The central banks of China and the United Arab Emirates (UAE) have teamed up with the equivalent authorities in Hong Kong and Thailand to investigate the potential for central bank digital currency (CBDC) use in cross-border foreign currency payments.
The People’s Bank of China’s Digital Currency Institute (PBC DCI), Central Bank of the United Arab Emirates (CBUAE), Hong Kong Monetary Authority (HKMA) and Bank of Thailand (BOT) this week released a joint-statement setting out that the PBC DCI and CBUAE would be joining the second phase of ‘Project Inthanon-LionRock’, the CBDC project focused on cross-border payments initiated by the HKMA and the BOT.
The four authorities are also collaborating with the Bank for International Settlements (BIS) Innovation Hub Centre in Hong Kong, with the project being renamed as ‘m-CBDC Bridge’ (the ‘m’ stands for ‘multiple’).
The project will further investigate the capabilities of distributed ledger technology (DLT), through developing a proof-of-concept (PoC) prototype, to facilitate real-time cross-border foreign exchange payment-versus-payment transactions in a multi-jurisdictional context and on a 24/7 basis.
It will also explore business use cases in a cross-border context using both domestic and foreign currencies. Two securities exchanges, 19 banks, three consultancy firms and five further corporates will participate through interviews and workshops.
Aiming to ‘alleviate current pain points’
Most central banks are researching or experimenting with central bank digital currencies (CBDC), with China’s journey towards a digital yuan one of the most progressed and highest-profile examples.
CBDC is also among six priorities set out by the BIS Innovation Hub in its 2021-2022 work programme, published last month.
The m-CBDC Bridge project would ‘foster a conducive environment for more central banks in Asia as well as other regions to jointly study the potential of DLT in enhancing the financial infrastructure for cross-border payments,’ BIS said this week.
BIS, whose headquarters is in the Swiss city of Basel, explained that m-CBDC Bridge’s specific aim is to ‘propose solutions and concepts to alleviate the current pain points in making cross-border fund transfers’. These include inefficiencies, high cost and complex regulatory compliance. Features including payment tracking, messaging format standardisation and ‘preliminary’ compliance checking will be studied.
The quartet of central banks will take into account the results of the PoC work to evaluate the feasibility of the CBDC Bridge project for cross-border fund transfers, international trade settlement and capital market transactions in their own jurisdictions, BIS added.
Project findings will be published ‘at the appropriate moment’ and, afterwards, the participating entities would enter into pilot trials on the m-CBDC Bridge using real transactions.
UAE is building on ‘Project Aber’
The Central Bank of the UAE has already run a wholesale CBDC proof-of-concept with the Saudi Central Bank to settle domestic and cross-border transactions using central bank money via distributed ledger technology.
The two central banks published a 93-page report on their joint-initiative, known as ‘Project Aber’ last year, having announced their plans in 2019. ‘Aber’ is Arabic for ‘crossing boundaries’, capturing the project’s cross-border nature as well as the central banks’ ‘hope that it would also cross boundaries in terms of the use of the technology’, the report noted.
Project Inthanon-LionRock also launched in 2019, with US-headquartered blockchain firm ConsenSys appointed last year to ‘work on the second implementation stage’ alongside consultancy PricewaterhouseCoopers and Forms HK, a Hong Kong-based fintech.
The HKMA and CBUAE have also jointly announced this week the agreement of a Memorandum of Understanding (MoU) to bolster co-operation between the two jurisdictions in promoting ‘innovative financial services and regulatory development’. “The HKMA has been making considerable efforts to expand our international fintech network to include counterparts in the Middle East,” said HKMA chief executive Eddie Yue.