CBDCs: Bank of International Settlements Explains how Interoperability and Common Interfaces are Needed for Central Bank Digital Currencies

Reserve banks across the globe are increasingly focusing on developing or at least considering central bank digital currencies (CBDCs). They’re also looking into potential new ways to use virtual currencies to enhance the cross-border payments infrastructure.

During the past few years, CBDCs have become one of the most researched Fintech innovations. Countries like China are already running their CBDC pilots in several major cities such as Shenzhen and Shanghai.

Many reserve bank officials are really interested in CBDCs’ ability to enable greater financial inclusion, while significantly improving the overall efficiency to carry out digital transactions. Additionally, CBDCs could streamline the process of making international payments, according to research reports.

As noted in a research paper, titled Multi-CBDC Arrangements and the Future of Cross-Border Payments (published by the Bank for International Settlements), there are different models for implementing multi-CBDC (mCBDC) solutions for conducting international payments and supporting interoperability. The report from BIS also reveals that the organization has performed extensive research into these new types of fund transfer systems.

For this year and 2022, mCBDC will be a key focus area are for the BIS Innovation Hub, the institution’s innovation division.

The mCBDC Bridge project will focus on examining various proof of concepts (PoCs) to connect wholesale CBDC in different national currencies in order to facilitate cross-border transactions. It will leverage distributed ledger technology (DLT) to carry out real-time cross-border transfers and aims to establish a corridor network prototype that may support CBDCs developed by other banking institutions.

This new system from the BIS Innovation Hub in Hong Kong will aim to leverage the prior experience of Inthanon-LionRock, an initiative of the Hong Kong Monetary Authority and the Bank of Thailand.

With reserve banks across the globe working seriously on various CBDC projects, the BIS believes that it’s quite important to address interoperability and also the ability to link to other national systems.

The research paper from BIS noted that any reserve bank that provides a CBDC will be doing so to support its local mandate and public policy. The paper added that as the “globalization of economic activity continues, a broader horizon will be needed.”

The BIS also mentioned that we should make CBDC systems compatible from the beginning, but it may take a long time before common technical standards are adopted, and the relevant legal or regulatory frameworks have been adopted.

The report pointed out that these CBDCs might need a common technical interface between local systems or even some sort of shared clearing system.

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