The Driving Force of Global Local Currency Cross-Border Payments: How Real-Time Payment Networks are Reshaping Financial Infrastructure

Global financial institutions and central banks worldwide are accelerating the process of using local currencies for cross-border payments. This trend is not only a result of technological progress but also a strategic move by countries seeking to reduce transaction costs, limit exposure to major currency fluctuations, and decrease reliance on a few dominant currencies. With innovations in payment and settlement technologies, including the application of artificial intelligence, this trend is profoundly reshaping the "pipeline" of global financial infrastructure.

Industry Background: Drivers of Local Currency Payments \[Digital Payments, Banking Innovation, Cross-Border Payments, Open Banking, Real-Time Payments, Payment Infrastructure, AI in Finance, Financial Regulation

Since 2023, countries have made significant progress in adopting cross-border payments in local currencies. The core driving force behind this trend is the desire to reduce transaction costs, avoid foreign exchange volatility risks, and alleviate the systemic vulnerability brought about by dependence on a few dominant currencies. This demand is accelerating the implementation of fintech innovation in the payments sector.

Current Development: Modernizing the Financial "Pipeline"

The key infrastructure required to enable local currency cross-border payments is being deployed globally in several ways:

1. Proliferation of Real-Time Payment Systems (IPS)

Instant Payment Systems (IPS) are the foundation for enabling local currency cross-border payments. These systems provide real-time or near real-time settlement capabilities and typically follow the ISO 20022 standard for interbank messaging. The G20 cross-border payment roadmap is aligned with these efforts, aiming to achieve its goals by 2027.

It is noteworthy that over a hundred countries have begun developing fast payment systems for retail transactions, especially after the COVID-19 pandemic. At the wholesale level, many countries are adopting hybrid systems; for example, the UK, Singapore, and South Africa rely on deferred net settlement (DNS) to save bank liquidity, while other countries use a hybrid model of real-time gross settlement and DNS. The scale of real-time payments is projected to grow from 16% in 2023 to 22% in 2028.

2. Construction of Regional Payment Platforms

To connect different national networks, countries are exploring the construction of bilateral or multilateral payment platforms. If these IPS adhere to the ISO 20022 standard, they can exchange financial information, thereby supporting local currency cross-border payments and enabling direct real-time currency exchange through recognized foreign exchange providers.

At the multilateral level, the Bank for International Settlements (BIS) is collaborating with central banks such as India, Malaysia, Singapore, Thailand, the Philippines, and Indonesia (observer) to develop Nexus, a central settlement hub designed to connect national IPS. It offers automated, competitive real-time foreign exchange quoting, conversion, and settlement functions to enable instant cross-border payments in local currencies.At the multilateral level, the Bank for International Settlements (BIS) is collaborating with central banks such as those of India, Malaysia, Singapore, Thailand, the Philippines, and Indonesia (observer) to develop Nexus, a central settlement hub designed to connect national Payment Systems (IPS). It offers automated, competitive real-time foreign exchange quoting, conversion, and settlement functions to enable instant cross-border payments in local currencies.

Furthermore, China has promoted international settlements denominated in RMB through its Cross-Border Interbank Payment System (CIPS), which connects 190 countries with daily transaction volumes exceeding 1.22 trillion RMB, equivalent to about $179.7 billion. This indicates the growing scale of cross-border use of specific national currencies.

3. Regional Cooperation and Innovation

At the regional level, ASEAN in Asia is accelerating frameworks for local currency transactions, including cross-border QR code interoperability, allowing consumers to transact in their respective local currencies among participating countries. Additionally, Brazil's Pix system and the promotion of Pix in Argentina and Uruguay demonstrate how fintech companies can leverage local innovation to build cross-border real-time payment chains.

Impact on the Financial System: Reshaping Efficiency and Competition

The widespread adoption of cross-border payments in local currencies has a profound impact on the global financial system, primarily manifested in the following aspects:

Enhancement of Payment Efficiency

The deployment of real-time payment systems (IPS) significantly reduces foreign exchange settlement risk, thereby lowering the need for hedging and easing reliance on liquid foreign exchange markets. This accelerates the settlement speed of cross-border transactions, substantially improving payment efficiency.

Expansion of Financial Inclusion

By allowing transactions in local currencies, this model provides a pathway for developing economies and emerging markets to bypass the traditional dollar-dominated system, enhancing the potential for financial inclusion and lowering the barrier to accessing financial services.

Intensification of Banking Competition

The standardization and interconnection of payment infrastructure will spur more intense competition among banks and fintech companies in local payment solutions, exchange rate services, and customer experience. The banking sector needs to invest in technological integration to keep pace with this rapid evolution.

Optimization of Cross-Border Payment Risk Management

The real-time settlement mechanism shifts risk management from traditional periodic hedging to more granular, real-time monitoring. Although this changes the nature of risk, it also poses new requirements for regulators regarding how to oversee these fast-paced, localized transaction flows.

Challenges: Data Governance and Regulatory Coordination

Despite significant technological advancements, the promotion of cross-border payments in local currencies still faces several challenges:

Data Privacy and Security

As payment networks become increasingly interconnected, the challenges of data governance and cross-border data privacy become more prominent. Ensuring the security and compliance of payment data across jurisdictions is a priority that must be addressed during the technological adoption process.

Complexity of Technological Integration### Complexity of Technical Integration

How to seamlessly link IPS systems across different countries and regions and achieve full interoperability with the ISO 20022 standard remains a huge technical integration challenge. The lack of unified interfaces and standards may still lead to fragmentation.

Regulatory Uncertainty

Despite technological innovation, friction remains in the coordination of financial regulation among countries. Balancing the convenience of local currency payments with the stability of the global financial system, as well as Anti-Money Laundering (AML) and sanctions compliance requirements, is a major challenge for regulators.

Future Outlook: CBDC and Localized Ecosystems

In the next three to five years, the trend of cross-border payments in local currencies will become clearer. The research and development of Central Bank Digital Currencies (CBDCs) will be a key driving force. Some countries, such as the BRICS nations, have already linked national IPS and CBDCs as platforms to build an ambitious blueprint aimed at promoting cross-border payments in local currencies, such as Project mBridge.

We anticipate that cross-border payments in local currencies will lead to a more fragmented global payment landscape, but this fragmentation does not mean the US dollar will be completely replaced. Instead, it may prompt the US dollar to adjust its role in reserve assets and international lending, while local currencies take on a more important position in daily trade and regional settlements. Ultimately, a successful local currency payment ecosystem will depend on technological standardization for interconnection and the gradual coordination of global regulatory frameworks.