BIS Envisages DeFi FX Spot Market After Mariana “Success”

The Bank for International Settlements (BIS) has issued a final report for Project Mariana, which tested the cross-border trading and settlement of wholesale central bank digital currencies (wCBDCs) between financial institutions, using new decentralised finance (DeFi) technology concepts on a public blockchain.

The project, conducted by three BIS Innovation Hubs in association with the Banque de France, Monetary Authority of Singapore and Swiss National Bank, successfully tested the cross-border trading and settlement of hypothetical euro, Singapore dollar and Swiss franc wCBDCs between simulated financial institutions. The process relied on a common technical token standard provided by a public blockchain to facilitate exchange and interoperability between the different currencies; bridges for the seamless transfer of wCBDCs between different networks; and an Automated Market Maker (AMM), which is a specific type of decentralised exchange to trade and settle spot FX transactions automatically.

The BIS says the project, “successfully demonstrates the technical feasibility of the proposed architecture and adds novel insights on the potential of tokenisation in three dimensions. First, wCBDCs are implemented as smart contracts, enabling central banks to manage their wCBDC without the need to directly operate or control the underlying platform. Their design followed best practices from the public blockchain space, building on a widely used standard (ie ERC-20), as well as enabling upgradeability.

“Second, bridges may serve as a mechanism to enable broader interoperability in an emerging tokenised ecosystem,” it continues. “As implemented in the PoC, they may enable the seamless and safe transfer of wCBDC between domestic platforms and the transnational network without manual intervention. The bridge design features controls and safeguards and ensures resilience through on-chain (i.e. bridge smart contracts) and off-chain (i.e. communication between bridge smart contracts) infrastructure managed by central banks.

“Third, the AMM, as tested and calibrated in Mariana, fulfilled requirements based on selected FX Global Code (FXGC) principles, the BIS adds. “It delivers the contours of a possible future tokenised FX market that has a number of potential benefits. These include supporting simple and automated execution of FX transactions, providing options to broaden the range of currencies, eliminating settlement risk and enabling transparency. However, the use of AMMs requires the pre-funding of liquidity and their adoption would therefore entail a significant departure from the ex-post funding (deferred net settlement) in use in today’s FX markets.”

These protocols could be used by the next generation of financial market infrastructures facilitating cross-border trading and settlement between financial institutions

The report into Mariana does observe that concerns remain, especially around cyber-security and the vulnerabilities of blockchain and DeFi technology, and accepts that it is merely a first step towards understanding the benefits, or otherwise, of AMMs and their ability to be commercially viable. It also acknowledges that collaboration between stakeholders in the FX market would be required.

It further notes that tokenisation may raise questions about monetary policy implementation, from very specific ones such as remuneration of wCBDCs, to very broad ones, such as monetary policy instruments building on DeFi ideas and concepts. It also points out that further work is needed to understand the role of central banks and wCBDCs in a broader tokenised ecosystem potentially including stablecoins, tokenised deposits and financial instruments, such as tokenised bonds and securities.

For Project Mariana, the AMM pooled the liquidity of the hypothetical euro, Singapore dollar and Swiss franc wCBDCs with innovative algorithms enabling spot FX transactions to be priced and executed automatically and settled immediately. “These protocols could be used by the next generation of financial market infrastructures facilitating cross-border trading and settlement between financial institutions,” the BIS says.

“Project Mariana pioneers the use of novel technology for interbank foreign exchange markets,” says Cecilia Skingsley, head of the BIS Innovation Hub. “It successfully demonstrated that it is feasible to exchange wholesale CBDC across borders using novel concepts such as automated market makers. Bringing together a diverse team of software engineers, policy, and FX experts across three Innovation Hub centres and central banks was key to this success.”