Will Central Bank Digital Currencies Revolutionize Global Finance?

In late January, the Trump administration released an executive order banning “any action to establish, issue, or promote CBDCs within the jurisdiction of the United States or abroad,” citing issues with privacy, stability of the financial system, and even the sovereignty of the United States. Supporters of the order say that CBDCs are a “tool for tyrants to intimidate, control, and surveil the activities of American citizens,” while others note that this move “hammers a final nail into the coffin of a U.S. central bank digital currency.” So, what are CBDCs?

Central bank digital currencies (CBDCs) have been heralded as a game-changing development in the realm of international finance and security, promising to reshape cross-border payments and potentially challenge the dominance of traditional systems like SWIFT (Society for Worldwide Interbank Financial Telecommunications). Proponents argue that CBDCs, particularly those being developed by Russia and China, will usher in a new era of financial sovereignty and alternative payment routes. Yet a closer examination of these CBDC pilot programs reveals that their impact may be underwhelming in certain areas and troublesome in others.

This article critically assesses the purported advantages of CBDCs over the traditional SWIFT system from an international security perspective. An examination of the current state of cross-border payments, the promises and realities of CBDCs, and the ongoing adaptations of SWIFT shows that the existing infrastructure—when coupled with recent technological advancements—may already address many of the challenges that CBDCs aim to solve.

The development of CBDCs raises several international security implications: first, the purported speed advantage that CBDCs have over the SWIFT system; second, the potential for sanctions evasion and the creation of alternative financial systems; and third, the potential for CBDCs to improve financial access for communities without fully developed banking relationships.

Speed

One of the key reasons why CBDCs are said to be superior to the traditional SWIFT system is because of their purported speed advantage. CBDCs would theoretically enable inexpensive, almost instantaneous settlement of both cross-border and domestic payments, reducing the risk of settlement delays, and improving the user experience. They could facilitate peer-to-peer transactions directly, decreasing the need for intermediaries and thereby the cost of fees associated with traditional cross-border payments. Projects like mBridge are being implemented to connect different CBDCs together, enabling efficient cross-border transactions and direct bank-to-bank coordination without relying on third-party payment networks like SWIFT.

The SWIFT network is generally considered slower than CBDCs. Traditional SWIFT payments typically take one to four business days to settle for several reasons. These include processing delays due to time zone differences, the involvement of intermediary banks, and the need for settlement through Nostro accounts (home bank accounts operating in a foreign country and making cross-border payments in the foreign country’s currency) and Vostro accounts (foreign bank accounts operating in a home country and receiving cross-border payments in the home currency). Additionally, SWIFT payments can only occur during foreign exchange market hours, which further delays processing, especially for payments sent late at night or during weekends. Perhaps most important, SWIFT transactions all go through anti-money laundering (AML) and know-your-customer (KYC) compliance checks; if multiple transactions are made at once, a large sum of money is requested, or a transaction appears suspicious, a transaction request may be flagged for human review, requiring more time.

Yet the speed advantage of CBDCs rests on the assumption that all countries operating with a specific CBDC will conduct cross-border payments on the same ledger. This means that all transactions would have to be processed on a single, shared digital record where all transactions are stored and updated in real-time, ensuring that all entities see the same information simultaneously. For example, real-time cross-border payments between China and Brazil using the digital yuan would be possible only if Brazil were open to operating on the same ledger as the digital yuan. Attempting to create a CBDC that has the same reach as SWIFT with the hypothetical speed of direct settlement would require all participating countries to use the same ledger, which is prohibitively difficult at present because of incompatible technical infrastructures, divergent regulatory frameworks, and sovereignty concerns.

Most CBDC projects—like China’s digital yuan or the European Central Bank’s digital euro—are built on distinct distributed ledger technologies or centralized systems tailored to domestic priorities. For instance, SWIFT’s experiments revealed that bridging Corda and Quorum blockchains for cross-border CBDC transactions required extensive customization. Regulatory fragmentation further complicates interoperability, as jurisdictions like the EU and Saudi Arabia impose conflicting rules on data privacy, AML controls, and access to central bank accounts. Even if technical hurdles were overcome, nations are unlikely to cede oversight of monetary systems to a shared ledger, fearing loss of control over monetary policy and financial stability.

Marc Recker, global head of product, institutional cash management at Deutsche Bank, noted—in reference to CBDC global integration—that “[e]ven with a more mid-term view it’s unrealistic that we can achieve it. Just looking at it from a geopolitical perspective alone, there would need to be a huge degree of consensus across central banks and industry bodies to eliminate the current inefficiencies in cross-border payments.”

While initiatives like Project mBridge, Project Jura, and Project Dunbar have made significant headway in establishing exchange platforms that serve multiple CBDCs—with mBridge reaching the minimum product viability stage—these projects would allow CBDC interoperability for only a few countries. Project mBridge would connect China, Hong Kong, Thailand, the United Arab Emirates, and Saudi Arabia; Project Jura would service France and Switzerland; and Project Dunbar would involve Australia, Malaysia, Singapore, and South Africa. Challenging the traditional SWIFT model, which relies on intermediary banks, would necessitate that these CBDC projects either achieve interoperability with a broader range of countries or develop a direct connection with the SWIFT system. The latter would require significant innovation, particularly in creating application programming interfaces (APIs) that enable seamless interaction between CBDCs and the SWIFT network. At the current rate, this level of innovation is unlikely to occur in the next decade.

Furthermore, despite claims of CBDCs outpacing traditional SWIFT platforms, there have been significant improvements in the efficiency of SWIFT payment settlement processes in the past seven years that level the playing field. SWIFT GPI (Global Payments Innovation) has significantly addressed the speed issue in cross-border payments, transforming the landscape of international transactions since its launch in 2017. Last October, SWIFT announced that “90% of cross-border payments sent over the SWIFT network reach the destination bank within an hour, well ahead of the G20’s target of 75% reaching the end customer’s account by 2027.” Furthermore, 35% of payments are processed in less than 30 minutes. This dramatic improvement is achieved through several key features: real-time tracking of payments using a Unique End-to-End Transaction Reference (UETR), enhanced communication between banks, and the implementation of service level agreements requiring same-day use of funds. SWIFT GPI also combines domestic real-time payment networks to deliver cross-border payments almost instantly, bypassing the restrictions of bank operating hours. Additionally, the system’s prevalidation feature reduces the likelihood of transaction failures, further speeding up the process.

Even accepting the claims of SWIFT’s slower transaction speeds would not necessarily make CBDCs a more attractive alternative to the international banking system. In fact, lag time in the SWIFT system between and within intermediary banks might be a feature rather than a bug. As a prominent example, look no further than the Bangladeshi central bank. In 2016, the central bank of Bangladesh lost $81 million to a group of hackers later tied to the Lazarus Group operating at the hand of North Korea. These hackers used malware disguised as a job application to gain access to the bank’s servers and establish a backdoor to its system, which they would later use to carry out the heist. Once inside, the hackers sent 35 fraudulent requests to the New York Federal Reserve to transfer $951 million to four different accounts routed and laundered through casinos in the Philippines.

These hackers exploited numerous weaknesses to evade detection. First, the Philippines did not have tight AML scrutiny in 2016, allowing the hackers to successfully clean the stolen funds through high-roller Baccarat games. Second, the hackers were able to buy themselves three days without being discovered by capitalizing on time zone differences between Bangladesh and New York, as well as the Lunar New Year in the Philippines, when they knew the bank would be closed and unmonitored by its employees. It was only due to human intervention that more money was not lost: Misspellings in the transfer requests led one of the routing banks, Deutsche Bank, to stop the transaction; a high volume of transfer requests to private entities was flagged by the Fed as suspicious activity.

There are countless other instances in which attempted schemes were foiled or mitigated due to the settlement times of SWIFT. One can only imagine how much money would have been lost because banks were heisted before they even knew they were being robbed. The lesson of the story is that speed is not always an inherent good. While quick transfers without tedious delays would be ideal in a world in which illicit financing and theft were nonexistent, until the technology of CBDCs allows near-perfect gut checks of funding requests, central banks would be wise not to fully transition to them.

Sanctions Evasion

CBDCs developed by countries like Russia and China also have the potential to alter the landscape of international sanctions, but the extent of CBDCs’ efficacy in avoiding these sanctions is limited by global infrastructure. CBDCs could provide an alternative to the SWIFT global payments system, from which much of Russia’s banking system was disconnected in 2022. They could potentially facilitate cross-border payments without using traditional Western-controlled financial infrastructure. Technically, CBDCs could enable foreign companies to exchange directly with their Russian counterparts, bypassing commercial banks at the forefront of enforcing Western sanctions.

Russian lawmaker Anatoly Aksakov—who is a co-author on a new law allowing for the development and implementation of a digital ruble—claimed, “We will be able to use this technology … to carry out settlements with foreign countries and foreign companies. Thus, it will be very difficult for our enemies, including the United States, to influence our financial activities. It’s a big step forward, both in terms of payments and as an opportunity to protect ourselves from sanctions.” The advent of CBDCs by countries like Russia and China may pave the way for the creation of alternative payment systems, which would weaken the effectiveness of sanctions relying on the dominance of traditional financial networks. In a world in which projects like mBridge, Jura, and Dunbar succeed in launching a platform that allows for interoperability of many different CBDCs, the threat that CBDCs pose in allowing countries to evade sanctions would be heightened, as these platforms could potentially enable countries to bypass traditional financial systems and sanctions regimes by creating alternative networks for cross-border transactions.

However, as of now, using CBDCs for the purpose of evading sanctions is far from simple. Again, the success of CBDCs eliminating intermediary banks relies on the assumption that every nation involved in cross-national payment shares the same ledger or that there is a working platform that allows for global CBDC interoperability. For instance, if China needed to transfer funds to Russia, it would probably rely on its Cross-Border Interbank Payment System (CIPS) in order to eschew secondary sanctions rather than risk using CBDCs to deal with sanctioned Russian entities. Reports in the Asia Times suggest that Russia is already taking advantage of the CIPS, detailing how Russia could use it to “survive the recent round of sanctions imposed by the West over the Ukraine issue as it was not holding a lot of U.S. dollar assets, but mainly gold, oil and foreign currency.” Additionally, China could transfer money to a nonsanctioned entity in Russia, which could then transfer that money to the sanctioned recipient.

Moreover, there are significant limitations on CBDCs’ potential to circumvent sanctions. Currently, there is no fully operational, cross-border, central bank-to-central bank infrastructure for transferring money outside of the scrutiny of international sanctions checkers. Establishment of such a system would imply the creation of sophisticated and detailed bilateral agreements and technology sharing between central banks, which could take years to arrange. Furthermore, CBDCs’ ability to evade sanctions depends on the desirability of the underlying currency. For instance, the Russian ruble’s slump in international markets limits the potential of a digital ruble to circumvent sanctions.

Finally, as CBDCs gain popularity, sanctions regimes could evolve to target CBDC-related activities. The U.S. Office of Foreign Assets Control (OFAC) has already sanctioned crypto exchanges and developers of digital financial asset platforms. The technology required to make a CBDC the tool of choice for sanctions evasion is simply too far off to pose an immediate threat to the SWIFT infrastructure.

Financial Access

One area in which CBDCs show considerable promise is increasing financial access for people in underbanked areas. Countries like Nigeria, the Bahamas, Brazil, and Mexico have communities in regions that cannot take full advantage of retail banks and the freedom of financial transactions that come along with them, such as secure savings options, affordable credit, and efficient cross-border remittances, thereby limiting their economic opportunities and financial stability. CBDCs offer a potential solution.

First, CBDCs theoretically eliminate the need for intermediary banks, reducing the fees associated with the traditional banking system: maintenance fees, transaction fees, and withdrawal fees. They could also help connect countries to a more global financial system without the need for a strong network of preexisting central bank-to-central bank relationships. Second, CBDCs do not require the physical infrastructure of banks to reach people in remote or underserved areas where traditional banking services are scarce or nonexistent; rather, they rely on the convenience of smartphones, which are becoming vastly more common even among the most rural populations.

Currently, three CBDCs have been launched in Nigeria, the Bahamas, and Jamaica. In October 2020, the SandDollar CBDC from the Bahamas was the first CBDC to be launched. Unlike typical cryptocurrency, the SandDollar is backed by foreign reserves. As the SandDollar uses a blockchain-based platform, each transaction can be traced and verified, and the system has robust AML and KYC compliance checks. Currently, about 25 percent of the Bahamian population uses the SandDollar, and it is only projected to grow as new versions improve convenience.

As another example, the Nigerian eNaira launched in 2021, and like the SandDollar, its value is connected to the Nigerian naira. One of its key benefits is allowing people who do not have active bank accounts to make financial transactions through their smartphones. With 38 million people and 36 percent of the adult population of Nigeria not having bank accounts, the eNaira offers a streamlined alternative to financial transactions and the distribution of social benefits. It has also lowered remittance transfer costs, which usually range from 1 percent to 5 percent of the transaction value. Finally, as Nigeria relies on a large informal economy, the eNaira has helped to simplify domestic transactions from wallet to wallet. As a bonus, the eNaira is account based, which means that transactions are traceable, adding a degree of transparency and accountability to its informal economy.

It is important to note, however, that the eNaira is the only CBDC that has engaged in cross-border transactions for remittances. The three CBDCs that have launched are retail CBDCs, so they are meant primarily for domestic transactions. Currently, the ledger technologies enabling CBDC interoperability, such as mBridge, are still in development. As a result, the primary benefits of CBDCs continue to focus on enhancing financial access within a country’s borders, rather than facilitating international transactions. While CBDCs offer significant advantages in domestic financial inclusion, their potential for cross-border transactions remains limited until these interoperability solutions are fully developed and implemented.

Recommendations

Although CBDCs are an emerging technology with potential international security implications, their impact on the traditional financial system is likely to be evolutionary rather than revolutionary. Moreover, the introduction of CBDCs is most likely to occur initially for domestic transactions as opposed to cross-border transactions. Although belligerent parties may attempt to leverage CBDCs, these digital currencies are not poised to completely upend existing financial structures. In addition, the large-scale rollout and adoption of CBDCs in key economies is not likely to materialize over the next 10 years, considering the intricate technical, regulatory, and policy hurdles. The main thing that ongoing CBDC development can do is spur innovation in bankroll payments and financial transactions. There are numerous ways that SWIFT and the conventional banking system can innovate to mitigate the potential threats of CBDC development:

1. Continue to develop existing transaction systems like SWIFT to compete with the speed and convenience of CBDCs (for example, SWIFT GPI). Embedding KYC or AML compliance checks into the metadata of transaction requests and reducing the number of intermediary banks involved in cross-border transactions are two ways in which SWIFT could improve the speed of its transactions. SWIFT has also been experimenting with distributed ledger technology to improve the efficiency and traceability of its transactions. Further investment into this technology could be beneficial.
2. Cultivate financial allies and partners by expanding financial access to underbanked communities, especially Global South countries that China and Russia are trying to win over, and those in the process of developing CBDCs of their own. The success of an adversary’s CBDC will depend on it creating a network of CBDCs that embrace its ledger or interoperability project. Without nations that display confidence in the CBDC itself, countries like Russia and China cannot subvert the existing, dollar-dominant financial system. It is in Washington’s best interest to project U.S. economic statecraft and diplomacy in this ongoing financial tug-of-war for hearts and minds in countries that have strong diplomatic ties with both the U.S. and its competitors.
3. Continue to strengthen global confidence and valuation of the U.S. dollar. Regardless of how established a CBDC is, it must anchor itself to the value of its respective currency. Whether the U.S. develops a CBDC of its own or not, the strength of the U.S. dollar will either help to boost the stability of an American CBDC or effectively compete against foreign CBDCs without having one of its own.
4. Consider CBDC alternatives. Recent developments in asset tokenization show that investment in stablecoins may be the more strategic decision. Unlike CBDCs, stablecoins are issued by private companies and commercial banks and are a form of decentralized finance (DeFi). Recent legislation, such as the STABLE Act and the GENIUS Act, is already making strides in establishing a regulatory framework within which stablecoins could operate responsibly. Provisions include federal licensing oversight requirements, reserve requirements that mandate complete backing by U.S. Treasury assets or cash equivalents, AML and counter-terrorist financing (CTF) compliance checks, and consumer protections.
5. Emphasize private-sector innovation. There are several reasons why this is an advantage from the U.S. perspective. First, the private sector is able to innovate faster than government-led initiatives. It is thus able to respond more quickly to market needs and consumer concerns, as well as stay ahead of foreign breakthroughs in digital currency technology. Second, private enterprises would be more cost efficient, as market competition would push companies to lower transaction costs and expand financial access. Finally, private-sector inclusion in issuing digital currencies like stablecoins would allay fears of government overreach and privacy concerns involving the anonymity of financial transactions.

While CBDCs could represent a significant development in the global financial landscape in the distant future, their effect on security and international finance may turn out to be less revolutionary than many predict. The purported advantages of CBDCs, such as transaction speed and sanctions evasion, are tempered by ongoing development in existing systems like SWIFT GPI and by the realities of international cooperation. In addition, the potential for countering U.S. dollar dominance is limited by broader geopolitical and economic factors.

In a broad sense, Trump’s executive order is not a wholly bad decision. It promotes private-sector innovation into other forms of digital currencies and stablecoins, which is a much more viable option than developing a CDBC, both in a wholesale or retail format. It also indirectly maintains the stability of the conventional banking system by preventing a potential shift away from traditional banks. The U.S. relies heavily on these banks and holds a dominant position in the global banking sector. By refraining from  CBDC development, the U.S. avoids disrupting this established financial infrastructure, which is crucial for maintaining economic stability and preserving its global financial leadership.

However, other parts of the order, particularly the termination of any “ongoing plans or initiatives at any agency related to the creation of a CBDC,” may represent an excessively blunt approach. Feasibility studies and research into the theoretical implementation of a CBDC are still important for the prospects of CBDC development, even if its adoption seems distant or far-fetched. The reality is that CBDCs are being developed and tested in pilot projects globally, including in countries where it may not align with U.S. interests to have a similar system. This development is happening regardless of the U.S. stance on CBDCs. The U.S. cannot afford to fall behind; assuming that CBDCs will not gain a significant global foothold is not sufficient reason to halt research into them. Ultimately, the success of CBDCs and other digital currencies will depend on striking a delicate balance between innovation and regulation so that these new financial instruments benefit the global financial system without risking international security.