As Prepared for Delivery
Good afternoon, and thank you to Harvard Law School and the Program on International Financial Systems for inviting me today.1
I’d like to contribute to today’s event by thinking about central bank digital currencies (CBDCs) in the broader context of the cross-border payments landscape.
Technological, legal, policy, and market changes make this a time of significant innovation in the payments landscape. Institutions that would not be directly involved in issuing or distributing CBDCs, including the U.S. Treasury, are busy considering the policy implications of new forms of digital money and payments.2 We are assessing the potential for new technologies to help achieve longstanding goals in cross-border payments.
Payment systems are, of course, primarily within the purview of central banks. But payment systems also have important implications for public policy issues beyond a central bank’s mandate—issues like privacy and consumer protection, national and economic security, and broad financial policy. Here, the U.S. Treasury and Administration have a complementary role to play, one which we have been pursuing under the President’s March 2022 Executive Order on Digital Assets.3 Our work has two core goals, which have particular relevance to international financial policy: To improve cross-border payments; and to ensure that new payment systems and other innovations are secure, resilient, and reflective of democratic values and core U.S. interests.
Our work in this area is ongoing. Today, I hope to cover three things: Our current view of the landscape for international payments innovation; the U.S. objectives, values, and interests most relevant to cross-border payments innovations; and Treasury’s priorities for improving cross-border payments.
Cross-border payments landscape
Cross-border payments need innovation. Cross-border payments are too often slow, expensive, opaque, and difficult to access. This is particularly true for emerging market and developing economies. Individuals may not know in advance how much a cross-border payment will cost in bank and foreign exchange fees, nor will they know how long a payment will take. Differences in messaging formats between systems may introduce errors and cause failures in the payment chain. For institutions, cross-border payments in some corridors may tie up capital as collateral against settlement risk for multiple days. And these are just some of the challenges.
The G20 recognizes these shortcomings, and in 2020, it launched the Roadmap to Enhance Cross-border Payments. The United States strongly supports the Roadmap. Work has entered a critical phase, with G20 countries and others focused on implementing practical changes to improve systems. We have made real progress, particularly in small remittances, where some measures show average cost has fallen 30% since 2011.4 But we are still well short of the G20’s goals, and we are at a critical juncture for further improvement.5 Meanwhile, no one is waiting for the U.S. Government to solve the problems. There is presently a wealth of innovation that will change the payments landscape. If the United States wants future cross-border payment systems to align with our values and interests, we need to be in the game.
Within and beyond the G20’s work, the public and private sectors have introduced a growing number of proposals to address challenges to cross-border payments. They range from incremental technology improvements to blue-sky ideas for transformational payment platforms. Many build on new technologies, like fast payment systems, distributed ledger technology (“DLT”), and asset tokenization. CBDCs are instrumental to some, but not all, of these initiatives to improve cross-border payments. As we consider the value and promise of new payment options, we should do so against the backdrop of a broad set of possible solutions that aim to address many of the same problems. We should also keep in mind the legal, regulatory, and governance challenges that drive many of the core frictions in cross-border payments, and which technology alone cannot solve.
Let’s consider these emergent solutions in more detail.
Several initiatives are already underway to upgrade legacy payment systems. “Legacy” in this context does not mean old; it means the network of existing national payment systems based on relatively mature technologies including fast payment systems, correspondent banks, and specialized financial market infrastructures (FMIs). Payment service providers, system operators, banks, and FMIs are investing in operational improvements to make their systems faster, cheaper, more transparent, more accessible, and more efficient for individual or financial sector users. For example, institutions around the world are presently at different stages of implementing the ISO 20022 messaging standard. This standard is more data-rich than its precursors and facilitates straight-through payments processing with faster messaging, lower payment failure rates, and other advantages.
Some jurisdictions with strong bilateral economic relationships are going further and interlinking their fast payment systems. India stands out as a jurisdiction advancing bilateral links between its Unified Payments Interface system (UPI) and those of other countries, including Singapore and the United Arab Emirates. A set of ASEAN countries have the greater ambition of interlinking fast payment systems multilaterally. In both contexts, the G20 Payments Roadmap has channeled efforts toward opportunities for tangible, near-term progress. One of the G20 Roadmap’s three priority action areas is “payment system interoperability and extension”—that is, facilitating better payment system connectivity and operational alignment along key corridors. When achieved, this enables the instant transfer and settlement of payments across systems. And monitoring efforts under the Roadmap show that upgrades to legacy systems, including those that predate the G20’s payments work, have already begun to deliver positive results.6
In parallel, jurisdictions are also exploring future states of money and payments, including experiments with cross-border CBDCs and DLT-based payments. In theory, new technologies in this space present the opportunity of a fresh start for payments systems, although reality may be more complex. In an idealized vision, we could use these technologies to design cross-border payment systems with all of the beneficial features of legacy systems, plus some additional features that legacy systems do not provide. These additional features might include transparency of costs and institutions in the payment chain; atomic, instantaneous settlement; and programmable payments. Together, these functionalities could help achieve our two core goals of increasing efficiency while reducing risk.
The diversity of projects reflects different strategies for realizing the potential benefits of new technologies. For example, the Bank for International Settlements has 15 ongoing or recent projects experimenting with cross-border payment solutions, of which 12 explore the uses of CBDCs. In other public-private and private-sector efforts, participants are experimenting with tokenizing their central bank reserves or bank deposits to improve cross-border settlement without the public investment a CBDC would require.
An additional, ambitious, and still mostly theoretical group of proposals concern new systems to more radically transform global payments and other transactions. In general, these proposals envision infrastructure that banks and other institutions can use to transact in digital currencies and tokenized assets, with fewer frictions than exist today. Some concepts use CBDCs, while others rely on private-sector distributed ledgers; some imagine single, shared platforms, whereas others suggest networks of ledgers. Proposals also vary in their goals. Some seek to enhance competition in payments by expanding the range of entities and jurisdictions with direct access to cross-border payments infrastructure. Other proposals seek to radically change how we engage in trade, creating platforms on which we transact between money and assets synchronously. The variety reflects the blue-sky nature of this work.
However, these novel payment proposals still face common challenges, which have little to do with technology. Cross-border payment solutions require agreement between participants about key policy issues, like terms of access, payment messaging standards, payment system liquidity and liquidity risk management, and AML/CFT and sanctions controls. Failure to address these types of issues adequately may introduce the same or similar frictions in cross-border payments as those we experience today, or it may prevent some jurisdictions from participating in new solutions. In addition, at least for some time, any new innovations will need to interact with legacy systems and should try to address the frictions and issues embedded in those systems.
In sum, we face a landscape crowded with innovative and competing visions for the future of money and payments. Governments, markets, and individuals are eager for progress. There is a sense, possibly accurate, that new tools could dramatically improve the global payments system. But to do so, the public sector needs to invest in the foundations for robust, responsible private-sector payment innovation—or we risk replicating existing frictions and losing the opportunity for meaningful progress. If we fail to act, the private sector will create solutions that may be outside our policy parameters. And if the United States and its partners do not lead in this area, then other jurisdictions will—producing systems and standards that may not align with our policy objectives or core values, like individual rights, financial stability, and the rule of law.
Policy objectives
Treasury published its report, “The Future of Money and Payments,” against this backdrop just over a year ago. This report called for a Treasury-led working group to advance work on CBDCs and the future of payments. The working group complements the independent efforts of the Federal Reserve, by considering the implications of new payments technologies for broader U.S. policy objectives. At a high level, our goal is to ensure that the future of global payments architecture reflects policy objectives and core U.S. values.
I will discuss three sets of U.S. policy objectives: First, global financial leadership and sound governance of the international monetary system; second, national security; and third, privacy, illicit finance, and financial inclusion.
First, global financial leadership. Today, the dollar facilitates international transactions in a highly liquid currency, which all else equal reduces transaction costs. Dollar-denominated assets are also a safe and liquid asset for foreign currency reserves and other stores of value. These functions rest on several structural factors, including open, deep, and liquid financial markets; institutional transparency; strong and predictable legal systems; sound macroeconomic policy; a commitment to a free-floating currency; and strong U.S. economic performance. However, if payments in U.S. dollars were to become markedly slower, costlier, or less dynamic than those in other currencies, this could diminish the dollar’s international role. We aim to ensure the dollar continues to fulfil all its functions in ways that are mutually beneficial to the United States and the rest of the world. This means considering investments in the financial infrastructure that underpins dollar transactions as well as preserving its strong institutional foundation.
The second set of policy objectives relate to national security. The United States uses sanctions and other financial measures to address threats and to deny criminals and other illicit actors access to the U.S. and international financial system. The effectiveness of these tools rests, in part, on the strength and centrality of the U.S. financial system, the international role of the dollar, and collaboration and cooperation with allies and partners implementing complementary measures. We work closely with allies and partners to ensure that global financial institutions implement strong AML/CFT measures to bring transparency to the international financial system. We are considering what actions may be needed to support the security and resilience of future payment systems while in parallel improving their speed and efficiency, such as by encouraging the implementation of standardized messaging systems.
The third set of objectives relate to privacy, illicit finance, and financial inclusion. New payment technologies will need to both protect users’ privacy and minimize the risk of illicit financial transactions. We are also evaluating how technologies may promote equity and inclusion in the delivery of payment services.
Even with the technology to improve payment systems, the greater challenge may be doing so in ways that fulfil this broad range of goals. With this in mind, I would like to highlight several axioms that Treasury believes are critical for progress, and which continue to frame our work: Reliability, optionality, a strong private sector role, and robust international standards.
First, and above all, payments innovations must not compromise the safety, security, and reliability of the payment or broader financial system. Linking payment systems, and introducing new technologies into our payments infrastructure, poses important operational risks. The process of interlinking can introduce new complexity into critical financial market infrastructure. It can, by design, disrupt important day-to-day payment processes. And it can increase coordination challenges, particularly where a strong foundation of trust, understanding, and aligned expectations—on issues like access, governance, pricing, liquidity, or credit risk—does not yet exist between payment system operators.
The newer and more complex the payment solution, the greater the vulnerabilities are likely to be. For example, financial firms’ DLT-based payment solutions are nascent and still relatively untested. They now process only a few billion dollars of transactions per day. Compare this to legacy systems, like CLS Bank, which handles almost $2 trillion of foreign exchange trades daily. 7 The U.S. and global financial system benefits from secure and resilient payments with strong cyber-security and user data protections. We should insist that new systems meet international operational and security standards long before they begin to operate.
Second, policymakers should preserve optionality for payment innovation to develop and evolve. The legacy system for international payments, in which U.S. financial institutions and the dollar play central roles, is critical to basic economic functions. We would be ill-advised to abandon this valuable infrastructure in favor of speculating on new solutions. The United States needs to balance investing in legacy systems while also experimenting with new technologies. For example, the Federal Reserve launched FedNow for instant retail payments in July this year; is planning to introduce the new ISO 20022 messaging standard in its legacy Fedwire real-time gross settlement system; and is sponsoring a range of experimentation, such as at its New York Innovation Center.
Relatedly, policymakers should continually evaluate and prioritize the cross-border payment solutions that best fit our policy objectives in each payments category. In retail payments, for example, incremental investments in existing fast payment systems may be able to deliver the same benefits as some new, less-tested technologies. In contrast, novel technologies may provide benefits for wholesale payments that are difficult to achieve in legacy systems. Each case involves trade-offs, and the costs and benefits will differ by project and by payment channel.
Next, the private sector is essential to improving cross-border payment solutions. Working within the parameters defined by public policy, private-sector initiatives have advantages with respect to incentives for continuous innovation and speed of development. Policymakers should create a sturdy enabling environment that encourages the U.S. financial sector to develop, participate in, and improve cross-border payments initiatives.
Finally, innovative payment systems are still payment systems. They will and should be subject to the same legal, regulatory, governance, security, and technical standards that apply to existing payment systems globally. Measures like the Principles for financial market infrastructures protect the safety and soundness of today’s most critical payment systems. The consistent application of these standards to new technologies across jurisdictions will reduce risks and uphold a level playing field. Consistent application of standards could also reduce payment frictions in legacy and new systems.
By extension, where standards are absent, we should look to experienced institutions for the development and promotion of fit-for-purpose international standards. These institutions include the G7, G20, and established standard-setting bodies, such as the Committee on Payments and Market Infrastructures and the Financial Action Task Force. To the degree that new standards are necessary, the United States has an interest in preserving and promoting those consistent with democratic values, including sound economic governance, financial stability, individual rights, and the rule of law. For this purpose, the United States also has an interest in engaging with the evolution of new payment systems and related technologies, regardless of the technologies we choose for our domestic payment systems.
Cross-border payment priorities
These axioms build on a common, unavoidable fact: Legal and regulatory differences don’t often yield to technological fixes. Take, for example, gaps in jurisdictions’ requirements for payments messaging and clearing formats, and for accompanying legal documentation. Meeting these requirements often takes manual intervention, which can make cross-border payments slower and more expensive. Bridging these gaps is slow, grinding, technical work, and it’s hard enough to do when the will is there. But requirements like these are also grounded in policy and political choices. Reconciling those choices between jurisdictions adds a new layer of challenge, and it’s made harder by firms, users, and systems accustomed to the status quo.
Success only comes with time, effort, and the political support and momentum to maintain both. It also requires international engagement and the coordination necessary to avoid making the rulebook even more fragmented. Treasury has a key role to play on both these fronts, and we are committed to playing it.
We are active in the Financial Stability Board’s (FSB) Cross-Border Payments Coordination Group, responsible for overseeing progress under the G20 Payments Roadmap. We participate in a number of FSB working groups to address frictions from legal and regulatory differences. And progress on payments issues remains a critical component of our bilateral and multilateral engagement—among large economies such as the G7 and among emerging markets, such as our neighbors in the Western Hemisphere.
Many areas still need work, and we are actively involved. Two current priorities relate to addressing frictions caused by: One, distinctions in the treatment of bank and non-bank payment service providers, and two, the application of different data frameworks to cross-border payments.
First, earlier work by the FSB found that, in some jurisdictions, there is inconsistent supervision between banks and non-banks providing the same payment services. Second, frictions in cross-border payments arising from fragmentation among data frameworks present constant challenges. Achieving the G20 payments targets will require more data, not less, to be shared across borders. Payments messages may require a beneficiary’s address, for example, and this can be in tension with some jurisdictions’ rules for collecting, storing, and managing user data, including to protect privacy. Data localization measure make it more it difficult for payment service providers to identify fraud and manage risks. More generally, service providers may be uncertain about how to balance their various obligations under different data frameworks.
We dedicate our resources to these efforts because we believe there is a narrow, ongoing, and important window to deliver policy solutions. There is no “clean slate” in payments, on which governments can design real-world networks seamlessly, flawlessly, and from scratch. There is only the complicated, imperfect, but essential payments architecture we have, on which almost all economic activity ultimately relies. New systems and technologies will need to enter and coexist in the context of this architecture. They will need to interact with legacy systems, and payment systems with different technical designs will still need to interoperate across borders. This is still a world where common, familiar frictions can keep us from achieving our cross-border payments goals.
To make the most of this period of innovation, we must be intentional about reducing existing frictions and avoiding new ones. Especially where payments improvements may be in tension with other policy objectives, doing so will require sustained, high-level political commitment. It will require us, and other jurisdictions, to affirm our common support for a better payment system built on an equally strong foundation. And it will require legal, regulatory, and policy frameworks to strike an appropriate balance between different, important goals, like privacy, transparency, and national security.
Treasury and the Administration have an important role to play in meeting these requirements. In the near term, we must deliver the G20’s vision of faster, cheaper, more transparent, and more accessible cross-border payments. In the longer term, we should explore more far-reaching changes to encourage responsible innovation.
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1. This event was organized by Harvard Law School and the Program on International Financial Systems.
2. U.S. Department of the Treasury, “The Future of Money and Payments: Report Pursuant to Section 4(b) of Executive Order 14067,” September 2022.
3. Executive Order No. 14067, “On Ensuring Responsible Development of Digital Assets,” March 9, 2022.
4. The World Bank, Remittance Prices Worldwide, available at http://remittanceprices.worldbank.org.
5. Financial Stability Board, “Annual Progress Report on Meeting the Targets for Cross-Border Payments: 2023 Report on Key Performance Indicators,” October 2023.
6. Financial Stability Board, “G20 Roadmap for Enhancing Cross-border Payments: Consolidated progress report for 2023,” October 2023.
7. CLS Group, “CLS FX trading activity,” February 14, 2023, https://www.cls-group.com/news/cls-fx-trading-activity-january-23/.