In a unique collaboration, Bank of Canada and the Monetary Authority of Singapore (MAS) have successfully conducted an experiment on cross-border and cross-currency payments using central bank digital currencies. This is the first such trial between two central banks, which was revealed on May 2, and has great potential to increase efficiencies and reduce risks for cross-border payments.
Cross-border payments today are often slow and costly. They rely on a correspondent banking network that is subject to counterparty risk, inefficient liquidity management and cumbersome reconciliation. Bank of Canada and MAS have been collaborating in the use of distributed ledger technology (DLT) and central bank digital currencies to make the cross-border payment process cheaper, faster and safer.
Bank of Canada’s senior special director for financial technology, Scott Hendry, says their 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. He adds: “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.”
The two central banks 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.
PvP is defined by Committee of Payments and Market Infrastructure as a settlement mechanism that ensures that the final transfer of a payment in one currency occurs if and only if the final transfer of a payment in another currency or currencies takes place.
The Jasper-Ubin project was carried out in partnership with Accenture and J.P. Morgan, who supported the development of the Canadian network on Corda, and the Singapore network on Quorum, respectively. Project Jasper was the experiment conducted by Bank of Canada, while Project Ubin was conducted by MAS. They sought to increase the efficiency of cross-border payments and reduce the risks and costs involved by using DLT to enable entities across jurisdictions to make payments directly with one another without intermediaries.
Following the successful conclusion of the project, Bank of Canada and MAS have 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, representing opportunities for further collaboration among central banks, financial institutions and fintech firms. Bank of Canada and MAS 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 chief fintech officer at MAS Sopnendu Mohanty says Project Jasper and Project Ubin together 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,” he points out. “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.”
