The Innovation Hub of the Bank for International Settlements (BIS) and four central banks have jointly developed a prototype of multiple central bank digital currencies (mCBDCs). According to the Hub, it demonstrates the potential of using digital currencies and distributed ledger technology (DLT) for ensuring “real-time, cheaper and safer cross-border payments and settlements.”
The mBridge project is a collaboration between the BIS and four Asian central banks: the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China, and the Central Bank of the United Arab Emirates.
“The prototype is part of our efforts to design CBDC technology. The project includes experimenting with use cases and trials, balanced with analysis of governance, policy and legal considerations with a focus on cross-border use,” said Benoît Cœuré, Head of the BIS Innovation Hub.
The prototype platform for mCBDC settlements succeeded in completing international transfers and foreign exchange operations in seconds. This is in contrast to several days that are normally required for any transaction to be completed using the existing network that relies on commercial banks.
Additionally, “CBDCs can be operated 24/7, eliminating any mismatch of operating hours,” they said.
A report published by the project participants states that the cost of such operations to users can also be reduced by up to 50%.
This said, the study also notes several limitations that could hamper the DLT’s further implementation in cross-border payments.
“In particular, the reliance on Privacy Groups to preserve privacy across multiple jurisdictions does not allow for fully atomic [payment versus payment] transactions,” according to the report.
Also, “since there is no single entity or jurisdiction that can view the balance of all pending [foreign exchange] transactions; an optimal liquidity savings mechanism has yet to be found,” they said.
In addition to this, the scalability and performance of DLT in carrying out large transaction volumes requires to be further assessed if more jurisdictions or currencies are to be added to the platform. In-depth risk governance procedures also need to be put in place, the study said.
Despite these limitations to the technology’s global roll-out, the project participants say they will “continue to push the capabilities of DLT and CBDC in areas where results are not yet sufficiently advanced to support real-world critical infrastructure requirements.” This will involve trials with market participants to “further iterate and improve on the prototype and its functionalities.”
Meanwhile, a 2021 survey by the BIS showed that 86% of the polled central banks were actively researching the potential of CBDCs.
Based in Basel, Switzerland, the BIS says it is jointly owned by the world’s 62 central banks, representing countries that together represent some 95% of the global gross domestic product (GDP).
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