Details have been revealed of an international collaboration to develop a prototype platform for the tokenisation of financial instruments known as promissory notes.
The experimentation, which is expected to run for at least 12 months, is being spearheaded by the Bank for International Settlements (BIS) Innovation Hub, Washington DC-headquartered World Bank and Swiss National Bank (SNB). The International Monetary Fund (IMF) is participating as an observer.
The context to the initiative – known as ‘Project Promissa’ – is presented this week by the Switzerland-headquartered BIS Innovation Hub as having the potential to help a G20 ambition to deliver better, bigger and more effective multilateral development banks by substantially increasing their financing capacity.
‘Today, many international financial institutions (including multilateral development banks – MDBs) are partly funded by financial instruments known as promissory notes, most of which are still paper-based,’ a newly created BIS Innovation Hub webpage for the project explains.
‘While the current system provides the operational controls for member nations to make subscription and contribution payments to institutions like the World Bank, the custody of outstanding promissory notes can be digitised to address operational challenges and enhance efficiency,’ the webpage states.
Capitalising on DLT
Project Promissa is looking to build a proof-of-concept (PoC) digital platform for tokenised promissory notes. The aim is to complete the PoC and testing by ‘early 2025’.
Using distributed-ledger technology (DLT), the aim is to ‘simplify the management of the notes and provide a single source of truth for all counterparties throughout the notes’ lifecycles’.
‘That means that the government of a member nation and its central bank, acting as the designated custodian, will have a comprehensive overview of all notes outstanding with different international financial institutions. And, vice versa, international financial institutions, such as the multilateral development banks, will have uniform visibility of the outstanding notes held by different central banks,’ the BIS Innovation Hub explains.
Its website describes the volume of promissory notes across international financial institutions as ‘significant’, stating that two of the World Bank’s largest entities, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), ‘both have a substantial amount of notes pledged by member nations’.
‘While the project aims to simplify the management of promissory notes between member nations and international financial institutions, in the future it could be extended to include payments (or encashments) associated with such notes by integrating tokenised payment systems based on private or public money,’ the website also states.
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Improving ‘efficiency’ of MDBs’ financing
G20 finance ministers and central bank governors meeting on 12-13 October 2023 in Morocco noted that ‘transformative changes are required in MDBs’ vision, operating models and financing capacities’.
‘An effective way to address operational challenges and enhance the efficiency of MDBs’ financing strategies to support Sustainable Development Goals is digitisation,’ World Bank vice-president and treasurer Jorge Familiar wrote this week in a LinkedIn post about Project Promissa.
The collaboration is, he stated, looking to develop a platform that would ‘help countries move a step closer to pivot from paper-based promissory notes to digital financial instruments for our members’ contributions.’
The partnership with the BIS Innovation Hub and SNB would, he noted, ‘also promote international collaboration on the creation of digital public goods, thus enabling the development community to reap the benefits of emerging technology’.
The BIS Innovation Hub’s work on the project is being led by Swiss centre head Morten Bech.
Moving on from ‘piles of paper’
BIS Innovation Hub head Cecilia Skingsley first mentioned the project in a speech at a conference organised by the Atlantic Council in Washington DC on 28 November 2023.
‘Let me tell you something that is happening not too few miles away from here,’ she said (in a speech titled ‘Shaping the future financial system in the public interest’). ‘We’re actually building a real structure around tokenisation together with the World Bank. And this is the first time I can talk about this in the public space.’
Skingsley described the project as ‘simplifying the process for making development money available for emerging and developing economies through international financial institutions’, describing work as currently operating through ‘quite an arcane structure’.
‘There are papers – piles of paper – sitting in vaults across central banks, the World Bank, and receiving institutions across the world,’ she said. ‘So, here we are collaborating and say: can we actually get tokenisation methodology to work in reality? It’s not going to revolutionise the world, ladies and gentlemen, but by trying these things and make it work in a real-life setting, I think we will make a lot of progress.’