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How DLT, APIs, and CBDCs are Changing Cross-Border Payments

May 6, 2024

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DLT, APIs, and CBDCs in Cross Border Payments

DLT-powered CBDCs are set to redefine cross-border payments. Learn how cutting-edge APIs can empower FinTechs to optimize on this opportunity.

The global economic landscape has witnessed an increase in the transfer of goods, capital, and services across borders, owing to an increase in globalization and the digital revolution. This has also positively affected the volume and frequency of international payments. Remote work, and increased movement of individuals across borders for work add to the need of cross-border money movement.

The buzz around CBDCs and the underlying DLT framework highlight that the cross-border payments sector has reached an inflection point. This blog takes a deep dive into what makes CBDCs and DLTs crucial to the future of digital payments and the role of APIs in facilitating the same.

DLT Simplified

Digital ledger technology (DLT) is a record keeping system for the transaction of digital assets. It enables multi-party access and validation through a distributed network. Every node in the network has a copy of the complete ledger and any updates at an endpoint are sent to every other node automatically to maintain the integrity of the transaction recording system. DLT offers a streamlined mechanism to validate financial transactions through the consensus of nodes on the network.

The enterprise-grade DLT market is forecasted to expand to $38.8 million by 2032, expanding at a CAGR of 26.7% between 2023 and the end of the forecast period.

How DLT Transforms Cross-Border Payments

  • Decentralized validation brings down transaction settlement times from days to minutes.
  • Encryption-based security prevents unauthorized access to or modification of the ledger.
  • Intermediaries are eliminated, which lowers transaction costs.
  • DLTs have the potential to improve the accessibility of capital to the underserved, promoting financial inclusion.
  • The technology embeds transparency into the transaction recording and validation processes, allowing all parties to view and verify transactions.

Decoding Central Bank Digital Currencies (CBDCs)

Fiat currencies take a digital form in CBDCs, issued and regulated by central banks. CBDCs are one of the most popular applications of DLT. Their benefits include ensuring settlement finality, liquidity, and integrity of digital fund transfers, just like cash, while eliminating production and distribution costs.

“A central bank digital currency (CBDC) could well incorporate options and features specifically designed to execute cross-border payments, with a view to reducing the inefficiencies and rents… by shortening the payments value chain.”

The World Bank

Here’s what else CBDCs offer:

Consolidation of the Financial Space: CBDCs will eliminate long transaction chains and address the fragmented nature of the current financial ecosystem. Removal of intermediaries and the use of truncated data formats, through standardized mechanisms, will defragment the global financial space and enable seamless money movement.

Enhanced Safety in the Capital Markets: CBDCs in cross-border payments will enable individuals and businesses to buffer economic shocks and stimulate growth. The markets will also offer greater investment and risk-sharing opportunities by mitigating cross-currency risks. Moreover, with CBDCs, compliance will be a part of the currency design, making it simpler for FIs to adhere to regulations.

Better Capital Flow Management: The programmability of CBDCs will enable central banks to limit supply. This will make capital flow management more efficient and automated, improve the compatibility of currencies at a technical level, and simplify their usage in global trade.

Facilitate Direct Participation: Reduced cost and scalability, leveraging network economies, will make cross-border payments more accessible. CBDCs will allow PSPs to manage their own liquidity, while eliminating infrastructure requirements. This, in turn, will lower entry barriers to smaller and medium-sized participants in the global markets.

Innovation Opportunities: CBDCs will enable FIs to offer novel products and services without geographical boundaries, leveraging cutting-edge technologies. However, they will have to prioritize regulatory compliance across international borders to capitalize on market opportunities.

APIs Will be Instrumental in CBDC Implementation and Use

APIs are the key to innovation across the digital arena. FinTechs, being early adopters of new technology, are among the sectors that benefit the most. APIs enable interoperability of disparate systems. This translates into seamless integration, real-time operations, and compliance, which form the cornerstones of success in the evolving digital payments space.

How APIs Simplify Cross-Border Transactions

  • Seamless interconnection of payments networks, using APIs, facilitates real-time currency exchange and transaction settlement.
  • APIs facilitate data aggregation, enabling expedited decision-making, and automation. This eases multi-currency management for global businesses.
  • APIs are highly adaptable and customizable, encouraging innovation and fostering greater interoperability. They instill agility in technological frameworks, making them flexible, extendible, and scalable.
  • By integrating KYC and FX services, APIs simplify currency conversion and user verification, instilling greater reliability and security in the underlying DLT-based architecture.

What Does this Mean for Banks, Credit Unions, and PSPs?

The cross-border payment ecosystem is well on its way to becoming open, connected, and seamless. While CBDCs leverage DLT to enable frictionless international payments, APIs are the tools that foster interoperability and interconnectivity within DLTs.

The total value of cross-border payments is forecasted to reach $290.2 trillion by 2030. 

As the payments landscape evolves, banks, credit unions, and other payment enablers must keep pace with the change to remain relevant and stay ahead of the curve by regularly adding novel products and services to their offerings.  Optimal technology utilization and experience can help FIs position themselves as pioneers in the emerging international payments space. With 26+ years of experience in the money movement space, Opus Technologies has deep experience with payment enablement, technology modernization, and digital innovation. Speak to our experts to build an edge over the competition in the payments landscape.

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