The Innovation Center of the Bank for International Settlements (BIS) and four central banks have jointly developed a prototype of several central bank digital currencies (mCBDCs). According to the hub, it shows the potential of using digital currencies and distributed ledger technology (DLT) to ensure “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 develop CBDC technology. The project involves experimenting with use cases and studies that are balanced with the analysis of governance, political and legal considerations with an emphasis on cross-border use,” said Benoît Cœuré, head of the BIS Innovation Hub.
The prototype platform for mCBDC settlements managed to complete international transfers and foreign exchange transactions in seconds. This is in contrast to several days, which are usually required to conclude a transaction through the existing network, which relies on commercial banks.
In addition”CBDCs can operate around the clock, which avoids mismatch in 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%.
However, the study also notes some limitations that could hinder the further implementation of the DLT in cross-border payments.
“In particular, trust in privacy groups to maintain privacy in multiple jurisdictions does not allow for fully automated transactions [payment against payment],” the report says.
Also “since there is no single entity or jurisdiction that can see the balance of all outstanding [foreign exchange] transactions; an optimal liquidity saving mechanism has yet to be found,” they said.
In addition, the scalability and performance of DLT when performing large volumes of transactions must be further evaluated if additional jurisdictions or currencies are to be added to the platform. The study also states that in-depth risk management procedures must be introduced.
Despite these limitations in the global adoption of the technology, project participants say they will “continue to advance the capabilities of DLT and CBDC in areas where results are not yet sufficiently advanced to meet real-world critical infrastructure requirements.”This will involve trials with market participants to” further iterate and improve the prototype and its functionalities.”
Meanwhile, a BIS survey in 2021 revealed, that 86% of central banks surveyed actively explored the potential of CBDCs.
Based in Basel, Switzerland, which UNTIL says it is jointly owned by the world’s 62 central banks, representing countries that together represent around 95% of global gross domestic product (GDP).