The Bank for International Settlements (BIS) has developed two prototypes for a shared platform that will allow for international settlements using digital currencies issued by multiple central banks.
Code-named “Project Dunbar,” the platform is designed in a way to enable cross-border transactions using different currencies between financial institutions. The solution can potentially reduce the reliance on intermediaries, thereby minimizing costs as well as the time taken to process transactions. BIS collaborated with the Bank Negara Malaysia, Reserve Bank of Australia, the South African Reserve Bank, and the Monetary Authority of Singapore for the project.
Established in 1930, the BIS is owned by 63 central banks, which represent nations that collectively make up about 95 percent of the world’s GDP. Its mission is to act as a bank for central banks. BIS also seeks to support the central banks’ pursuit of monetary and financial stability through international cooperation.
In domestic payments, banks pay each other directly, or on a single national payment platform. But for cross-border transactions, there is no single international platform for making payments. Instead, banks hold foreign currency accounts with each other.
To make a single cross-border payment, it might need to pass through several banks. Each step contributes to making international transactions more time-consuming and expensive.
A single platform that allows for multi-currency cross-border payments, like what is being developed at BIS, would make things simpler as transacting parties can pay each other directly without multiple banks in between.
“A common platform is the most efficient model for payments connectivity, but is also the most challenging to achieve,” Andrew McCormack, Head of the BIS Innovation Hub Centre in Singapore, said in a March 22 BIS press release.
“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 for the development of future global and regional platforms.”
Central banks across the world are trying to come to terms with a rapidly changing payment landscape. Facebook is developing its own payment network that could make use of the company’s digital coins.
The growth in the use and trade of cryptocurrencies is a threat to existing monetary systems, creating an urgent need to make cross-border payments through banks more simple and efficient.
Though allowing entities to directly hold and transact in central bank digital currencies can cut down the need for intermediaries while making cross-border payments, it must be done in a manner that maintains the “security and resilience” of the payments, Michele Bullock, Assistant Governor (Financial System), Reserve Bank of Australia, said in the press release.
“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,” she added.
The project’s next steps involve developing a platform rulebook, reviewing the regulatory and legal frameworks of participating jurisdictions, testing the payment platform at a large-scale industry level, and so on.