Project 1 : International Settlements using multi-CBDC — Project Dunbar
Focus Area:
Wholesale payments between banks (interbank payments)
Overview:
Project Dunbar explores how a common platform for multiple central bank digital currencies (multi-CBDCs) could enable cheaper, faster and safer cross-border payments. The project is a collaboration between the Bank for International Settlements (BIS) Innovation Hub Singapore Centre, the Reserve Bank of Australia, Bank Negara Malaysia, the Monetary Authority of Singapore and the South African Reserve Bank.
Motivations:
- ) Address current inefficiencies in the cross-border payments — slow, opaque and expensive transfers because of fragmented networks across the countries.
- ) A common platform for international settlements using CBDCs could potentially improve cross-border payments.
- ) Explore the potential benefits and opportunities of a multi-CBDC platform, understand the critical obstacles and challenges to implementing such a platform, develop design approaches to address them, and prove the viability of the concept through the building and testing of technical prototypes.
- ) Explore the governance model and the processes involved in making the overall system work
Figure below describes all the elements addressed in the project study –
Financial institutions involved:
BIS Innovation Hub
Reserve Bank of Australia
Bank Negara Malaysia
Monetary Authority of Singapore
South African Reserve Bank
Banque de France
Magyar Nemzeti Bank
Technology and Design partners:
Accenture
R3
Partior
DBS Bank
J.P. Morgan
Temasek
Design considerations:
The chosen design model involves a jointly operated mCBDC payment system hosting multiple CBDCs. All FX settlements would be PvP by default, rather than requiring routing or settlement instructions through a specific entity acting as an interface. Trading venues could also be integrated into an mCBDC system, to reduce complexity, fragmentation and concentration.
In a shared multi-CBDC platform, every central bank involved can issue its own CBDC using their respective domestic currency. By doing so, commercial banks participating in the system can directly hold these CBDCs, granting them access to foreign currencies without relying on correspondent bank accounts. Since all participating banks have the potential to hold various CBDCs directly, they can engage in transactions with one another using the respective currencies involved.
Technical Solutions:
Two different solution approaches were tried out. Technology provider R3 built a prototype with Corda as a distributed ledger while technology provider Partior built a prototype with Quorum as a distributed ledger. Both prototypes were developed in a cloud infrastructure, with R3’s deployed on Azure cloud and Partior’s deployed on Amazon Web Services (AWS).
This phase of the project focused only on transactions within a multi-CBDC platform. Further development and testing of technical connectivity and integration with existent payment systems and external systems have to be explored, together with the business perspective of supporting other commercial use cases and applications.
To enable global payments across all jurisdictions and currencies, a regional multi-CBDC platform will need to connect with other national or regional multi-CBDC platforms. This would require global standards to be enforced for seamless interoperability.
Conclusion:
This phase of the project successfully developed working prototypes on Corda and Quorum platforms and demonstrated practicable solutions, achieving its aim of proving that the concept of multi-CBDCs was technically viable. The prototypes validated the design approaches taken to resolve three critical sets of challenges relating to access, jurisdictional boundaries and governance.
Project Dunbar, being one of the first technical experiments in the emerging field of multi-CBDCs, dedicated equal attention to problem identification and resolution. As a result, the project concluded with a number of unanswered questions, exceeding the number that existed prior to its initiation. Throughout the process, various open questions and challenges were identified and grouped into categories encompassing policy, business, and technology. Additionally, key milestones and subsequent steps were determined.
In an ideal world, you would have a single global settlement platform that transacts with all central banks and commercial banks in a seamless manner. Considering the collaboration, complexity and the dedication required to build such a standardised system, it’s almost an impossible feat to achieve. Each jurisdiction has their own unique requirements and scale at which they operate. A more probable solution is to implement it as a series of regional platforms rather than as a single global platform. This leads to considerations around how it may be possible to connect these individual regional platforms to realise synergies such that participants transact directly across jurisdictions, including via the lower-volume corridors.
Source:
https://www.bis.org/publ/othp47.htm
Project 2: Wholesale CBDC – Project Khokha
The initial stage of Project Khokha was initiated in 2018 to investigate the applicability of distributed ledger technology for settling interbank payments in South Africa, now known as PK1. During this phase, the project successfully imitated certain functions of the South African real-time gross settlement (RTGS) system using distributed ledger technology, delving into the potential effects of this technology-driven innovation on financial markets.
Subsequently, the second phase of Project Khokha (PK2) aimed to assess the influence of distributed ledger technology on trading, clearing, and settlement within a limited proof-of-concept (PoC) environment. This PoC was confined to the issuance of a South African Reserve Bank (SARB) debenture on distributed ledger and the implementation of two payment options: a wholesale central bank digital currency (wCBDC) token and a wholesale digital settlement token (wToken). PK2 was a collaborative effort involving the Intergovernmental Fintech Working Group (IFWG), industry members, and led by SARB. The core team encompassed technical service providers such as Accenture and Block Markets Africa (BMA), with Deloitte offering support. Prominent participants included Absa, FirstRand, Nedbank, Standard Bank, and JSE Limited (JSE), while various stakeholders from IFWG, the industry, and observers were also engaged.
The ability to construct a market for a specific tokenized security by assembling distinct components influenced various participants and their roles, allowing for consolidation onto a unified platform. If role players share similar functions, these roles could potentially fall under existing regulatory frameworks. However, challenges arise when existing laws do not account for emerging innovations in shaping the market structure. Regulatory bodies are proceeding cautiously, considering developments before enacting changes, recognizing that regulated entities await clear regulations before entering DLT-based token markets. Meanwhile, unregulated markets are evolving. Creating interconnected frameworks necessitates thoughtful deliberation to avert unintended repercussions. It is anticipated that policies, mechanisms, and legal structures will evolve through collaborative efforts involving policymakers, regulators, and the industry.
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