The Great Wholesale Digital Currency Race Heats Up

Digital Currenc
The Great Wholesale Digital Currency Race Heats Up

The final month of 2021 has seen some definitive progress in central banks’ investigations into wholesale digital currencies and tokenized assets, after several years of tentative proof-of-concepts (PoCs).

Both central banks and commercial institutions have been testing whether distributed ledger technology (DLT) could be the basis for an always-on, programmable, instantaneous, multi-asset, cross-border transaction network with finality of settlement.

On December 8, the Bank for International Settlements, the Banque de France (BDF) and the Swiss National Bank announced the completion of Project Jura, which explored cross-border settlement using wholesale central bank digital currencies (wCBDCs). The experiment, in collaboration with private sector firms including Accenture, Credit Suisse, Natixis, R3, SIX Digital Exchange (SDX) and UBS, involved real-value payments and settlements under existing legal and regulatory frameworks.

The explanatory video shows how the experiment took place over three days, starting with Natixis in France issuing a tokenised French commercial paper (TFCP) with a nominal value of €200,000. UBS then bought the TFCP using euro wCBDC and Credit Suisse settled a foreign exchange (FX) transaction with Natixis, buying euro wCBDC against Swiss franc wCBDC. One day two, UBS sold the TFCP in a secondary market transaction to Credit Suisse against euro wCBDC.

The Great Wholesale Digital Currency Race Heats Up

To finish the experiment, Credit Suisse redeemed the TFCP to Natixis on day three and a FX transaction was also settled between these two institutions to return to their original balances.

Tokenised assets and foreign exchange transactions were settled safely and efficiently using payment-versus-payment (PvP) and delivery-versus-payment (DvP) mechanisms. The tokens circulated on a single test platform, SDX, built on R3’s Corda, with different sub-networks each with its own notary node (controlled by the respective central banks for each wCBDC) that signs and timestamps every transfer.

The participants believe that Project Jura’s approach, including subnetworks and dual-notary signing, may give central banks comfort to issue wCBDCs on third-party platforms and to provide regulated non-resident financial institutions with access to wCBDCs.

On the same day, the Reserve Bank of Australia (RBA), Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys, with input from King & Wood Mallesons, announced the conclusion of their wCBDC experiment, Project Atom.

The year-long project involved a PoC for the issuance of a tokenised form of CBDC that could be used by wholesale market participants for the funding, settlement and repayment of a tokenised syndicated loan on an Ethereum-based DLT platform. The Australian central bank said that the PoC demonstrated that the digitisation of syndicated loans on a DLT platform could provide efficiency gains and reduce operational risk by replacing manual and paper-based processes.

“Integrating a wCBDC on the same DLT platform enabled ‘atomic’ DvP settlement of the drawdown, novation and repayment of the tokenised syndicated loan, and could potentially allow for other forms of programmability that could improve efficiency and reduce risk in transactions,” according to the RBA.

Two days before, SETL, a specialist firm building DLT solutions for financial markets which had previously worked with BDF, published a technical whitepaper detailing the Regulated Liability Network’s (RLN) performance tests on SETL’s Global Banking Blockchain, in an environment run on Amazon Web Services (AWS).

According to the tests, the RLN was capable of processing 1 million transactions per second (tps). In comparison, traditional card payment systems process around 1700 tps on average with volumes peaking at around 24,000 tps.

The whitepaper details a system which creates a very large-scale distributed transaction processing platform. Each bank, central bank, or custodian controls a segregated partition on the RLN, into which they issue tokens representing liabilities to their customers. The RLN then co-ordinates atomic movement of value between the partitions, according to SETL.

The goal of the testing performed was to demonstrate the scalability of the technical implementation to support 1,000 banks around the world initiating 1,000 tps to be processed in a simulated three-partition scenario. The environment built on the AWS global infrastructure using SETL’s open source blockchain components successfully scaled up to process 1 million tps showing such architecture could support instant settlement of transactions at a global scale.

Commercial banks are also moving settlement onto DLT. On December 13, Baton Systems announced that HSBC and Wells Fargo had completed the first interbank PvP settlement outside of CLS using Baton’s Core-FX DLT solution and Baton Rulebook.

The two banks are now using the platform to collaboratively settle FX trades bilaterally on demand using real currencies in real accounts, all in less than three minutes and with legal settlement finality. All currencies, including emerging market currencies, which are ineligible for PvP settlement in CLS, can now be settled using DLT that provides flexibility and transparency, according to Baton Systems.

Spurred on by the ongoing G20 and Committee on Payments and Market Infrastructures’ work on improving cross-border payments and settlement, as well as a greater understanding of DLT’s potential, central banks, commercial banks and the regulated non-bank sector have an immense opportunity to work together to solve settlement.

As Tony McLaughlin, managing director, transaction banking, Citi, said during SETL’s RLN webinar: “The world needs better settlement. Let’s take this opportunity to apply the best technology and a regulated financial market infrastructure to upgrade the global settlement layer.”