The Bank for International Settlements (BIS) and the central banks of France, Singapore and Switzerland have successfully completed a novel experiment on cross-border payments using wholesale central bank digital currencies (wCBDCs). The project, dubbed Project Mariana, tested the feasibility and efficiency of using wCBDCs for cross-border trading and settlement between financial institutions, using new decentralized finance (DeFi) technology concepts on a public blockchain.
What are wCBDCs and why are they important?
Central bank digital currencies (CBDCs) are digital forms of money issued by central banks that can be used as legal tender. Unlike cryptocurrencies, CBDCs are backed by the full faith and credit of the issuing authority and are subject to regulation and oversight. CBDCs can be classified into two types: retail CBDCs, which are intended for general public use, and wholesale CBDCs, which are restricted to financial institutions and markets.
Wholesale CBDCs (wCBDCs) have the potential to enhance the efficiency, speed, security and transparency of cross-border payments and settlements, which are currently plagued by high costs, delays, risks and frictions. By enabling peer-to-peer transactions between financial institutions without intermediaries, wCBDCs can reduce operational costs, settlement risks and counterparty risks. Moreover, wCBDCs can facilitate cross-currency and cross-jurisdictional interoperability, as well as innovation in financial services and products.
How did Project Mariana work?
Project Mariana was developed jointly by three BIS Innovation Hub centres (the Swiss, Singapore and Eurosystem Hub Centres) together with Bank of France, Monetary Authority of Singapore and Swiss National Bank. The project’s proof of concept successfully tested the cross-border trading and settlement of hypothetical euro, Singapore dollar and Swiss franc wCBDCs between simulated financial institutions. The process relied on three elements:
- A common technical token standard provided by a public blockchain to facilitate exchange and interoperability between the different currencies.
- Bridges for the seamless transfer of wCBDCs between different networks.
- An Automated Market Maker (AMM), which is a specific type of decentralized exchange to trade and settle spot FX transactions automatically.
For Project Mariana, the AMM pooled the liquidity of the hypothetical euro, Singapore dollar and Swiss franc wCBDCs with innovative algorithms enabling spot FX transactions to be priced and executed automatically and settled immediately. These protocols could be used by the next generation of financial market infrastructures facilitating cross-border trading and settlement between financial institutions.
What are the implications and challenges of Project Mariana?
Project Mariana’s architecture balances central banks’ domestic need for oversight and autonomy with financial institutions’ interest in efficiently holding, transferring, and settling wCBDC across borders. This is achieved through the use of a common token standard on a public blockchain which facilitates interoperability and seamless exchange of wCBDC across varied local payment and settlement systems maintained by participant central banks. As such, Mariana offers possible approaches to factoring an international dimension into current wCBDC design explorations.
As tokenization and DeFi technologies are still nascent, further research and experimentation is needed to address the technical, legal, regulatory and governance challenges that may arise from the use of wCBDCs for cross-border payments. Some of these challenges include ensuring compliance with anti-money laundering and counter-terrorism financing rules, safeguarding data privacy and cyber security, managing liquidity risks and market distortions, coordinating standards and policies among different jurisdictions, and ensuring interoperability with existing systems and platforms.
Project Mariana is one of the many initiatives that the BIS and its partner central banks are undertaking to explore the potential benefits and challenges of CBDCs. The BIS Innovation Hub is also working on other projects related to retail CBDCs (Project Aurum), green finance (Genesis 2.0), tokenized securities (Project Helvetia) and synthetic CBDCs (Project Dunbar). These projects aim to foster international collaboration and innovation in central banking in the digital age.
