The Bank of Canada and the Monetary Authority of Singapore (MAS) reported May 2 that they have conducted a successful experiment on cross-border and cross-currency payments using central bank digital currencies and distributed ledger technology (DLT). This is the first such trial between two central banks, they said in a release. These technologies have great potential to increase efficiencies and reduce risks for cross-border payments.
Cross-border payments today are often slow and costly. These payments rely on a correspondent banking network that is subject to counterparty risk, inefficient liquidity management and cumbersome reconciliation. The Bank of Canada and the MAS have been collaborating in the use of DLT and central bank digital currencies to make the cross-border payment process cheaper, faster and safer. Blockchain is a type of DLT.
The two central banks have successfully linked up their respective experimental domestic payment networks, namely Project Jasper and Project Ubin, 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 payment versus payment (PvP) settlement without the need for a trusted third party to act as an intermediary. The Jasper-Ubin project was carried out in partnership with Accenture and J.P. Morgan, which supported the development of the Canadian network on Corda, and the Singapore network on Quorum, respectively.
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. Titled “Jasper-Ubin Design Paper: Enabling Cross-Border High Value Transfer Using Distributed Ledger Technologies”, the report describes the technical implementation of HTLC and highlights possible limitations and challenges with the implementation model.
The report further suggests areas of research in DLT interconnectivity mechanisms and alternative network models. This represents opportunities for further collaboration among central banks, financial institutions and FinTech firms. The Bank of Canada and MAS said they would like to encourage the global financial community to build on these findings and work together to make international payments better, faster and cheaper.
“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,” said Scott Hendry, Bank of Canada senior special director, Financial Technology. “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.”
“Project Jasper and Project Ubin have built on previous innovations in the payments area to demonstrate that cross-border payment and settlement can be made simpler and more efficient,” said Sopnendu Mohanty, chief FinTech officer, MAS. “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.”