BIS completes wholesale CBDC trial for FX, cross-border payments

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The Bank for International Settlements (BIS) has released its final report on a pilot involving the use of wholesale central bank digital currencies (CBDCs) to settle cross-border and foreign exchange (FX) transactions.

Titled Project Mariana, the experiment leveraged blockchain and themes from decentralized finance (DeFi) to offer a solution. The joint study drew participation from the Monetary Authority of Singapore (MAS), Banque de France, and the Swiss National Bank.

One key study theme is about automated market makers (AMM) that allow commercial banks to make international payments via bridges. Using AMMs in the design offers several benefits, including instant settlements of FX transactions and the possibility of accommodating several currencies on the platform.

However, the report noted that pre-funding of liquidity will be required before AMMs can be deployed, a giant leap from what is obtainable in present FX markets.

In its proposed design, central banks do not need to control the underlying platform but will rely on smart contracts that follow industry best practices. To ensure greater resilience, the BIS notes in the reports that bridges allowing cross-border payments will be built with necessary guardrails to ensure both on-chain and off-chain stability.

Despite the promise shown by Project Mariana, the BIS noted that further studies should be carried out to ensure efficiency. The first area identified in the report was security, with the BIS documenting the vulnerabilities associated with using blockchain and DeFi technology in finance.

“Clearly, cyber attacks have repeatedly uncovered vulnerabilities of blockchain and DeFi technology, often with considerable damage to the parties involved,” read the BIS report. “Therefore, while tokenisation and DeFi may have potential benefits, a thorough investigation of security questions is needed.”

Outside of technical design, the BIS pointed out that the report did not shed light on the “commercial viability” of AMMs in cross-border transactions and failed to explore the monetary policy implications of the project. The BIS noted that it will probe the role of banking regulators and CBDCs in stablecoins, tokenized deposits, securities, and bonds.

Cross-border payments fuel BIS initiatives

The BIS has embarked on several studies involving the cross-border functionalities of CBDCs, completing Project Icebreaker and mCBDC experiments. While its studies have racked up impressive results, the BIS has pointed out that interoperability remains a significant challenge to deploying CBDCs in cross-border payments.

To solve the interoperability challenge, the BIS has proffered several solutions, including creating a single cross-border CBDC platform and adopting common standards to make distinct CBDCs compatible.

However, the BIS notes that each alternative is fraught with challenges, including technical and regulatory bottlenecks.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Watch: Utilizing sovereign nodes for CBDCs & micropayments