Interpretation of BIS Multinational Central Bank Digital Currency Interoperability Plan “Dunbar Project” (1): Platform Design

Project Dunbar is a collaboration between the Bank for International Settlements (BIS) Innovation Centre and the Reserve Bank of Australia (RBA), Bank Negara Malaysia (BNM), the Monetary Authority of Singapore (MAS) and the South African Reserve Bank (SARB). The project aims to establish a multi-CBDCs platform to achieve cheaper, faster and safer cross-border payments. Cross-border payments are divided into large-scale wholesale payments and retail payments, and the “Dunbar Project” focuses on wholesale payments between banks.

Currently, cross-border payments use the correspondent banking model, that is, banks hold foreign exchange accounts with each other. To complete a single cross-border transfer, multiple correspondent banks may be involved, and these correspondent banks use their foreign currency holdings for cross-border payments. Each transaction segment requires time and effort to process, and transactions need to be recorded on multiple ledgers on multiple systems with different technologies and different information formats.

In October 2020, the G20 released a roadmap for strengthening cross-border payments, formulating a five-year plan to address the challenges of high cost, slow speed, limited access and insufficient transparency brought about by cross-border payments. A key area of ​​focus on the G20 roadmap is new payment infrastructure and arrangements, including CBDCs. CBDC is a digital currency. It can be used by individuals to make payments to businesses or other individuals (known as retail CBDC), or by financial institutions or other wholesale market participants to settle financial markets or other transactions (known as wholesale CBDC). CBDCs have shown great potential to improve payments and have been the subject of exploration by many central banks.

On March 22, BIS released a report saying that the “Dunbar Project” has completed the development of two prototypes, which can use digital currencies issued by multinational central banks for international settlement. The interpretation of the report will be divided into three chapters: three aspects: platform design, management and process, and future challenges; this article is interpretation (1), which mainly focuses on the CBDC platform design.

Multinational CBDC Interoperability Platform Model

BIS proposes three conceptual models of multi-country CBDC interoperability platforms, which are compatible CBDC systems (Model 1), interconnected CBDC systems (Model 2), and CBDC systems integrated into a single system (Model 3).

Model 1: Enhancing the compatibility of CBDCs in various countries

Enhance compatibility with CBDCs across countries by establishing a unified regulatory framework, market operations, information formats, and data requirements.

Interpretation of BIS Multinational Central Bank Digital Currency Interoperability Plan "Dunbar Project" (1): Platform Design

Figure 1. Enhancing the compatibility of CBDCs in various countries

Model 2: An interconnected CBDC system

The interconnected CBDC system can be built on the basis of enhanced compatibility through PVP settlement (peer-to-peer payment), while providing additional security protection. Link disparate payment systems together by sharing technical interfaces or developing common clearing mechanisms (e.g., operated by a central bank, acting as a correspondent in a cross-currency setup). This model can improve efficiency, especially when they are linked to foreign exchange transactions.

Interpretation of BIS Multinational Central Bank Digital Currency Interoperability Plan "Dunbar Project" (1): Platform Design

Figure 2. Interconnected CBDC system

Model 3: Integrated CBDC Interworking System

This model recreates a system of central bank digital currencies of multiple countries. All foreign exchange settlements are PVP settlement methods by default, and there is no need to execute settlement commands through a specific entity as an interface. By establishing a single rulebook and governance arrangement, a mutually recognized marking scheme, a single infrastructure and ledger, the model also integrates trading venues into a multi-country CBDC interoperability system, thereby reducing complexity, decentralization and centralization.

Interpretation of BIS Multinational Central Bank Digital Currency Interoperability Plan "Dunbar Project" (1): Platform Design

Figure 3. Integration into a single mCBDC system

Building on the previous work experience of its partner central banks, Project Dunbar explores the development of a shared settlement platform that connects all participating central and commercial banks. This is consistent with the arrangement of the Model 3.

The advantages of establishing a multi-country CBDC interoperability platform

Reduce reliance on intermediaries

A single cross-border transfer may involve one or more correspondent banks using their foreign currency holdings to settle the transaction. Every aspect of the entire transaction takes time and effort to process. The multi-country CBDC interoperability platform enables participating banks to directly conduct transactions using different CBDCs without holding foreign exchange accounts. CBDC can be transferred directly from sender to receiver bank.

Simplify the process

Under the correspondent banking model, a single cross-border transfer requires multiple ledgers to be updated on different systems. On the multi-country CDBC interoperability platform, transfers are recorded on a ledger, and participants can see their balances completely in real time. Therefore, the resolution process is simplified.

Increase efficiency with a common platform

Multiple banks involved in cross-border transfers typically perform similar processes individually, such as AML/CFT and sanctions review. These procedures are similar in nature and share the purpose of verifying the identities of senders and recipients in order to minimize the risk of transactions that facilitate money laundering, terrorist financing or other forms of financial crime. A common platform creates an opportunity to centrally execute these processes.

Process automation for smart contracts

When assets are issued on a public platform, then they can be managed directly by smart contracts without the need for a trusted intermediary and coordination across different platforms.

“Dunbar Project” Work System

The “Dunbar Project” is divided into three parallel workflows, the design workflow and the technical workflow, where the technical workflow is also divided into two parts to develop technical prototypes on two different DLT platforms (Corda and Quorum) , transforming the idea of ​​a multinational CBDC mutual aid platform into a prototype.

Interpretation of BIS Multinational Central Bank Digital Currency Interoperability Plan "Dunbar Project" (1): Platform Design

Figure 4 Dunbar Project Workflow

Many basic functions required for a multi-country CBDC interoperability platform, such as CBDC issuance, trading and redemption, are similar to domestic wholesale CBDC systems. As this area has been the subject of significant research efforts by central banks and technology providers, many of these capabilities have been developed and are available as pre-existing capabilities on both DLT platforms. As such, the Dunbar Project does not seek to replicate these efforts, but instead focuses on the specific needs of a multi-country CBDC interoperability platform.

The goal of the technical workflow is to develop technical prototypes on two different DLT platforms (Corda and Quorum), turning the idea of ​​a multi-country CBDC interworking platform into a working prototype. Corda platform development is led by R3, while Quorum platform development is led by Partior (with support from DBS, JPMorgan and Temasek). The two prototypes were developed from the requirements and designs presented in the design workflow, while leveraging the existing underlying capabilities and architecture of their respective platforms. These functions and features are enhanced to support the specific needs of a multi-country CBDC interworking platform.

As an exploratory project, the goals of the three parallel workflows were also based on the sequencing of key information needed by technology partners to develop prototypes.

Table 1 Goals of each workflow

Interpretation of BIS Multinational Central Bank Digital Currency Interoperability Plan "Dunbar Project" (1): Platform Design

Design example of multi-country CBDC interoperability platform

A multi-country CBDC interoperability platform requires basic capabilities across the three domains of governance, process and technology.

Interpretation of BIS Multinational Central Bank Digital Currency Interoperability Plan "Dunbar Project" (1): Platform Design

Figure 5 Multi-country CBDC interworking platform functions and precautions

Governance function

Governance functions are related to platform operations, usage rules and boundaries, and decision-making mechanisms. A key part of governance is specifying participants and stakeholders, and their roles and responsibilities on the platform. Other aspects of governance include considerations for accessing the platform, how members can join the CBDC Interoperability Platform, decision-making structures, and how rules are developed and applied.

Process function

Processes are related to the functions required to complete payment transactions and perform those operations. As this phase focuses on proving the viability of cross-border payments, much of the work revolves around the interbank payment process. It has to do with the integration and connectivity capabilities of the central banking system.

technical function

Technology refers to the need for a complete solution to realize the technical delivery of the multi-country CBDC interoperability platform. The technical infrastructure includes servers, networks and DLT platforms that enable central banks to communicate with each other on a shared platform.

Application example of multi-country CBDC interoperability platform

On a multi-country CBDC interworking platform, each participating central bank issues CBDC in its own national currency. Participating commercial banks are able to hold these CBDCs directly and do not need to obtain foreign currency through an account with a linked bank.

For example, Bank of Singapore is a banking group that holds licenses to operate in Singapore and Malaysia. It can use the national payment systems of both jurisdictions and can be settled in two central bank currencies (Singapore dollar and Malaysian ringgit). The multi-national central bank digital currency exchange platform is designed to allow the bank to directly hold currencies in jurisdictions where it does not operate, such as CBDCs in Australia and South Africa. In this way, it can hold Australian and South African Rands issued by the central banks of Australia and South Africa. This enables all banks participating in the platform to hold multiple currencies and conduct direct transactions with each other. For example, Singaporean banks can pay directly to South African banks for their Australian CBDC holdings, which was not possible in the past system.

Interpretation of BIS Multinational Central Bank Digital Currency Interoperability Plan "Dunbar Project" (1): Platform Design

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