MAS and the Bank of France put cross-border transactions to the test in a CBDC test

MAS and the Bank of France put cross-border transactions to the test in a CBDC test

In a joint announcement on Thursday (July 8), the Bank of France and the Monetary Authority of Singapore (MAS) Announced the successful completion of a wholesale cross-border settlement and payment experiment using central bank digital currency (CBDC).

The experiment, supported by JP Morgan’s Onyx, simulated cross-border transactions involving multiple CBDCs (m-CBDCs) on a common network between Singapore and France.

It simulated cross-border and cross-currency transactions for CBDC in Singapore dollars (SGD) and CBDC in euros (EUR), and was carried out using an authorized and privacy-enabled blockchain based on Quorum technology.

Although the experiment was limited to two central banks, the design of the m-CBDC network allows it to be expanded to support the participation of multiple central banks and commercial banks located in different countries.

What are central bank digital currencies?

A central bank’s digital currency uses an electronic register or digital token to represent the virtual form of a fiat currency of a particular nation. They act as a digital representation of a country’s fiat currency and are backed by an appropriate amount of reserves, such as gold or foreign currency.

CBDCs are centralized and are issued and regulated by the competent monetary authority of each country.

Like normal coin bearing a unique serial number, each CBDC unit will also be distinguished to avoid counterfeiting.

According to InvestopiaThe Bank of England was the pioneer in initiating the CBDC proposal. After that, banks in other countries such as China, Canada, Uruguay, Sweden, Thailand and Singapore also began to study the possibility of producing a CBDC.

Key results of the Singapore-France pilot

According to an announcement by The Banque de France, four key results of the experiment were achieved:

First, the experiment demonstrated interoperability between different types of cloud infrastructure. The blockchain nodes were set up on public and private cloud infrastructures in both countries.

Furthermore, the configuration of an experimental m-CBDC network succeeded in incorporating an automated liquidity pool and a market making service for the EUR / SGD currency pairs. The use of smart contracts automatically managed the EUR / SGD exchange rate according to the transactions and market demands in real time.

The design of a common m-CBDC network also allows the two central banks to have visibility over cross-border payments, while maintaining independent control over the issuance and distribution of their own CBDCs.

Finally, the simulation of an experimental m-CBDC network showed that the number of correspondent banks involved in the payment chain for cross-border transactions could be reduced.

Consequently, the number of contractual agreements, the KYC (Know Your Customer) burden, as well as the associated costs, could be reduced.

Building a multi-currency shared accounting infrastructure enables participants from all countries to transact with each other directly in different currencies. This m-CBDC experiment has broken new ground by decentralizing the financial infrastructure, to improve liquidity management and market making services. It paves the way for scalable CBDC networks where central banks and commercial banks can work together to achieve the vision of a cheaper, more secure and more efficient infrastructure for cross-border payments.

Sopnendu Mohanty, Director of Financial Technology, MAS

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Featured Image Credit: Euromoney