Core Focus: The legal and regulatory challenges of cross-border CBDC interoperability, including divergent AML/CFT standards, legal framework incompatibilities, data sovereignty concerns, and the need for a multicontext governance framework.

In-Depth Notes:
While technical interoperability is essential for cross-border CBDCs, it is not sufficient. The legal and regulatory challenges are often more significant than the technical ones. As the CBDC cross-border cooperation literature identifies, the key challenges include divergent AML/CFT standards, incompatible legal frameworks, data sovereignty concerns, and governance fragmentation .

Divergent AML/CFT Standards:
AML/CFT standards vary significantly across jurisdictions. A token-based CBDC system may conflict with the “travel rule” and other data-sharing requirements. The lack of uniform regulation—and the limitations of regional cooperation—impedes large-scale cross-border CBDC use. Divergent AML/CFT and identity verification standards create significant challenges for cross-border interoperability. There is no uniform AML/CFT regulatory standard for CBDCs globally, and the “travel rule” for CBDC transfers is still in development .

Legal Framework Incompatibilities:
Cross-border transactions involving CBDCs face the problem of legal conflicts, especially when the same digital currency is subject to different legal frameworks. The United States applies a combination of federal and state laws, the EU relies on the MiCA framework, and China uses a civil law system with strict capital controls. These differences complicate cross-border CBDC transactions. The transatlantic divergence in approach—the US promoting private stablecoins while the EU develops the digital euro—adds another layer of legal complexity .

Data Sovereignty and Data Flows:
CBDCs generate transactional data that is of high strategic value. A key issue is how to handle cross-border data flows while protecting citizens’ privacy and complying with data localisation requirements. The EU’s General Data Protection Regulation (GDPR) sets a high standard for data protection that conflicts with the data-sharing requirements of some cross-border payment systems. Cross-border and data-sharing regulation are critically constrained .

The Need for a Multi-Context Governance Framework:
The literature calls for a governance framework for cross-border CBDC payments based on multi-context governance and flexible regulation. This framework should be driven by multilateral consensus, feature compatible and adaptable institutional structures, and have regulatory capacity that is flexible and prudent. Such a framework would bridge the gaps in AML/CFT regulation, legal frameworks, and data protection standards, helping CBDCs achieve scale in cross-border applications .

The mBridge Governance Precedent:
Project mBridge provides a precedent for addressing governance challenges. The project’s steering committee created a bespoke governance and legal framework, including a rulebook tailored to the platform’s decentralised nature . The principle that cross-border CBDC platforms must respect every central bank’s monetary sovereignty—a principle articulated by Zhou Xiaochuan, the former governor of the PBoC—is embedded in the project’s governance framework .