Promising trial of digital ledger technology by central banks is another step towards development of much more efficient cross-border payment and settlement processes.
In the first such trial between two central banks, Bank of Canada and Monetary Authority of Singapore (MAS) have successfully completed an experiment on cross-border and cross-currency payments using central bank digital currencies and digital ledger technology.
The two banks believe the success highlights the “great potential” of the technology to increase efficiencies and reduce risks for cross-border payments. Currently, such transactions are often slow and costly and rely on a correspondent banking network that is subject to counterparty risk, inefficient liquidity management and cumbersome reconciliation.
But by using distributed ledger technology (DLT) to support transactions of central bank digital currencies, the two banks believe it may be possible to make the cross-border payment process cheaper, faster, and safer.
The experiment involved the Bank of Canada and MAS linking up their respective experimental domestic payment networks, Project Jasper and Project Ubin1, which are built on two different DLT platforms. The project teams used a technique called Hashed Time-Locked Contracts (HTLC) to connect the two networks and allow settlement of transactions without the need for a trusted third party to act as an intermediary.
Following the successful conclusion of the project, the Bank of Canada and MAS jointly published a report that proposes different design options for cross-border settlement systems. The report describes the technical implementation of HTLC and highlights possible limitations and challenges with the implementation model. It also suggests areas of research in DLT interconnectivity mechanisms and alternative network models – opportunities, the banks believe, for further collaboration among central banks, financial institutions and fintech firms.
Scott Hendry, Bank of Canada Senior Special Director, Financial Technology, says: “The world of cross-border payments is complicated and expensive. Our exploratory journey into the use of DLT to try to reduce some of the costs and improve traceability of these payments has yielded many lessons. The importance of international cooperation through projects such as this one cannot be underestimated. Only through continued collaboration and fundamental research will it be possible for this technology to mature and for policy-makers to fully understand its potential.”
Sopnendu Mohanty, Chief Fintech Officer at MAS, added: “Project Jasper and Project Ubin have been built on previous innovations in the payments area to demonstrate that cross-border payment and settlement can be made simpler and more efficient. Together these projects have addressed many technical questions and brought the technology to a higher level of maturity.
“The next wave of central bank blockchain projects can make further progress by bringing technology exploration together with policy questions about the future of cross-border payments. It is challenging work, and we welcome other central banks to join us in this global collaboration, to bring benefit to consumers, businesses and the broader financial industry.”
David Treat, Managing Director and Global Blockchain Lead, Accenture, a partner on the trial project, believes that central bank digital currency, tokenisation, and distributed ledger technology could well become key enablers for the future of financial systems. He adds: “The successful outcome of the Jasper-Ubin project is a big milestone for the modernisation of cross-border, cross-currency transactions. This collaboration between central banks, industry participants and technology experts has shown that material transformation is possible and that the challenges can be overcome.”