, the problem of delay in confirming the receipt of funds.
Isn’t there a faster and more efficient way to make international fund transfers? How is it possible that a SPEI transfer in a local payment can be confirmed in minutes and a cross-border payment can take hours and even days on certain occasions?
An international funds transfer generally involves the use of correspondent banks, which means a complex operational process. What is a correspondent bank? It is the bank in the jurisdiction where the payment originates and where the foreign banking entity receiving the transfer has a bank account.
But the use of correspondent banks requires a double transfer of funds: first, from the payer’s account to the correspondent bank’s account, and then, from the correspondent bank’s account to the foreign account. The above involves various operational complexities – authorizations and availability reviews, clearing and settlements in multiple payment systems and central banks located in different time zones, etc. – and legal – “KYC” reviews to prevent washed of money in various entities – which tend to delay payment. This often has to be added to the currency exchange.
Faced with this problem, the Bank for International Settlements and various central banks are devising solutions. One of these projects is called “Project Agorá” and the Bank of Mexico is participating, along with the Bank of France, the Bank of Japan, the Bank of Korea, the Swiss National Bank, the Bank of England and the Federal Reserve. from New York.
The Agorá Project will be based on the tokenization of cross-border payments, the use of smart contracts and a unified registry (unified ledger). Although the system is being designed, it appears that the unified ledger – a single ledger for all participants – is the cornerstone because it allows payment and settlement to be recorded simultaneously in a ledger shared by all participants. The Bank for International Settlements has mentioned that the system will allow the participation of central banks, but also banks and other private players. This poses major governance challenges – who will set the rules of the system and how they will be executed – that it is not clear how they will be resolved.
Another similar project is called “mBridge”, in which the Hong Kong Monetary Authority, the Central Bank of the United Arab Emirates, the Digital Currency Institute of the Bank of China and the Bank of Thailand, among others, participate. mBridge is based on the use of digital currencies issued by central banks (known as “CBDCs”) and blockchain. This solution will be based on the use of multiple digital currencies coexisting in the same ecosystem (mCBDC) and not through the use of the same digital currency for everyone. This solution remains hypothetical, since very few central banks have issued digital currencies (we understand that only the Bahamas, Jamaica and Nigeria).
Certainly, outside of the efforts made by central banks and monetary authorities, the use of virtual assets or cryptocurrencies could also facilitate international payments. In fact, there is already significant growth in the use of virtual assets as a substitute for sending remittances through traditional channels (v.gr. money transmitters). This solution, cryptocurrency supporters claim, not only makes money transmission faster but could also make it cheaper by substantially reducing intermediation costs. But this solution still needs to be consolidated due to technical complexities, greater institutionalization, lack of widespread knowledge, and in certain cases, limited liquidity.
The essential point is that both traditional channels (known in the industry as TradFi) and new decentralized channels (DeFI) are developing new means to facilitate cross-border payments. I believe that the reduction in time and costs of cross-border payments is very promising and is a technological advance, perhaps more discreet than generative artificial intelligence, but which will bring numerous benefits and speed up international trade.
