Why Interoperability Is the Make-or-Break Regulatory Challenge for CBDCs

Led by the BIS and central banks like Hong Kong and Thailand, this experiment proves wholesale CBDC interoperability is technically possible but politically constrained. It's a blueprint for a regulated, permissioned network of central bank nodes.

• Key Benefit: Enables real-time, PvP foreign exchange transactions between jurisdictions.
• Key Benefit: Demonstrates governance models for multi-central-bank ledgers, a prerequisite for adoption.

A BIS experiment using automated market makers (AMMs) and wrapped CBDCs on a public testnet. It highlights that technical interoperability via smart contracts is solved; the hard part is the legal framework for cross-jurisdictional stablecoin issuance.

• Key Benefit: Proves programmability and composability of CBDCs with DeFi primitives like Uniswap.
• Key Benefit: Exposes the critical gap: who legally backs a wCBDC on a foreign chain?

Current cross-border payments rely on a web of nostro/vostro accounts. CBDCs could dismantle this but require new legal entity structures for intermediaries. The challenge isn't messaging (see ISO 20022) but establishing digital legal liability across borders.

• Key Benefit: Potential to eliminate pre-funded accounts, freeing ~$10B+ in trapped liquidity.
• Key Benefit: Forces a long-overdue modernization of international financial law to handle digital bearer instruments.

The core regulatory tension. Seamless interoperability, as seen in public blockchains with bridges like LayerZero or Axelar, risks policy spillover and loss of control. Regulators fear a "digital dollarization" scenario where foreign CBDCs circulate domestically.

• Key Benefit: Clear articulation of the trade-off: efficiency gains vs. control over monetary policy and capital flows.
• Key Benefit: Frames the debate, pushing solutions toward regulated gateways and identity-linked wallets (e.g., ECB's digital euro model).

National CBDCs risk creating fragmented liquidity pools that contradict the global nature of finance. A US CBDC user cannot natively pay a Eurozone CBDC merchant without a costly, slow correspondent bank. This defeats the purpose of a digital currency.

• Capital Inefficiency: Trapped liquidity reduces utility and adoption.
• Compliance Nightmare: Each bilateral bridge requires its own KYC/AML stack.
• Fragmentation: Echoes the pre-SWIFT era, but with digital rails.

Adopt a hub-and-spoke model using interoperability protocols like LayerZero or Axelar as the neutral settlement layer. This creates a single compliance and technical standard for cross-CBDC transactions, moving beyond bespoke bilateral treaties.

• Atomic Settlement: Finalize cross-border payments in ~2-5 seconds, eliminating Herstatt risk.
• Unified Compliance: Embed regulatory logic (e.g., travel rules) at the protocol layer.
• Developer Access: Enables a global ecosystem of cross-border DeFi and trade finance apps.

Projects like UniswapX, CowSwap, and Across have solved for optimal cross-chain value transfer using intents and solver networks. A CBDC network must adopt similar intent-based routing to find the most efficient, compliant path for value, not just the technical one.

• Optimized Execution: Automatically routes via jurisdictions with the best liquidity and lowest fees.
• User Abstraction: Citizens experience a seamless payment; the complexity is handled by the network.
• Proven Model: Solves the liquidity fragmentation problem that plagues current DeFi bridges.

Interoperability cannot mean ceding monetary sovereignty. The technical architecture must enforce policy-based firewalls where a central bank can programmatically restrict flows (e.g., large capital outflows) without breaking the network. Privacy techniques like zero-knowledge proofs are essential.

• Policy as Code: Granular, reversible controls at the smart contract level.
• Data Minimization: Transaction metadata stays within sovereign jurisdictions.
• Auditability: Full transparency for regulators, privacy for citizens—a dual-layer model.

The regulatory path is clearer for wholesale CBDC interoperability between central banks. Starting here de-risks the technical and policy framework before exposing retail users. The Bank for International Settlements' (BIS) Project mBridge is the canonical testbed.

• Lower Stakes: Limits systemic risk during the testing phase.
• Institutional Trust: Builds confidence among regulators and legacy banks.
• Provenance Trail: Creates a clear audit trail for high-value, cross-border settlements.

Designing a CBDC as a closed-loop payment system is a strategic error. The end-state is a composable global monetary network where CBDCs, stablecoins, and tokenized assets interact seamlessly. Regulators must architect for this reality from day one or cede the future to private networks.

• Future-Proofing: Ensures CBDCs remain the dominant anchor asset in the digital economy.
• Innovation Surface: Enables native integration with tokenized bonds, trade finance, and more.
• Strategic Dominance: The alternative is a fragmented system where private stablecoins (e.g., USDC) become the de facto cross-border standard.