Professional Documents
Culture Documents
The objective of major cross-border payment innovation projects is focused on reducing frictions and
barriers among the counterparties in an effort to increase efficiency, reduce cost, and reduce time and
complexity for conducting such transactions(Bindseil & Pantelopoulos, 2022). Central Bank Digital
Currency (CBDCs) is one innovation in the monetary policies of the world that has been heavily
researched in the recent past(Kosse & Mattei, 2022) and central banks across the world have been
increasingly conducting pilot projects into establishing CBDC systems and infrastructures and building a
framework for cross border payments like the Jasper-Ubin project(Scott & Sopnendu, 2019).
This paper proposes a Bilateral or Multilateral model that outlines a framework for cross-currency
payments utilizing future CBDC infrastructure. Being a theoretical model, the authors have chosen to
exclude practical development considerations and macroeconomic working explanations.
Interoperability is the primary aspect of the proposed model to overcome frictions that are mainly
caused due to the number and layers of intermediaries that exist in the current payment systems which
have two legs, the payment clearing and settlement system and the messaging and information system.
hence the aim is to reduce the number of intermediaries to a minimum. These intermediaries exist in
both the message/information exchange system as well as the payment settlement system.
Two independent CBDC systems with independent monetary policy systems are conceptualized to be
linked using a coalition blockchain(Liao & Wang, 2020). acting as the shared technical interface and
clearing and settlement mechanism. The Jasper-Ubin pilot project (Scott & Sopnendu, 2019)
demonstrates a shared technical interface using Hashed Timelocked Contract technology to support
contractual agreements based on smart contracts created on DLTs. The secondary approach links CBDC
systems using common clearing mechanisms and settlement accounts where central banks or authorized
financial government intermediaries hold settlement accounts with the trading country's central banks
or authorized financial intermediaries. This clearing system can take a centralized approach like the
TARGET2 settlement system or a decentralized system like the EAPS. (Bech, 2020)
A coalition blockchain DLT can serve both as a shared interactive technical interface and a common
clearing system. This system integrates messaging systems like SWIFT and the clearing settlement on the
same platform (Liao & Wang, 2020). The coalition blockchain would be a multi-layered arrangement
where different layers would handle different functions of the cross-border payment function. A storage
layer stores cross-border payment data, the Hash h(x) functions for the HTLC, and given that the
coalition blockchain has limited access granted to authorized financial institutions, the data is auditable
due to ease of search using hash pointer (Islam et al., 2023). The customized consortium/coalition
blockchain allows for the recovery of funds as well since financial authorities with access can implement
contingency protocols that sort out issues regardless of the inability to reverse a block exists (Islam et al.,
2023). The digital currency clearing and settlement system is placed in the payment interface layer along
with the user interface mechanism. The user mechanism includes Retail CBDC e-wallets held by
individuals under account with the authorized government financial intermediary or the central bank
directly(Bjerg, 2017). The government is advised to charge nominal cross-border payment fees to make
the system financially sustainable assuming this cost would be less than the current average 6% of the
transaction value lost in transaction fees paid to intermediaries. A consortium blockchain layer is
intercalated between these layers to facilitate and provide technical backing to the clearing system and
the HLTC layer. The authority financial intermediary gains access to the consortium blockchain in this
layer via a consensus mechanism. This layer holds the smart contracts on the DLT which determine the
exchange rate for the currency conversion. The presence of smart contract eradicates the need for
escrow accounts or intermediaries that hold necessary funds or information when two parties enter into
a contract. The smart contract can be customized to block amount or information in the account for both
parties rather than transferring money and information to escrow intermediaries therefore reduce
intermediary counterparty risk. This customization reduces transfer fees, and escrow fees and reduces
time since it rids the conventional system of layer of intermediaries.
CBDC interlinked system combined with a consortium blockchain DLT allows for PvP (payment vs
payment) compatibility that may not be possible with an entirely decentralized and informal
system.