RBA, other central banks find digital wholesale currency 'technically viable'

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RBA, other central banks find digital wholesale currency 'technically viable'

Could make cross-border payments cheaper, faster and safer.

Using central bank digital currencies (CBDC) for cross-border payments is “technically viable”, a trial between the central banks of Australia, Singapore, Malaysia and South Africa has found.

But there is still a long way to go before a shared multi-CBDC platform is a reality, with the trial highlighting “critical challenges” in access, jurisdictional boundaries and governance.

Led by the Bank for International Settlements (BIS) Innovation Hub, the 'Project Dunbar’ trial began in September 2021 to test whether CBDC could make for cheaper, faster and safer cross-border payments.

It sought to develop a prototype platform for central banks to perform international settlements using multiple CBDCs, and explore different technical, governance and operating models.

Wholesale CBDCs aim to improve the internal workings of financial systems such as settling trades, whereas a retail CBDCs would be used by individuals.

Expected benefits included reduced reliance on intermediaries, simplification of settlement processes, and process automation with programable money using smart contracts

Releasing the findings [pdf] of the trial on Tuesday, BIS said two prototype shared platforms enabling international settlements using CBDCs had been developed as part of Project Dunbar.

The prototypes were developed on two different distributed ledger technology platforms, Corda and Quorum, by two concurrent technical workstreams.

“The Corda platform development was led by R3 while the Quorum platform development was led by Partior (with support from DBS, JP Morgan and Temasek),” the report said.

A third design workstream, led by Accenture, focused on “high-level functional requirements and design”.

BIS concluded that a shared multi-CBDC platform was “technically viable”, but that it was “just a first step into the space”.

According to the report, access, jurisdictional boundaries and governance – or more simply put, trust – proved the biggest challenges.

For example, BIS questioned whether “non-resident banks... can be trusted to access and make payments with CBDC when they do not have a presence in those jurisdictions”.

“The design approaches to solving the three challenges were validated through the development of technical prototypes that demonstrated practicable solutions,” a report said.

“In that regard, this initial phase of Project Dunbar has successfully achieve its aim of proving that the concept of multi CBDCs was technically viable.”

Project Dunbar also uncovered some “previously unknown unknowns”, allowing for a “clearer understanding of the challenges that need to be solved”, while turning some unknowns into knowns.

“However, even at the completion of this first phase, there are still more unknowns than knowns,” the report added.

Head of the BIS Innovation Hub Andrew McCormack said that while a common platform is the “most efficient model for payments connectivity”, it is also the “most challenging to achieve”.

“Project dunbar demonstrated that key concerns of trust and shared control can be addressed through governance mechanisms enforced by robust technological means, laying the foundation of future global and regional platforms,” he said.

Reserve Bank of Australia assistant governor Michele Bullock said the project “provided valuable insights into the opportunities and challenges associated with developing a shared platform for multiple CBDCs to enhance cross-border payments”.

“Allowing entities to directly hold and transact in CBDCs from different jurisdictions could reduce the need for intermediaries in cross-border payments, but it would need to be done in a way that preserves the security and resilience of these payments,” she said.

“While there is clearly more work to be done in thinking about the feasibility and design of multi CBDC platforms, the findings from Project Dunbar provide a good platform for future work in this area.”

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