Executive Summary
As of early 2026, 134 countries representing 98% of global GDP are actively exploring or have launched Central Bank Digital Currencies, according to the Atlantic Council's CBDC Tracker. This represents a dramatic acceleration from just 35 countries in 2020. Yet beneath this headline consensus lies a profound coordination problem: each central bank must independently choose among competing architectural paradigms — retail versus wholesale, account-based versus token-based, permissioned versus open ledger — with limited visibility into the choices other jurisdictions will make.
Unlike the Prisoner's Dilemma that characterizes cross-border data governance (where defection is individually rational), CBDC architecture presents a coordination game: all parties genuinely prefer convergence on a common standard, but they disagree on which standard should prevail. The result is a game with multiple Nash equilibria, none of which is self-evidently focal. Without deliberate coordination mechanisms, the global monetary system risks fragmenting into incompatible digital currency blocs — a fragmentation that would undermine the very efficiency gains CBDCs promise to deliver.
This policy brief applies coordination game theory, network externalities analysis, and mechanism design to model the strategic landscape of global CBDC development. We argue that interoperability — achieved through compatibility standards rather than common platforms — represents the Pareto-dominant strategy, and we propose institutional mechanisms to facilitate convergence.
The Coordination Game Structure
The standard Prisoner's Dilemma captures situations where individual rationality leads to collective suboptimality — each player has a dominant strategy (defect) regardless of what others do. CBDC architecture decisions exhibit a fundamentally different strategic structure. No central bank wants to build a system that is incompatible with the rest of the world; the disagreement is over which compatible standard to converge upon. This is the defining feature of a coordination game.
The most precise analogy is the Battle of the Sexes game. Consider two central banks, each choosing between Architecture A (say, account-based retail CBDC with centralized ledger) and Architecture B (token-based retail CBDC with distributed ledger). Both prefer coordination to miscoordination — a world where both adopt A is better for both than a world where they adopt different architectures — but Central Bank 1 has a mild preference for A (perhaps due to existing infrastructure compatibility) while Central Bank 2 mildly prefers B. The payoff matrix illustrates the dilemma:
In this structure, there are two pure-strategy Nash equilibria — {A, A} and {B, B} — and a mixed-strategy equilibrium in which each player randomizes, producing miscoordination with positive probability. The mixed equilibrium is inefficient: expected payoffs are lower than either pure equilibrium. Without a focal point or coordination mechanism, players may become trapped in the mixed equilibrium, which in the CBDC context manifests as prolonged uncertainty, delayed deployment, and ultimately fragmented systems.
The real-world landscape maps directly onto this model. China's e-CNY represents one equilibrium candidate: a centralized, account-based, two-tier retail CBDC with extensive state oversight capabilities. The European Central Bank's digital euro project pursues a different architecture emphasizing privacy-by-design and offline functionality. The Bank of England's digital pound consultation has explored token-based models with enhanced programmability. The Federal Reserve's Project Hamilton (conducted with MIT) investigated high-throughput transaction processing architectures distinct from all three. Meanwhile, the BIS mBridge project — linking the central banks of China, Thailand, the UAE, and Hong Kong — represents a wholesale-focused, multi-CBDC platform approach.
Each of these projects constitutes a potential focal point around which global coordination could crystallize. But the multiplicity of candidates is precisely the problem: in a coordination game with multiple equilibria, the existence of several plausible focal points can prevent convergence on any single one.
Network Effects and Tipping Points
The coordination game becomes more tractable — but also more consequential — when we incorporate network effects. The seminal framework of Katz and Shapiro (1985) on network externalities demonstrates that the value of adopting a technology standard increases with the number of other adopters. Applied to CBDCs, this means that the utility a country derives from its CBDC architecture choice is not fixed but depends on how many other countries adopt compatible architectures.
Formally, let Vi(k) represent the value to country i of its CBDC when k other countries operate compatible systems. The Katz-Shapiro framework predicts that Vi(k) is convex and increasing in k: each additional compatible system adds more value than the last, because it opens not just bilateral channels but multilateral routing possibilities. This convexity implies the existence of critical mass thresholds — a minimum number of adopters k* beyond which the network becomes self-sustaining and adoption accelerates endogenously.
Historical standards competitions provide instructive analogs. The VHS/Betamax contest of the 1970s and 1980s illustrates how a technically inferior standard (VHS) can prevail through early network effects advantages — JVC's licensing strategy built a larger installed base of compatible hardware, which attracted more content providers, creating a positive feedback loop that rendered Betamax's superior image quality irrelevant. The TCP/IP protocol suite's triumph over competing network architectures (OSI, SNA, DECnet) followed a similar dynamic: early adoption by U.S. academic institutions created a critical mass that made TCP/IP the path of least resistance for subsequent adopters, ultimately establishing the universal standard for internet communications.
For CBDCs, these historical parallels carry an important implication: the first architecture to achieve critical mass among economically significant jurisdictions may lock in as the global standard, regardless of its technical merits relative to alternatives. This creates first-mover incentives that can accelerate premature commitment to suboptimal architectures — a market failure that justifies coordinated standard-setting.
The economic stakes are substantial. BIS data indicates that cross-border payment costs currently average 6.3% for remittances globally, with costs exceeding 10% for many Sub-Saharan African corridors. Much of this cost arises from the correspondent banking model's multi-hop architecture, which requires intermediary banks to maintain nostro/vostro accounts across currencies. Interoperable CBDCs could reduce these costs to under 1% by enabling direct central bank-to-central bank settlement, eliminating intermediary markups and compressing settlement times from 2–5 days to near-instantaneous. But these savings are achievable only if CBDC systems are interoperable — if they fragment into incompatible blocs, cross-border efficiency gains evaporate.
The Interoperability Trilemma
Nations designing CBDCs confront a fundamental constraint that we formalize as the Interoperability Trilemma: it is impossible to simultaneously achieve full monetary sovereignty, seamless cross-border interoperability, and independent monetary policy transmission. Any two of these three objectives can be achieved, but only at the expense of the third. This trilemma is a structural extension of the Mundell-Fleming impossible trinity (free capital flows, fixed exchange rates, and independent monetary policy) adapted to the digital currency context.
Sovereignty + Interoperability → Constrained Monetary Policy. If a nation maintains full sovereign control over its CBDC design (setting its own privacy standards, transaction limits, and programmability features) while also ensuring seamless interoperability with foreign CBDCs, it must accept that monetary policy transmission is partially determined by the interoperability protocol. Cross-border CBDC flows respond to interest rate differentials instantaneously — far faster than traditional capital flows — meaning that domestic rate changes trigger immediate capital movements that can offset the intended policy effect. This echoes the classic impossible trinity: free digital capital movement combined with a fixed interoperability protocol constrains monetary autonomy.
Sovereignty + Independent Monetary Policy → Limited Interoperability. If a nation insists on both sovereign design authority and full monetary policy independence, it must restrict cross-border CBDC flows — through capital controls embedded in the CBDC protocol, transaction speed limits, or conversion restrictions. This preserves policy space but sacrifices the efficiency gains of interoperability. China's e-CNY architecture, with its tiered wallet system and transaction monitoring capabilities, arguably reflects this choice.
Interoperability + Independent Monetary Policy → Shared Sovereignty. Achieving both seamless interoperability and independent monetary policy requires delegating certain design decisions to a supranational coordination body — effectively pooling sovereignty over technical standards, settlement protocols, and potentially exchange rate mechanisms. The eurozone's monetary union represents the extreme version of this choice; a CBDC interoperability protocol would require a more modest but still meaningful sovereignty concession.
The trilemma implies that CBDC interoperability is not merely a technical challenge but a deeply political one. Each nation's position in the trilemma reflects its geopolitical priorities, and these priorities diverge: the United States emphasizes monetary policy independence and dollar hegemony; China prioritizes sovereignty and domestic control; the European Union seeks interoperability within the Single Market while maintaining policy autonomy vis-a-vis non-EU partners. These divergent priorities map directly onto the multiple equilibria of the coordination game.
Mechanism Design for CBDC Coordination
If the uncoordinated equilibrium risks fragmentation, and the interoperability trilemma constrains the design space, what institutional mechanisms can facilitate convergence? Mechanism design theory — the branch of economics concerned with designing institutions that produce desired outcomes given participants' incentives — offers several principles.
1. Hub-and-Spoke Architecture with Compatibility Standards. The BIS Innovation Hub's Project Nexus model provides a template. Rather than requiring all CBDCs to adopt a common platform (which would demand sovereignty concessions most nations will refuse), a hub-and-spoke architecture connects heterogeneous domestic CBDC systems through a standardized interoperability layer. Each nation retains full sovereignty over its domestic CBDC design — choosing its own ledger technology, privacy model, and programmability features — while committing only to implement a common messaging and settlement protocol at the international interface. This is analogous to how the internet's TCP/IP protocol enables communication between vastly different computer systems without requiring hardware standardization.
2. ISO 20022 as a Coordination Focal Point. The global financial messaging standard ISO 20022 provides a successful precedent for standards-based coordination. By 2025, major payment systems across 70+ countries have committed to ISO 20022 adoption, including SWIFT, the Federal Reserve's FedNow, and the ECB's TARGET2. ISO 20022's success illustrates a critical mechanism design insight: coordination is easier when the standard is perceived as technically neutral — not advantaging any particular national architecture — and when it is incrementally adoptable rather than requiring wholesale system replacement. A CBDC interoperability protocol designed on these principles — specifying message formats, settlement finality conditions, and dispute resolution procedures without mandating underlying ledger technology — could serve as a focal point for convergence.
3. Graduated Commitment with Early-Mover Incentives. Drawing on the theory of coalition formation in game theory, the coordination mechanism should be designed so that early adopters capture disproportionate benefits. The BIS mBridge project demonstrates this principle: the initial participants (China, Thailand, UAE, Hong Kong) gain immediate efficiency improvements in their bilateral corridors, creating demonstrated value that attracts subsequent participants. Formally, if the benefit function is convex in coalition size, there exists a participation threshold beyond which joining becomes individually rational for all remaining players — the key is structuring early benefits to reach that threshold.
4. Dispute Resolution and Governance Framework. Coordination games are vulnerable to hold-up problems: once a standard is established, participants who invested heavily in the chosen architecture may exploit their position. A robust governance framework — specifying voting rules for standard modifications, appeal mechanisms for disputes, and exit procedures — is necessary to sustain coordination over time. The governance of the internet's core protocols through bodies like the IETF and ICANN, while imperfect, offers a model of multi-stakeholder technical governance that could be adapted for CBDC interoperability.
Quantitative Estimates
The economic case for CBDC interoperability coordination is substantial. BIS estimates that global cross-border payment volumes reach approximately $150 trillion annually, processed through a correspondent banking network that involves over 11,000 financial institutions across 200+ countries. The inefficiency of this network — characterized by multiple intermediary hops, opaque fee structures, and multi-day settlement times — imposes significant costs on the global economy.
Interoperable CBDCs could generate savings of $45–100 billion annually in correspondent banking costs alone, according to BIS and McKinsey estimates. These savings arise from three sources: elimination of nostro/vostro account liquidity requirements (estimated at $27–40 billion), compression of settlement times reducing counterparty risk costs ($10–30 billion), and disintermediation of fee-extracting correspondent banking chains ($8–30 billion).
For emerging economies, the impact extends well beyond cost savings. IMF modeling suggests that reduced remittance friction from CBDC interoperability could contribute 2–3% GDP growth in remittance-dependent economies. Remittances represent over 20% of GDP for countries including Tonga, Lebanon, Tajikistan, and Honduras; reducing transfer costs from 6.3% to under 1% directly increases the purchasing power of receiving households. The World Bank estimates that the current cost structure of remittances effectively imposes a $48 billion annual tax on migrant workers and their families.
Financial inclusion represents perhaps the most transformative potential outcome. The World Bank's Global Findex database identifies 1.4 billion adults worldwide who lack access to formal financial services. Mobile-accessible CBDCs, interoperable across borders, could provide these individuals with a direct relationship to the monetary system — bypassing the commercial banking infrastructure that has proven unable or unwilling to serve them. India's UPI system demonstrates the scale of impact: since its launch, it has brought over 300 million previously unbanked individuals into the digital payments ecosystem. An interoperable CBDC framework could replicate this effect globally.
- $150 trillion in annual cross-border payment volumes (BIS estimate)
- $45–100 billion in potential annual savings from correspondent banking disintermediation
- 2–3% GDP growth potential for remittance-dependent emerging economies (IMF modeling)
- 1.4 billion unbanked adults who could gain financial system access through mobile-accessible CBDCs
- Remittance cost reduction from 6.3% average to under 1% through direct CBDC settlement
- $48 billion annual effective tax on migrant workers eliminated through reduced transfer costs
Implications for GDEF's Finance & Economy Working Group
The coordination game analysis presented here suggests that CBDC interoperability will not emerge spontaneously from decentralized decision-making. The existence of multiple equilibria, combined with divergent national preferences shaped by the interoperability trilemma, creates a strategic environment where deliberate coordination mechanisms are necessary to achieve the Pareto-dominant outcome.
GDEF's Finance & Economy Working Group is positioned to play a catalytic role in this coordination process. Three specific functions align with the mechanism design principles identified above. First, convening multi-stakeholder dialogue between central banks, technology providers, and international financial institutions to identify technically neutral interoperability standards — addressing the focal point selection problem at the heart of the coordination game. Second, commissioning independent economic modeling to quantify the costs of fragmentation and the benefits of interoperability across different scenarios, providing the shared analytical foundation that can shift expectations toward the cooperative equilibrium. Third, facilitating pilot programs that demonstrate the feasibility and benefits of interoperable CBDC architectures, generating the early-mover evidence needed to trigger the adoption cascade predicted by network effects theory.
The window for effective coordination is narrowing. As individual CBDC projects mature from research to deployment — with the Bahamas, Jamaica, Nigeria, and China already operating live systems and the ECB, Bank of England, and Reserve Bank of India in advanced pilot stages — the cost of retrofitting interoperability onto incompatible architectures increases. The Finance & Economy Working Group's 2026 initiative on CBDC Interoperability Standards aims to convene the necessary dialogue before architectural lock-in forecloses the cooperative equilibrium.
References & Sources
- Bank for International Settlements, Annual Economic Report 2025: Chapter III — Central Bank Digital Currencies. bis.org/publ/arpdf/ar2025e.htm
- Atlantic Council, Central Bank Digital Currency Tracker. GeoEconomics Center. atlanticcouncil.org/cbdctracker
- IMF, Cross-Border Payments — A Vision for the Future. International Monetary Fund. imf.org/en/Publications/Policy-Papers
- Bank of England, The Digital Pound: A New Form of Money for Households and Businesses? Consultation Paper. bankofengland.co.uk/paper/2023/the-digital-pound
- BIS Innovation Hub, Project mBridge: Connecting Economies Through CBDC. bis.org/about/bisih/topics/cbdc/mcbdc_bridge.htm
- BIS Innovation Hub, Project Nexus: A Blueprint for Instant Cross-Border Payments. bis.org/about/bisih/topics/fmis/nexus.htm
- Katz, M.L. & Shapiro, C. (1985). "Network Externalities, Competition, and Compatibility." American Economic Review, 75(3), 424–440. jstor.org/stable/1814809
- Mundell, R.A. (1963). "Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates." Canadian Journal of Economics, 29(4), 475–485. doi.org/10.2307/139336
- World Bank, Remittance Prices Worldwide Quarterly. remittanceprices.worldbank.org
- SWIFT, ISO 20022 Programme. swift.com/standards/iso-20022