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.
Dubbed 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 theme of the study is automated money makers (AMM) to 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 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 resilience.
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 noting 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 be probing the role of banking regulators and CBDCs in relation to stablecoins, tokenized deposits, securities, and bonds.
Cross-border payments fuel the 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 major challenge to the deployment of CBDCs in cross-border payments.
To solve the interoperability challenge, the BIS has laid out 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 its own challenges, including technical and regulatory bottlenecks.
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