BIS and central banks explore cross-border CBDC using DeFi

The BIS Innovation Hub is launching a new project around central bank digital currencies (CBDCs) and Decentralised Finance (DeFi) protocols as part of its 2022 work programme.

BIS explore cross-border CBDC using DeFi

Project Marianaexplores automated market makers (AMM) for the cross-border exchange of hypothetical Swiss franc, euro and Singapore dollar wholesale CBDCs.

It will seek to examine the potential between financial institutions to settle foreign exchange trades in financial markets.

The project involves the Eurosystem, Singapore and Switzerland BIS Innovation Hub Centres together with the Bank of France, Monetary Authority of Singapore and Swiss National Bank. The aim is to deliver a proof of concept by mid-2023.

Project Mariana uses DeFi protocols to automate foreign exchange markets and settlement, potentially improving cross-border payments (and supporting a priority of the Group of 20).

Today, DeFi built on public blockchains uses smart contract protocols to automate markets for crypto and digital assets.

AMM protocols combine pooled liquidity with innovative algorithms to determine the prices between two or more tokenised assets. In the future, similar AMM protocols could form the basis for a new generation of financial infrastructures facilitating the cross-border exchange of CBDCs.

“This pioneering project pushes our CBDC research into innovative frontiers, incorporating some of the promising ideas of the DeFi ecosystem” said Cecilia Skingsley, Head of the BIS Innovation Hub. “Mariana also marks the first collaboration across Innovation Hub Centres; expect to see more in the future,” she added.

Decentralised finance (DeFi)

Decentralised finance (DeFi) employs public blockchain networks and smart contracts to build open, transparent, composable and non-custodial financial protocols.

Today, one of the main activities in DeFi is the decentralised exchange of tokenised assets via so-called automated market makers (AMMs).

These are a kind of smart contract that uses liquidity pools to transfer digital assets automatically, as opposed to the traditional process of matching buyers and sellers and seeking consent for each operation.

As DeFi and its applications have the potential to become systemically important parts of the financial ecosystem, central banks need to understand their impact for cross-border payments.

AMM protocols that combine pooled liquidity with innovative algorithms to determine the prices between two or more tokenised assets could form the basis for a new generation of financial infrastructures facilitating the cross-border exchange of CBDCs.

Thus, the project provides significant contributions to the G20 priority of making cross-border payments faster, cheaper and more transparent.

The project has three main objectives: (i) explore the design and application of AMMs for wCBDCs; (ii) investigate if a supra-regional network could work as an efficient and trusted hub for cross-border settlement; and (iii) research wCBDC governance models within that network.

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