Shalini Nagarajan

Tobias Adrian, a financial counselor at the International Monetary Fund (IMF), recently discussed ways to revolutionize money with the global equivalent of a central bank digital currency (CBDC) system.



In a speech at a roundtable on CBDCs this week, Adrian explored the underlying infrastructure of money and shared a blueprint for enhancing cross-border and domestic payments, saying it could usher in a new era of financial transactions.



He discussed the difficulties cross-border payments face, including high costs, slow processing and need for more transparency. Adrian noted the IMF, World Bank, Bank of International Settlements and the Financial Stability Board have been working together on this issue.



A potential solution would involve a trusted ledger to provide a secure and reliable electronic system where property rights can be recorded.



“Expressed in today’s language, the vision is for a trusted ledger, which is essentially an electronic document representing property rights on which digital versions of central bank reserves in any currency can be traded among participants,” he <a href="https://www.imf.org/en/News/Articles/2023/06/19/sp061923-exploring-cross-border-and-domestic-payment-and-contracting-platforms" target="_blank" rel="noreferrer noopener">said</a>.



Adrian then broke down a platform concept called &#8220;XC&#8221; for cross-border payments and contracting, which consists of three main layers: settlement, programming financial contracts and managing information.



The idea would be to promote seamless money settlement across multiple fiat currencies on a single system.&nbsp;



<h2 class="wp-block-heading">Multicurrency system without a new settlement token</h2>



The IMF suggests developing distinct and standardized digital representations for fiat currencies, allowing for interchangeability.



Under the vision, XC platforms would facilitate multicurrency transactions without introducing a new settlement asset. Cryptocurrencies including XRP have been pitched as such a middleware cryptocurrency. 



The IMF’s XC platforms would instead allow users to freely select the currencies involved, while central banks maintain control over reserve allocation.



Through programming, contracts can be automated (as is the case with <a href="https://blockworks.co/news/eu-passes-smart-contracts-policy" target="_blank" rel="noreferrer noopener">smart contracts</a>), allowing for simultaneous currency swaps based on specific price conditions. This eliminates the need for parties to disclose sensitive information to a market maker when submitting their orders.



In terms of information management, XC platforms separate settlement and non-settlement services, including compliance checks. This ensures a clear division of responsibilities. Countries retain control over limits on foreign currency holdings and transactions, as well as compliance checks.



<h2 class="wp-block-heading">Domestic CBDC systems could plug into global ledger</h2>



He pointed out that XC platforms have a broader application beyond cross-border payments and can also benefit domestic financial systems.&nbsp;



To address this, he suggested the creation of domestic equivalents of the XC platforms, powered by individual CBDCs.



“A CBDC platform would be designed much in the same way as an XC platform. Its single ledger would be compatible with those of private firms,” he said.



He pointed out that more work needs to be done to test the technology and establish the necessary legal and governance frameworks.



CBDC systems vary in implementation and technological underpinnings, but they mostly run on private blockchains controlled by government institutions. This is opposed to the permissionless decentralized networks on which major cryptocurrencies like bitcoin and ether have been deployed.



The IMF has <a href="https://blockworks.co/news/imf-blockchain-good-crypto-disappoints" target="_blank" rel="noreferrer noopener">previously suggested</a> that private blockchain networks can make payments and settlements faster and more secure.



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IMF advisor sees power in global ledger that works with CBDCs

India&#8217;s central bank is ramping up two ongoing central bank digital currency (CBDC) test projects, which study both retail and wholesale implementations of a digital rupee.



The Reserve Bank of India (RBI) says it’s now introducing a range of use cases and features for the pilots over the next financial year. The Reserve Bank launched the digital rupee — or e-Rupee — <a href="https://blockworks.co/news/india-central-bank-hopes-cbdc-can-combat-crypto-threat" target="_blank" rel="noreferrer noopener">pilots</a> last year.



There are plans to expand the retail pilot, bringing in a larger number of participating banks, according to the bank’s <a href="https://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/0ANNUALREPORT20222322A548270D6140D998AA20E8207075E4.PDF" target="_blank" rel="noreferrer noopener">annual report</a> published on May 30. 



India’s wholesale CBDC tests commenced last November. The idea is to facilitate settlement of secondary market transactions in government securities using the digital rupee. Nine banks participated in the first phase.



The retail pilot kicked off in December, with the goal of using the digital rupee as a standin for physical currency notes. The central bank said eight banks are already involved in the retail pilot, and an additional five are in the process of joining.



“The results of both the pilots so far have been satisfactory and in line with expectations,” RBI said.



The issuance and redemption of the e-Rupee will be handled by the RBI, while the distribution and payment services will be entrusted to the banks.



“Settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk,” the bank said.



Before the pilots, a <a href="https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CONCEPTNOTEACB531172E0B4DFC9A6E506C2C24FFB6.PDF" target="_blank" rel="noreferrer noopener">&#8220;concept note&#8221; on CBDC</a> was released to increase awareness. In this note, the RBI said the e-Rupee would provide another option alongside traditional forms of money. While it is similar to physical banknotes, being digital makes it potentially easier, faster and cheaper to use, per the central bank.



RBI noted that India has become more resilient in the aftermath of the pandemic, largely due to the wave of digital transformation.



As of now, the specific technology behind the e-Rupee is unclear. The RBI still appears to be figuring out whether to opt for a regular centralized payments system, like WeChat and Venmo, or a distributed ledger technology (DLT) system.



Reuters&nbsp;<a href="https://www.reuters.com/markets/currencies/india-cenbank-says-digital-currency-transactions-stay-largely-anonymous-2022-12-07/" target="_blank" rel="noreferrer noopener">reported</a>&nbsp;in December that RBI was working with DLT, a term which mostly encompasses enterprise blockchain. But the official concept note states DLT systems, in their current form, are only viable in limited capacities. Blockworks has reached out to the RBI to learn more.



In any case, India is part of a small group of countries testing CBDCs, alongside&nbsp;<a href="https://blockworks.co/news/rba-to-explore-cbdc-use-cases-in-australia-via-research-pilot" target="_blank" rel="noreferrer noopener">Australia</a>,&nbsp;<a href="https://blockworks.co/news/china-cbdc-government-salaries" target="_blank" rel="noreferrer noopener">China</a>,&nbsp;<a href="https://blockworks.co/news/digital-hong-kong-dollar-trial" target="_blank" rel="noreferrer noopener">Hong Kong</a>, and&nbsp;<a href="https://blockworks.co/news/nigeria-cbdc-push-limits-cash-withdrawals" target="_blank" rel="noreferrer noopener">Nigeria</a>. Meanwhile, the US is&nbsp;<a href="https://blockworks.co/news/banks-pen-paper-cbdc-implementation" target="_blank" rel="noreferrer noopener">inching closer</a>&nbsp;to potentially deciding on formally proposing a Fed-issued digital dollar.



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India To Onboard More Banks For Digital Rupee Pilots

Sebastian Sinclair

Distributed ledger technology (DLT) such as enterprise blockchain could unlock $20 billion in annual savings across global clearing and settlement costs.



That’s according to a report from the Global Financial Markets Association (GFMA) in collaboration with Boston Consulting Group and two other law firms. The GFMA is a global body representing interests of capital markets participants and stakeholders.



Its report evaluates opportunities and risks associated with settling global trade on DLT-based systems. 



Despite the promising outlook, the GFMA acknowledged widespread adoption of DLT in securities markets has yet to occur, largely due to a lack of institutional interest alongside poor liquidity and risk management.



Investor demand for securities running on DLTs is likely to hinge on fixed-income offerings (corporate bond markets), and tokenized &#8220;illiquid and private asset classes like investment funds.”



“The global value of tokenized illiquid assets is estimated to be worth about $16 trillion by 2030, from a base of [around $0.3 trillion] today,” the report said. “New instruments (e.g., tailored frequency income payments) through product innovation may also act as a key value driver to serve client needs.”



DLT is a broader term that encompasses various decentralized technologies, while blockchain is a specific implementation of DLT with differing governance, consensus mechanisms, scalability and use cases.



Adam Farkas, GFMA chief executive said DLT holds growth potential and calls for a regulatory framework supporting stability, responsible innovation and fair competition.



“Policymaking should focus on creating a regulatory framework that supports financial stability and responsible innovation in digital asset markets,” Farkas said in a <a href="https://www.gfma.org/banks-call-for-regulators-to-take-more-innovative-approach-to-dlt/" target="_blank" rel="noreferrer noopener">statement</a>.



The executive also urged officials to “find a way forward” ensuring stability and protections, while also allowing the industry and wider economy to grab hold of the benefits the nascent tech promises.



Australia’s planned DLT overhaul of its primary securities exchange is perhaps the most prominent attempt at running a major settlement system on the technology.



The ASX ultimately <a href="https://blockworks.co/news/blockchain-not-bitcoin-is-dead-australian-bourse-cans-dlt-shift" target="_blank" rel="noreferrer noopener">canned the idea</a> late last year after spending $170 million.



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Tokenized Assets, Distributed Ledgers Could Save Finance Billions: GFMA

The Australian Securities Exchange (ASX) has placed a blockchain system (DLT) intended to upgrade its aging settlement layer on indefinite hold after three years of development.



The move marks the end of what was to be one of the most impactful implementations of distributed ledger technology — business-speak for <a href="https://cms.blockworks.co/news/enterprise-blockchain-provider-targets-wall-street-partners-with-rebrand" target="_blank" rel="noreferrer noopener">enterprise blockchain</a> — to date.



In a <a href="https://www2.asx.com.au/content/dam/asx/about/media-releases/2022/60-17-november-2022-CHESS-Replacement-ASX-reassessing-financial-derecognition_.pdf" target="_blank" rel="noreferrer noopener">statement</a> on Wednesday, ASX said its DLT, once pegged to replace its 25-year-old Clearing House Electronic Subregister System (CHESS), simply didn’t measure up.



ASX inked a <a href="https://www.asx.com.au/documents/about/MediaRelease-ASX-DigitalAsset-and-VMware-join-forces-on-DLT.pdf" target="_blank" rel="noreferrer noopener">three-party memorandum of understanding</a> in 2019 with enterprise blockchain firm Digital Asset and cloud computing giant VMware to build the software.



Between 245 million and 255 million Australian dollars ($165 million to $171 million) spent on developing the DLT will be scrubbed from ASX’s balance sheet starting next year, a spokesperson told Blockworks. 



The funds were previously listed as a financial asset or liability. ASX doesn&#8217;t expect the outcome to impact the company’s dividends.



DLTs are private (permissioned) blockchain-powered networks; databases involving multiple vetted parties across multiple trusted nodes, which process actions within a closed system.&nbsp;



Large companies and other institutions have gravitated towards DLT solutions rather than permissionless blockchains, as they award supreme power and control over the networks they support, with “blockchain, not Bitcoin” the mantra for many over the past five years.



Compare that with public (permissionless) blockchain systems such as Bitcoin and Ethereum. These networks have no central power and allow anyone at all (with the right equipment) to join, validate and otherwise participate in the network.



The ASX spokesperson said that while current activities on the project have been paused, it has not definitively ruled out a DLT implementation in the future.&nbsp;



“As we revisit solution design we will go back with an open mind,” the spokesperson said. “We will evaluate a number of options and we will work with both [Digital Asset] and VMware in those investigations.”&nbsp;



<h3 class="wp-block-heading">ASX repeatedly pushed back its DLT blockchain system</h3>



The Australian bourse, which handles clearing, settlement and registration of securities and equities in the country, first began exploring options to replace CHESS more than seven years ago.&nbsp;



Toward the end of 2018, DLT was tipped as the technology of choice to help modernize its systems, leading to a formal agreement to develop a blockchain-based solution a year later.



Some ASX customers initially balked at the idea, complaining that the blockchain implementation could ultimately fail. The exchange delayed the implementation <a href="https://www.thetradenews.com/asx-confirms-one-year-delay-to-dlt-post-trade-system/" target="_blank" rel="noreferrer noopener">several times</a> due to concerns over exactly how the new system would function.&nbsp;



The transition was initially slated to go live in 2020. Citing significant challenges posed by the design, ASX’s decision to can its DLT stemmed from a <a href="https://www2.asx.com.au/content/dam/asx/markets/clearing-and-settlement-services/asx-chess-replacement-application-delivery-review-2022.pdf" target="_blank" rel="noreferrer noopener">review</a> undertaken by IT consulting giant <a href="https://cms.blockworks.co/news/asx-taps-accenture-to-review-delayed-delivery-of-blockchain-system/" target="_blank" rel="noreferrer noopener">Accenture</a>, which was started in <a href="https://cms.blockworks.co/news/asx-taps-accenture-to-review-delayed-delivery-of-blockchain-system" target="_blank" rel="noreferrer noopener">August this year</a> and issued earlier this month.



Accenture said distributed systems introduce higher latency, exacerbated by multiple layers including client nodes, CHESS’ application and the ledger itself, where transactional data is stored.



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