The Monetary Authority of Singapore (MAS) and Banque De France have successfully completed a test using central bank digital currency (CBDC) for wholesale cross-border payment and settlement.
The new experiment represents another breakthrough in the banking sector that is rapidly increasing towards cryptocurrency and stablecoin initiatives.
The two participants in the new experiment believe that their new approach offers considerable potential to simplify the cost efficiencies with a single connection to the common platform, which replaced the multiple connections that are required in the current banking model.
J.P. Morgan’s Onyx facilitated the recent experiment
JP Morgan’s blockchain innovation lab, Onyx supported the new experiment and it simulated cross-border transactions involving multiple CBDCs (m-CBDC) on a common network between Singapore and France. It was the first CBDC experiment that has applied automated market-making and liquidity management capabilities to gain cross-border payment efficiencies.
Valérie Fasquelle, director of infrastructures, innovation, and payments at the Banque de France said, “By experimenting the circulation of euro CBDC in a shared corridor network, the MAS and the Banque de France tested the possibility to provide a link with other CBDCs all over the world. It is an opportunity to construct arrangements for m-CBDC models, which improve cross-border payments and increase harmonisation of post-trade procedures”.
Sopnendu Mohanty, CTO at MAS said, “This m-CBDC experiment has broken new ground by decentralising financial infrastructure to improve liquidity management and market-making services”.
“It charts the path for scalable CBDC networks where central banks and commercial banks can work together to achieve the vision of cheaper, safer, and more efficient infrastructure for cross-border payments,” Mohanty said.
Umar Farooq, CEO at Onyx by J.P. Morgan said, “Participating in simulations that explore the technology and operational aspects of multi-currency corridor networks will be a foundational component of global payment infrastructure to come. This is a natural continuation of our work in the area of the central bank and commercial bank digital currencies”.
Cross-border payments rely on correspondent banks that offer limited transparency on the foreign exchange rates. It has restricted working hours and currency settlement delays due to differences in the time zones. The experiment challenged all of these barriers and utilised a common m-CBDC network, aimed at facilitating cross-border payments on a 24x7 real-time basis.
The test simulated cross-border and cross-currency transactions for Singapore dollar (SGD) CBDC and euro (EUR) CBDC and was conducted using permission and privacy enabled blockchain that was based on Quorum technology. There were four key outcomes as mentioned by the MAS.
First, the demonstration of interoperability across different types of cloud infrastructure. Blockchain nodes were set up across private and public cloud infrastructures in both countries.
The design of a common m-CBDC network enabled the two central banks to have visibility on cross-border payments while retaining independent control over the issuance and distribution of their own CBDC.
The setup of an experimental m-CBDC network includes an automated liquidity pool and market-making service for EUR/SGD currency pairs. The use of smart contracts automatically managed the EUR/SGD currency exchange rate in line with real-time market transactions and demands.
The simulation of an experimental m-CBDC network showed that the number of correspondent banking parties involved in the payment chain for cross-border transactions can be reduced. Consequently, the number of contractual arrangements, the know your customer (KYC) burden as well as the associated costs could be cut down.
While the experiment was conducted between two central banks, the design of the m-CBDC network carries a potential to be scaled up so that it can support the participation of multiple central and commercial banks located in different regions. It has the potential to simplify the integration and can improve the cost efficiencies significantly as a single platform is being utilised.