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BIS Innovation Hub highlights tokenisation ambition in 2024 work priorities

BIS into 2024: the Bank for International Settlements Innovation Hub – which is headed by Cecilia Skingsley (inset) – has unveiled its priority workstreams | Credit: Tumisu (Pixabay) and (inset) BIS)

The Bank for International Settlements (BIS) Innovation Hub is gearing up for its ‘most ambitious project yet in terms of partners’ as it unveils 2024 priorities.

The Innovation Hub was established by Switzerland-headquartered BIS in 2019 to identify and develop insights into fintech trends, explore the development of tools to improve the functioning of the global financial system and become a focal point for central bank experts. Activities across its growing number of locations around the world are closely watched by financial authorities eyeing the cutting-edge of fintech innovation globally. Its fourth annual work programme, announced today (23 January), spans activity across the Innovation Hub’s six centres in Singapore, Hong Kong, Frankfurt/Paris, London, Stockholm and its ‘home’ nation Switzerland.

Shaping up as one of the Innovation Hub’s most significant initiatives is the development of a new type of financial infrastructure that BIS believes has the potential to ‘radically’ improve the global financial system, according to a ‘blueprint’ published last June. The ‘unified ledger’ infrastructure would combine tokenised forms of central bank digital currency (CBDC) with tokenised bank deposits and other tokenised claims on a programmable platform. Many of the components are already in place – or at least relatively well progressed through Innovation Hub-led experimentation.

“We are lining up what is probably going to be our most ambitious project yet in terms of partners, exploring tokenisation in a sort of multi-jurisdiction way,” BIS Innovation Hub head Cecilia Skingsley revealed during a media briefing attended by Global Government Fintech ahead the publication of the 2024 work programme (which does not specifically mention the ‘unified ledger’ initiative).

“We will line up partners from different countries and explore (a) multi-currency ledger for cross-currency transactions, given [BIS’s internal] approval process going our way, obviously,” Skingsley explained. “That’s going be a very exciting way to see: can we use tokenisation to build better infrastructures for the financial system.”

RELATED ARTICLE BIS releases ‘game-changing’ blueprint for global financial system – a news article (20 June 2023) on the special chapter of BIS’s 2023 annual economic report that detailed the ‘unified ledger’

Tokenisation is ‘key development’

The ‘Blueprint for the future monetary system: improving the old, enabling the new’, detailed in a chapter of BIS’s 2023 annual economic report, necessitates what is described as a ‘rethinking’ of the monetary system’s existing pillars.

‘The monetary system stands at the cusp of [a] major leap. Following dematerialisation and digitalisation, the key development is tokenisation – the process of representing claims digitally on a programmable platform,’ the chapter stated (BIS’s fuller explanation of tokenisation can be found at the end of this article).

‘Bringing together central bank money, commercial money, and different assets on the same platform, all tokenised and interacting, opens up a whole new range of possibilities. This would be a game-changer in how we think about money and how transactions take place,’ said BIS economic adviser and head of research Hyun Song Shin at the time.

In answer to a Global Government Fintech question during a BIS media briefing ahead of the chapter’s release about what BIS wanted to happen next, Shin responded that this was the ‘central question’. He said that he envisaged ‘a great deal of alignment’ between central banks and the private sector around the possibilities and that the ‘next step’ was to ‘bring the two parts together’.

BIS general manager Agustín Carstens first spoke of a ‘unified ledger’ in a speech (‘Innovation and the future of the monetary system‘) in Singapore 11 months ago.

RELATED ARTICLE South Korean authorities explore ‘unified ledger’ for CBDC – a news story (18 October 2023) on a major new CBDC initiative described as ‘representing the initial step in the development of a future monetary system for Korea’ – the programme, which is receiving technical input from the BIS, is focused on developing underlying wholesale (interbank) CBDC infrastructure, specifically mining the concept of a ‘unified ledger’

Promissa’s promise

Another significant project also focused on tokenisation for the Innovation Hub this year is the recently announced ‘Project Promissa’, which aims ultimately to help a G20 ambition to deliver better, bigger and more effective multilateral development banks by substantially increasing their financing capacity.

The project is testing the feasibility of tokenising promissory notes (financial instruments that help fund multilateral development banks and other international financial institutions). The experimentation, which is expected to run for at least 12 months, sees the Innovation Hub’s Swiss centre working alongside the Washington DC-headquartered World Bank and Swiss National Bank (SNB). The International Monetary Fund (IMF) is an observer.

In respect of CBDCs specifically, the Innovation Hub’s Hong Kong centre is embarking on a new phase for ‘Project Aurum’, which has already created a prototype for two-tier CBDC operations (two-tier meaning when a central bank issues and redeems CBDC, and distribution and payment services are delegated to the private sector). Project Aurum’s prototype system, together with technical manuals and the source code, was made accessible in 2022 to all BIS member central banks on BIS Open Tech – an ‘open’ platform for sharing nascent financial and statistical software as public goods – ‘to help catalyse and inspire the global quest for the most suitable retail CBDC architecture’.

In the newly announced phase, the Hong Kong centre will focus on retail CBDCs’ payments’ privacy. The goal is to make use of expertise from academia and privacy regulators ‘to advance central banks’ understanding of privacy in the design of CBDC systems’.

At this week’s media briefing Skingsley referred to privacy in payments as “an issue that’s discussed in media a lot – and social media even more”, saying that the topic was “something we hear and see and [are] taking action [on]”. She highlighted the Innovation Hub’s recently concluded ‘Tourbillon’ and ‘Aurora’ projects.

RELATED ARTICLE BIS Innovation Hub announces 2023 priorities – our news story (9 February 2023) on the Innovation Hub’s third annual work programme

New projects for 2024

In terms of new projects, the BIS Innovation Hub’s Hong Kong centre has launched an initiative testing the use of artificial intelligence (AI) and ‘Big Data’ technologies for supply-chain disclosure and adaptation. Dubbed ‘Project Symbiosis’, the project is seeking to improve the tracking of so-called ‘Scope 3’ emissions, which are indirect emissions that occur in the value chain of the reporting company.

A separate project – ‘Project NGFS Data Directory 2.0’, which is being led by the Innovation Hub’s Singapore centre – is also in the ‘green fintech’ ballpark. NGFS is the Central Banks and Supervisors Network for Greening the Financial System, which brings together 134 central banks and supervisors, as well as 21 observers. The project is looking to ‘rebuild’ the network’s ‘data directory platform’.

‘While the directory’s first version was built to systematically identify and map climate-related data gaps, the revised version will aim to facilitate searching and browsing through data sources, making the directory more usable as a public resource,’ BIS explains.

The Innovation Hub’s London centre, meanwhile, is aiming to test the use of ‘network analytics’ to help identify financial crime patterns in payment systems. Dubbed ‘Project Hertha’, this initiative is mapping ‘current and emerging financial crime typologies in real-time payment systems, drawing upon lessons from instant payment systems and digital asset networks.’ The project, a collaboration with the Bank of England (and which takes its name from prolific inventor and suffragette Hertha Ayrton), will also build a synthetic dataset ‘to test how the typologies could be identified accurately while reducing false positives’.

Project Hertha’s findings will be summarised in a report slated to be published by the end of 2024. Those involved are recruiting an advisory group (for which applications close tomorrow – 24 January) comprising representatives of public- and private-sector organisations, as well researchers and academics. 

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‘Almost 30’ projects instigated

Innovation Hub projects entering their next phase include ‘Project Leap’, which is focused on how quantum computing increases the vulnerability of the global financial system.

Experimentation during the first stage of Leap, which is being led by the Innovation Hub’s Eurosystem centre, involved the sending of test payment messages via a ‘quantum-resistant virtual private network (VPN) tunnel’ between servers located in Paris and Frankfurt. This experimentation concluded in June 2023 with the verdict that a quantum-safe financial system’s viability had been ‘proven’.

‘Now, the project will show how a payment system can be protected from the potential threat of quantum computers,’ BIS states.

The Innovation Hub has overall instigated ‘almost 30’ projects. Other projects that ‘will continue to develop’ this year are: ‘FuSSE’, ‘Gaia’, ‘Mandala’, ‘mBridge phase III’, ‘Nexus phase III’, ‘Pyxtrial’, ‘Rio’ and ‘Viridis’. Twelve projects were concluded during 2023: ‘Atlas’, ‘Aurora’, ‘Dynamo’, ‘Icebreaker’, ‘Leap phase I’, ‘Mariana’, ‘Meridian’, ‘Nexus phase ii’, ‘Rosalind’ phases i and ii, ‘Polaris’, ‘Sela’ and ‘Tourbillon’.

The Innovation Hub’s offices are now home to about 90 staff overall. A further Innovation Hub centre in the Canadian city of Toronto is apparently on track to open ‘soon’. Miguel Díaz, previously general director of payment systems and market infrastructures at the Bank of Mexico, was hired more than two years ago as its head.

The fourth BIS Innovation Summit, ‘Navigating rapid innovation’, will be held on 6-8 May 2024.

*** The NGFS, whose secretariat is provided by the Banque de France, last week announced the appointments of Deutsche Bundesbank executive board member Sabine Mauderer and South African Reserve Bank deputy governor Fundi Tshazibana (who is also chief executive officer of the Prudential Authority) as its new chair and vice-chair, respectively, both for a two-year term.