A group of central banks, including the Reserve Bank of Australia, has completed a trial using a shared platform to complete international settlements using multiple central bank digital currencies.
The trial, Project Dunbar, involved the Bank for International Settlements Innovation Hub, Bank Negara Malaysia, the Monetary Authority of Singapore, the South African Reserve Bank and the RBA.
The RBA said in a statement: “Project Dunbar proved that financial institutions could use CBDCs issued by participating central banks to transact directly with each other on a shared platform.
“This has the potential to reduce reliance on intermediaries and, correspondingly, the costs and time taken to process cross-border payments.”
It said the project developed prototypes that demonstrated the technical viability of shared multi-CBDC platforms for international settlements.
The project included the establishment of governance mechanisms for shared control of the platform, given the regulatory differences across jurisdictions.
However, the project report makes clear that the trial was an initial step and there are many issues still to resolve.
The RBA currently issues two forms of money: physical money in the form of banknotes; and digital money in the form of balances held in accounts that commercial banks and some other types of financial institutions can hold at the RBA to settle payment obligations between each other.
It defines CBDC as a new form of digital money that could be designed for retail use, like a digital version of banknotes; or for wholesale use, where it could be used by a limited group of market participants for wholesale payments and settlements.
Project Dunbar focused on cross-border interbank payments. Unlike domestic payments, where banks can pay each other directly on a single national payments platform, there is currently no single international platform for cross-border payments and settlements.
Currently, the correspondent banking model is used, where banks hold foreign currency accounts with each other. To complete a single cross-border transfer, multiple correspondent banks may be involved, with transactions recorded on multiple ledgers on multiple systems built on different technologies and communicating in different message formats.
The view of the project participants is that this model is fragmented, slow, opaque and expensive, compared with domestic payments.
There are processes that need to comply with regulations, such as foreign exchange controls, anti-money laundering measures and know-your-customer rules. These are often manual and may need to be performed in each jurisdiction.
“Globally, cross-border payments lag significantly behind domestic payments in meeting user expectations for services. Faster, cheaper, more transparent and more inclusive cross-border payments could have widespread benefits for citizens and economies,” the Project Dunbar report says.
The trial put CBDCs at the centre of a new cross-border payments infrastructure, using a jointly operated multi-CBDC platform.
On such a platform, each participating central bank issues its own CBDC. Commercial banks are then able to hold these CBDCs directly, gaining access to foreign currencies without the need for accounts with correspondent banks.
The project participants identified a number of challenges to this model, including:
· whether banks that do not have a local presence and are not authorised to operate domestically can be given access to CBDCs;
· whether cross-border payments can be simplified while respecting regulatory differences in different jurisdictions; and
· how central banks can share a payments platform, while maintaining control of their domestic payments systems.
Participants developed principles and decision-making frameworks to deal with each of these issues, attempting to balance central bank autonomy with a set of common rules. They also defined high-level technology and network architectures.
The project report makes clear that it is a first step. “While prototypes have been successfully developed and tested in the project, they were built based on a preliminary design, with the best possible set of assumptions known to the team while doing the project. As the project progresses, new information and better understanding resulted in continuous refinement of the assumptions.
“As an exploratory project with a limited timeline, Project Dunbar ended with more questions than answers, and more questions than before it started.”