The Bank for International Settlements (BIS) has been experimenting with the feasibility of using central bank digital currency (CBDC) platforms for cross-border payments.
In a research report titled, “Using CBDCs across borders: lessons from practical experiments,” the BIS Innovation Hub (BISIH) highlighted results achieved from four recent cross-border multiple CBDC platform pilot projects the BIS partook in with different central banks around the world. The smart contract models or mechanisms used are also noted.
The first of these is the Inthanon-LionRock2 (ILR2) project conducted by the BIS’s Hong Kong Innovation Hub, the Hong Kong Monetary Authority (HKMA), and the Bank of Thailand (BoT) back in September 2021. The project explored the use of digital ledger technology (DLT) to facilitate real-time cross-border funds transfers using an atomic payment versus payment (PvP) mechanism for foreign exchange (FX) transactions between the two jurisdictions.
The second project, Jura, was conducted by the BIS’s Swiss Centre with the Bank of France, the Swiss National Bank, and a private consortium in December 2021. It explored the direct transfer of euro and Swiss franc wholesale CBDCs, as well as tokenized securities, between the two central banks via blockchain platforms operated by the third-party intermediaries using PvP and delivery versus payment (DvP) mechanisms.
The third is Project Dunbar, which was conducted between the Singapore Centre, the Reserve Bank of Australia (RBA), Bank Negara Malaysia (BNM), the Monetary Authority of Singapore (MAS), and the South African Reserve Bank (SARB). The pilot was conducted in March 2022 and tested the BISIH’s mCBDCs platform for use in international settlements.
BIS also noted the mBridge project from February 2021 was carried out with the People’s Bank of China and the Central Bank of the United Arab Emirates. The project allowed participants to conduct peer-to-peer payments and redeem the CBDC for reserves at the issuing central bank.
The BIS’s verdict on CBDC vs. private digital currencies
From the successful cross-border CBDC pilots, the BIS concluded that CBDCs are the future of cross-border payments and can bring better efficiency, speed, and cost-saving to international settlements. However, challenges remain.
“CBDCs may help to deliver better cross-border payments. Yet to achieve this, central banks need to understand how they should be built and how they contribute to a broader vision of the future monetary systems,” the report said.
The BIS’s Annual Economic Report also reiterated this stance, talking up CBDCs, not private digital assets, to be “the future of the financial system.” The central bank’s support of CBDC exploration has been paying dividends.
Its recent research showed that about nine out of every 10 central banks globally are at one stage of CBDC implementation or the other.