A central bank fintech project experimenting with the concept of ‘synchronisation’ has presented its conclusions, highlighting what it describes as the potential to ‘catalyse innovation’ in wholesale payments.

‘Project Meridian’ has seen a team from the Bank for International Settlements (BIS) Innovation Hub’s London centre and the Bank of England (BoE) jointly exploring ‘synchronisation’ in which transactions settle using central bank money (reserves kept by commercial banks in the central bank) in a real-time gross settlement (RTGS) system. Funds transfer from a buyer to a seller only if a corresponding asset on another ledger – a house purchase registry in the project’s use case, but potentially any ledger or registry for other types of assets, such as equities or bonds – moves at the same time in the opposite direction.

The project saw the creation of a prototype entity – a ‘synchronisation operator’ – which used distributed-ledger technology (DLT) to interlink the central bank’s RTGS system with other financial market infrastructures and ledgers, automatically orchestrating the exchange in ownership of funds and assets.

The team behind the project conclude that synchronisation is a ‘relatively simple way to reduce the time, costs and risks of a transaction’. Synchronisation using central bank money eliminates such risks as a counterparty failing to hand over ownership of an asset (‘settlement risk’) or a payment not being completed, the Project Meridian page on the BIS website states. It could also reduce complexity and liquidity costs by cutting the amount of time and assets needing to be reserved for a specific transaction: an example being the management of escrow accounts, which temporarily hold a buyer’s funds in a ‘neutral’ third-party account.

Central banks and RTGS operators ‘can consider the benefits of this approach alongside others that improve payment infrastructures to improve wholesale settlement’ the Project Meridian report states, adding that ‘synchronisation can provide a catalyst for innovation in wholesale payments and support the emergence of new payments infrastructures that settle using central bank money’.

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House-sales as prime exemplar

The BoE itself is currently in the midst of a multi-year RTGS ‘renewal programme’. This overhaul is ‘prioritising features supporting innovation and global initiatives, which include synchronised settlement, extended operating hours and non-payment APIs [application programme interfaces],’ the central bank states on its website.

A seven-page ‘Background guide to proposed RTGS functionality: Synchronisation’ report, published by the BoE almost four years ago, states that ‘at the heart of synchronisation is the concept of “atomic settlement”’ – a phrase not used at all in the 44-page Project Meridian report.

This 2019 report also specifies the example of a house-sale in which ‘the seller doesn’t want to transfer ownership of the asset to the buyer until they are certain that they will receive the payment… and the buyer doesn’t want to transfer the payment to the seller until they are satisfied that ownership of the asset will be transferred’.

BoE consultations on synchronisation have highlighted various asset markets in which it could offer benefits. The most frequently cited, beyond housing transactions, are corporate actions, securities settlement and cross-border payments, the Project Meridian report states, adding that the Meridian prototype is designed to be extensible from a housing transaction to other asset classes.

Although the prototype used a DLT-based network to orchestrate the change in ownership of funds in an RTGS system and of the asset, in practice synchronisation operators could develop non DLT-based solutions, the report states.

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Prototype ‘assumptions need to be considered’

The BoE plans to ‘use the insights from the project to inform their work considering the introduction of synchronisation in its RTGS system beyond 2024’, the report states.

It goes on to explain that ‘assumptions made in the prototype will need to be considered’ and that, in developing synchronisation functionality, RTGS operators need to review these and assess policy and operational, regulatory and legal considerations.

Policy and operational considerations include security (a ‘trust model’), RTGS opening hours (‘synchronisation services would be restricted by existing RTGS operating hours, in the absence of any change’) and applicability to other use cases (beyond housing transactions).

In terms of regulatory considerations, the report points out that – in its experimentation –synchronisation operators placed an ‘earmark’ and initiated fund transfers in the RTGS system on behalf of account holders, and that ‘this activity will require some regulatory or supervisory oversight, although potentially less than if the operator actually took ownership of funds during the transaction process’. The degree to which the operators would be regulated or overseen needs further consideration, it adds.

Implementing synchronisation in practice would raise several legal questions, which are likely to vary across jurisdictions, the document also points out. These include settlement finality (determining the point the movement of cash in an RTGS system and the movement of the asset become final and irrevocable) and digital representation of asset ownership (for example, whether the time stamp of a digital deed, as implemented in the Meridian prototype for the housing market, is legally deemed as a change of property ownership).

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Project will ‘shape design’ of infrastructure

Project Meridian is the first experiment to be completed by the BoE-hosted BIS Innovation Hub London centre, which launched in 2021. It also involved HM Land Registry (a non-ministerial government department) and Coadjute, a London-headquartered ‘property technology’ company.

BIS Innovation Hub London centre head Francesca Hopwood Road said the project had “demonstrated the potential to improve the functioning of existing financial market infrastructures with new technologies such as DLT” and that “as central banks periodically update their settlement systems, the project’s insights will support the analysis of synchronisation’s benefits and shape how that service should be designed”.

Hopwood Road, who moved to the BoE from the UK’s Financial Conduct Authority, outlined the objectives of the project in March last year alongside a separate initiative called ‘Project Rosalind’. This project is building a prototype of an open application programming interface (API) to explore how it could best enable a central bank ledger to interact with private-sector service providers to safely distribute and settle retail central bank digital currency (CBDC) payments. A ‘techsprint’ for this project, due to be completed this month (April), will be followed by a final project report (expected to be published before the end of June).

The BIS Innovation Hub’s new Eurosystem centre, which has a twin location in Frankfurt and Paris, officially opened on 28 March. The centre was due to open in the first half of 2022 but the opening date was pushed back. Its initial projects are ‘Project Atlas’ (which aims to create an open-source crypto intelligence platform); ‘Project Leap’ (focused on testing cryptographic solutions that can withstand the processing power of quantum computers); and ‘Project Gaia’ (focused on how to increase the transparency of climate-related corporate disclosures).

FURTHER READING

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

‘BIS Innovation Hub London head outlines centre’s first two projects’ – news story (29 March 2022) on the launch of Project Meridian and Project Rosalind

‘BIS Innovation Hub centres open in Sweden and UK’ – news story (16 June 2021) on the opening of the Bank of England-hosted centre (and also a Nordic centre)

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The Global Government Fintech Lab 2023 will be taking place in Dublin on Thursday 18 May 2023. The Lab, our one-day event for senior public servants interested in exploring and implementing fintech solutions, is being organised in partnership with Ireland’s Department of Finance. The event, which is free to attend for all public servants, will feature keynote speeches, panels and breakout sessions focused on fintech-related opportunities and challenges for those working in central government, agencies and other public authorities.