The Real Trouble With Cross-Border Payments

Blame governments, not technology, for costly and inefficient international payments. But private cryptocurrencies could help.

AccessTimeIconApr 6, 2021 at 3:08 p.m. UTC
Updated Sep 14, 2021 at 12:36 p.m. UTC
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No, moving money internationally cannot be as easy and fast as sending an email. Cross-border payments are usually costlier and slower than national payments not because of technological limitations, but essentially because of politics.

When it comes to technology, many central banks and commercial banks take part in real-time payments networks that work smoothly. Even in the U.S., which tends to be conservative in payments initiatives, real-time payments have become more widespread since late 2019. FedNow, to be launched by the Federal Reserve in 2023, should push the adoption of instant payments forward.

At the international level, SWIFT, a provider of messaging services used by banks when processing cross-border payments, has also been working to improve funds transfer efficiency. The technology for faster payments exists and is already in use across the world. If, however, you or your company had to send money abroad recently, you know the process is far from being completed at the click of a button.

Marcelo M. Prates, a CoinDesk columnist, is a central bank lawyer and researcher.

If technology isn’t the problem, what then? Sovereignty is to blame. With rare exceptions, having control over money is as important for a sovereign as having military might: the powers of the purse and the sword. Most countries thus choose to have their own sovereign money, issued by a local authority and holding the irrevocable power to discharge any debt inside the sovereign territory – the legal tender status.

Some countries, like Brazil, will go one step further and make it illegal to use any currency other than the sovereign one in national transactions. But even in countries where legal tender rules allow private parties to agree on their preferred form of payment, like the U.S., practicality will favor the official money. When most prices are denominated in a currency, like the euro, making payments in yens can be not only inconvenient but impossible.

An immediate solution to these problems would be to have a supranational currency for cross-border payments. Like bitcoin, for example. Bitcoin has no issuer, so it is not connected to a jurisdiction and has its own unit of account, without any reference to or backing by a sovereign currency. A bitcoin in a Japanese wallet can be transferred to a Brazilian wallet and then to an American wallet seamlessly and in no time.

With rare exceptions, having control over money is as important for a sovereign as having military might.

Do you think any country is ready to accept a supranational currency for international transactions, even if not bitcoin? Also, if we can find an international organization prepared to create a global digital currency and a couple of countries willing to use it, how could we convince the major economies, which also issue the most used currencies internationally, to play along?

The diversity of sovereign currencies and the preference, legal or practical, for the official currency in each sovereign territory are the fundamental reasons behind the perceived inefficiency of cross-border payments.

Every international payment requires at least the conversion of one sovereign currency into another, which inevitably comes with different intermediaries and multiple regulatory requirements, from anti-money laundering and know your customer rules to capital controls.

In fact, most international payments, no matter if you’re using a bank or a fintech company, will require two or more currency conversions because the dollar and an American bank will be called to facilitate the transaction. And the greater the number of currency conversions, the higher the costs involved and the slower the process.

The figure below shows what happens when a Brazilian company (IB) has to pay a Korean manufacturer (EK) for imported goods. Brazilian reais would be useless for the Korean seller, which needs wons to pay its employees and suppliers in Korea. The Brazilian importer, on the other hand, won’t find wons in Brazil, not even with the biggest local banks. The only way to make the international payment work is to engage in a foreign-exchange transaction.

The Brazilian importer will have to ask his local bank (B1) to convert reais from its checking account into wons that can be delivered to the Korean manufacturer. As monetary transactions between Brazil and Korea are infrequent, the Brazilian bank won’t have relations with a Korean bank but will probably have a correspondent bank in the U.S. that could help.

So, the Brazilian bank will receive reais from the Brazilian importer, withdraw dollars from its prefunded account ($) with the American correspondent bank (B2), and ask it to take care of sending the withdrawn amount to South Korea.

If the correspondent bank in the U.S. doesn’t have relations with any Korean bank either, it’ll have to find another American bank that does. The U.S. correspondent bank will then transfer the dollars it received from the Brazilian bank to another American bank (B3), which will finally be able to order the payment by withdrawing wons from its prefunded account ($) with a Korean correspondent bank (B4).

With some luck, the South Korean manufacturer will have a checking account with the receiving bank and will be able to avoid one more transfer, from the Korean correspondent bank to its preferred bank in Korea (B5).


So, a single payment between Brazil and Korea may end up involving two currency conversions, four bank transfers, and five banking institutions in three different countries. And I didn’t even mention that some banks in this process may need to buy foreign currency from their central bank to replenish the balance of the account they keep with the foreign correspondent bank.

Technology may help expedite these transactions, especially if payments systems in all the participating countries operate 24/7 in real-time or central bank digital currencies (CBDC) finally come on the scene. Reducing the transaction and opportunity costs associated with cross-border payments will be harder because we have 180 currencies circulating in the world, each of them subject to a host of local rules and regulations.

As a multi-government commitment to use a common currency for international transactions doesn’t seem feasible anytime soon, cross-border payments will continue to be costly, slow, and inefficient. Until a privately-issued cryptocurrency not backed by sovereign currencies gains traction – perhaps a StarbucksCoin or a MacCoin. Then it will be too late for governments to react.


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