For central bank digital currencies (CBDCs), time is of the essence. Literally.
Just a few weeks after the Bank of International Settlements (BIS) urged central banks to get on board with CBDCs or risk being marginalized by stablecoins, the BIS has announced that CBDCs can save time in cross-border transaction settlements.
The BIS said in a report this week that it has conducted a series of tests for cross-border transactions involving four central banks, leveraging blockchain to settle the payments in seconds rather than days (representing an 80% reduction), and cutting costs by half.
In the report, titled “Ithanon-LionRock to mBridge: Building a multi CBDC platform for international payments,” the BIS said that the mBridge project represents a cooperative effort between the BIS Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China, and the Central Bank of the United Arab Emirates.
In describing the joint efforts, the BIS said the project marks the “first common platform for multiple CBDC settlement, corresponding to … [an] arrangement based on a single multi-currency system.”
Delving a bit into the technology deployed, the BIS noted that three layers of technology are tied to the platform. Layer 1 is the core layer, comprised of the blockchain ledger “where data persists and the smart contract logic that implements functionality is programmed.” The second layer exists as the application layer, which provides access, routing and identity functions. The third layer is the front end layer, which interfaces with the core systems.
The platform, according to the paper, allowed the participants of each network to conduct fund transfers and foreign exchange transactions on a peer-to-peer basis, “thus reducing settlement layers” and reducing “several of the core cost components of correspondent banking.”
According to the BIS, “costs associated with wholesale payments are difficult to measure, and individual costs vary per bank and region. The average retail payment cost ranges from below 2% in Europe to over 7% in Latin America, while the average global cost of sending remittances is 6.4%” of the amount sent.
To reduce nostro-vostro liquidity costs, the prototype manages liquidity across all participants algorithmically with liquidity-saving mechanisms.
“This minimizes the need for correspondent banks to manually monitor and predict supply and demand of cross-border payments in order to prefund their foreign accounts,” the report stated. “The prototype enables payers and payees to manage their own supply and demand by funding their own individual accounts. This represents a paradigm shift in the way adequate funding for cross-border payment is currently managed.”
Looking ahead, the mBridge efforts will center on data protection and liquidity.
“A data protection policy will be created outlining how data is to be classified, encrypted, protected physically and destroyed, as well as how to handle data breach reporting,” said the report. The BIS further stated that due diligence will be conducted with involved contractors and third-party vendors evaluating their own information security practices.
“If successful, an efficient, low-cost, compliant and scalable multi-currency, multi-jurisdiction arrangement can provide a network of direct central bank collaboration, greatly increasing the potential for international trade flows and cross-border business at large,” the BIS said.