Say country A sends some billions of dollars to country B in aid or in exchange for some resource. How does the actual transfer take place? How does the wealth of country A decrease and the wealth of country B increase?
In: 472
This is a fascinating subject.
It’s a *liiiitle* more complicated than just transferring the money from one bank account to another. Instead, central banks use a network of correspondent bank accounts in different countries called *nostro* or *vostro accounts* (which are also used by large corporations when settling international deals). The particulars of these arrangements get quite technical, but basically what it means is this:
If the central bank of one country wants to make a payment to the central bank of another country, they will use their correspondent accounts held in other foreign banks to act as middlemen.
By turning the payment into a series of transfers between all these different accounts involving third-party countries, both banks can deal in their own currency. Why does it have to be so complicated I hear you ask? To simplify things massively, this is mostly due to how complicated it is to deal with a foreign bank that’s isn’t doing any business in your own country.
The series of payments will be sent through via wire transfer; a secure messaging system made specifically for financial transactions, like SWIFT, Fedwire, CIPS. These don’t process the payment itself though, it’s just the protocol carrying the information. The payment itself is done through some kind of payment platform. In Europe for example, they use a system called TARGET2.
The entire process can sometimes take up to five days, sometimes even longer. This is a pretty opaque system, making it difficult for the institutions involved to really understand exactly how and when the payment will go through or even how much it will cost in the end.
To make things faster and easier, some banks and companies are working on new ways to make international payments. They are actually exploring the possiblity of using cryptocurrency – the Utility Settlement Coin, through a financial consortium called [Fnality](https://www.fnality.org/home). Pretty interesting stuff.
^(edit: grammar.)
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