How does CBDC (Central Bank Digital Currency) work in cross-border payments?

The diagram below shows an example between BOT (Bank of Thailand) and HKMA (Hong Kong Monetary Authority). The whole process can finish within 10 seconds!

How does CBDC (Central Bank Digital Currency) work in cross-border payments?

The diagram below shows an example between BOT (Bank of Thailand) and HKMA (Hong Kong Monetary Authority). The whole process can finish within 10 seconds!

There are three networks:

1. Inthanon network - initiated by BOT in 2018, focusing on Wholesale-CBDC (W-CBDC). The domestic transactions run in this network.

2. LionRock network - initiated by HKMA in 2017, also focusing on W-CBDC. The domestic transactions run in this network.

3. Corridor network - initiated by both BOT and HKMA in 2019, focusing on cross-border payments. To enter the corridor network, the currency must be converted into DR (Depository Receipt) for interbank exchanges.

Let’s walk through an example.

Suppose a Thai company needs to pay 1 million HKD to an HK company.

• Step 1: The Thai company informs bank A to transfer 1 million HKD to the HK company’s account at bank Z.

• Step 2: Bank A checks if bank Z is a member of the corridor network.

• Steps 3a - 3c: If the check is positive, bank A converts 4 million THB into DR-THB. BOT node is responsible for destroying W-CBDC and issuing DR-THB. The operator node in the corridor network, which is run by both BOT and HKMA, is responsible for managing DR and monitoring transactions.

• Steps 4 and 5: Bank A needs to convert DR-THB to DR-HKD. It searches among the market makers and finds bank Y offers the best FX rate.

• Steps 6a - 6c: Now the banks settle the currency conversion: bank A receives 1 million DR-HKD from bank Y, bank Y receives 4 million DR-THB from bank A, and bank Z receives 1 million DR-HKD from bank A.

• Steps 7a - 7d: Bank Z converts 1 million DR-HKD to W-CBDC, and confirms that it has received 1 million HKD. HKMA node is responsible for destroying DR-HKD and issuing W-CBDC.

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