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BIS: CBDC and DLT combo outperforms correspondent banking system

BIS: CBDC and DLT combo outperforms correspondent banking system

A prototype of multiple central bank digital currencies (mCBDCs) developed by the Bank for International Settlements and four central banks has demonstrated the potential of using digital currencies and distributed ledger technology (DLT) for cheaper and safer cross-border payments and settlements.

The mBridge project is a cooperation between the BIS Innovation Hub Hong Kong Centre, 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 common prototype platform for mCBDC settlements was able to complete international transfers and foreign exchange operations in seconds, as opposed to the several days normally required for any transaction to be completed using the existing network of commercial banks and operate in a 24/7 basis. The cost of such operations to users can also be reduced by up to half, according to the project's report.

Benoît Cœuré, head of the BIS Innovation Hub, states: "Payments, foreign exchange transactions and other operations usually travel across the world within the networks of large global banks, which serve as bridges between jurisdictions, a system generically known as correspondent banking. While serving a critical economic role, these networks and arrangements can be complex, sometimes fragmented, and involve operational inefficiencies. For example, banks work in different time zones, subject to the operating hours of national payment systems. Also, legally required safeguards to combat money laundering, tax evasion or terrorism financing are repeated by financial institutions in the network."

For the next phase, mBridge will continue to explore existing limitations of the current platform, related to privacy controls, liquidity management and the scalability and performance of DLT in handling large transaction volumes. In addition, the project pipeline will incorporate policy requirements and measures to ensure compliance with jurisdiction-specific regulations, including trials with commercial banks and other market participants.

Bénédicte Nolens, head of the BIS Innovation Hub, Hong Kong Centre, comments: "Enabling faster and cheaper cross-border wholesale payments, including to jurisdictions that don't benefit from a vibrant correspondent banking system, would be positive for trade and economic development; mBridge investigates these public good outcomes through a new DLT payment infrastructure that sits at the cross-roads of participating central banks."

Comments: (2)

Andrew Smith
Andrew Smith - RTGS & ClearBank - London 29 September, 2021, 10:201 like 1 like

It is always a positive move to look to address challenges and inefficiencies in the world of payments. This is a positive step forward in investigating possible solutions.

IMHO a blockchain adds potential hidden costs and adds friction at different stages of the true end to end / full proccess. Complications regarding liquidity management, data residency, privacy, global interopability, scale, performance, sanctions screening, AML are all challenges that become more complicated when you add in a blockchain. I am a great fan of DLT and blckchains, but for the right use case - for me, there is a simpler, more efficient, more flexible and more complete solution already being brought to the market.....

Tom Barr
Tom Barr - WOCU Limited - Chertsey 11 October, 2021, 17:081 like 1 like

Totally agreed with Andrew Smith  - cross-border payments Rationalisation by Centralisation is the way forward from the current inefficiency, not unnecessary Complication by DLT, or whatever. A global correspondent hub solution is the obvious ideal, with banks connecting in to a universal correspondent relationship for instant payment & settlement.