CBDC Prototype Can Speed Up Payments: BIS

The Bank of International Settlements (BIS) says a prototype of multiple Central Bank Digital Currencies (mCBDCs) developed by its Innovation Hub and four central banks demonstrated the potential of using digital currencies and distributed ledger technology (DLT) for delivering real-time, cheaper and safer cross-border payments and settlements.

The mBridge project is a cooperation 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, and is one of several the BIS is running concurrently.

The common prototype platform for mCBDC settlements was able to complete international transfers and foreign exchange operations in seconds, as opposed to the several days normally required for any transaction to be completed using the existing network of commercial banks and operate in a 24/7 basis, BIS says, adding, the cost of such operations to users can also be reduced by up to half.

“The prototype is part of our efforts to design CBDC technology,” says Benoît Cœuré, head of the BIS Innovation Hub. “The project includes experimenting with use cases and trials, balanced with analysis of governance, policy and legal considerations with a focus on cross-border use.”

Payments, foreign exchange transactions and other operations usually travel across the world within the networks of large global banks, which serve as bridges between jurisdictions, a system generically known as correspondent banking. While serving a critical economic role, the BIS says these networks and arrangements can be “complex, sometimes fragmented, and involve operational inefficiencies”, citing how banks work in different time zones, subject to the operating hours of national payment systems. They also duplicate a lot of work around legally required safeguards such as money laundering, tax evasion and terrorism financing.

According to the BIS’s most recent Annual Economic Report, mCBDCs offer the greatest potential for improving today’s systems’ limitations. They provide central banks with a “clean slate” start, not burdened by legacy arrangements or technologies.

The mBridge project builds upon the initial investigation by the central banks of Hong Kong and Thailand, which first proved the viability of a common CBDC platform between two jurisdictions, by testing critical features such as transaction privacy, FX matching, monitoring and compliance. The current phase of the project broadens the geographic and diversity of currencies and use cases, adding the Digital Currency Institute’s experience with rolling out the e-CNY pilot in China, and the learnings by the Central Bank of the United Arab Emirates from developing a single-currency blockchain solution with Saudi Arabia.

Going forward, the BIS says mBridge will continue to explore existing limitations of the current platform, related to privacy controls, liquidity management and the scalability and performance of DLT in handling large transaction volumes. In addition, the project pipeline will incorporate policy requirements and measures to ensure compliance with jurisdiction-specific regulations, along with testing and investigating appropriate governance models. The project’s next phases are expected to include trials in a safe/controlled environment with commercial banks and other market participants.

“Enabling faster and cheaper cross-border wholesale payments, including to jurisdictions that don’t benefit from a vibrant correspondent banking system, would be positive for trade and economic development,” says Bénédicte Nolens, head of the BIS Innovation Hub, Hong Kong Centre. “ mBridge investigates these public good outcomes through a new DLT payment infrastructure that sits at the cross-roads of participating central banks.”