The Monetary Authority of Singapore (MAS) and Bank of Canada have completed "a successful experiment" on cross-border payments using central bank digital currencies, tapping distributed ledger technology or blockchain with the aim to achieve faster, cheaper, and more secured transactions. The two central banks also discuss their learnings in a report that suggests design options for cross-border settlement systems and details limitations of a technique used, called Hashed Time-Locked Contracts (HTLC).
Marking the first such pilot between both agencies, the blockchain-based implementation showed potential to improve efficiencies and reduce risks for cross-border payments, they said in a joint statement released Thursday.
"Cross-border payments today are often slow and costly. They rely on a correspondent banking network that is subject to counter-party risk, inefficient liquidity management, and cumbersome reconciliation," they noted.
Both central banks had linked up their respective test domestic payment networks, both of which were built on different distributed ledger technology platforms. The partners used HTLC has a way to connect both networks and facilitate Payment versus Payment2 (PvP) settlements without the need for a trusted third-party to act as an intermediary.
To sum, the technique synchronises all actions required to process a cross-border payment so either all must occur or none would proceed. This is established through the use of smart contracts on the two blockchain platforms to lock or restrict the assets to be transferred, complete transactions on both platforms when a common secret is used, or release the locked or restricted asset on both platforms back to their original owners if the common secret is not used within the pre-agreed time period, or a timeout.
In their report, the central banks highlighted limitations and challenges of their technical implementation of HTLC and suggested further areas of research on distributed ledger technology interconnectivity mechanisms as well as alternative network models. This could pave the way for collaboration between central banks, financial institutions, and fintech companies, said MAS and Bank of Canada.
MAS' chief fintech officer Sopnendu Mohanty said: "The next wave of central bank blockchain projects can make further progress by bringing technology exploration together with policy questions about the future of cross-border payments. It is challenging work and we welcome other central banks to join us in this global collaboration, to bring benefit to consumers, businesses, and the broader financial industry."
Bank of Canada's senior special director for fintech Scott Hendry added: "The world of cross-border payments is complicated and expensive. Our exploratory journey into the use of distributed ledger technology to try to reduce some of the costs and improve traceability of these payments has yielded many lessons. The importance of international cooperation through projects such as this one cannot be underestimated. Only through continued collaboration and fundamental research will it be possible for this technology to mature and for policy-makers to fully understand its potential."
Monetary Authority of Singapore is looking to introduce changes to existing technology risk and business continuity management guidelines that will require financial organisations to implement more measures, including cyber surveillance, to boost operational resilience.
Monetary Authority of Singapore has provided a consultation paper detailing pre-defined sandboxes that it says will complement existing fintech regulatory sandboxes and enable businesses to more quickly embark on experiments.
Central banks from both countries have inked an agreement to jointly work on fintech innovation projects, research, and regulations, whilst two companies from both countries will collaborate on cross-border services.
The two Asian countries, which already have partnered on cross-border payment services, will create a joint working group to explore opportunities for further collaboration in fintech.
Because it provides a public "immutable" ledger, blockchains can facilitate a "single source of truth" and offer a robust, inexpensive way for documents to be digitally signed and authenticated.