Innovation Tagline: #CBDC #Wholesale CBDC, #OpenSource
Project Keywords: #CBDC #Wholesale CBDC, #OpenSource
Project Members
1. Adam Retkes - CBDC Advisor
2. Daniel Nagy - CBDC Advisor
3. Daniel Szego - DLT Architect
4. Balázs Héder - Blockchain specialist and researcher
5. Mate Brezovszki - digital currency and neobank expert
Project Description (no more than 1,000 words including graphics)
The world that we face today is rapidly changing. New technologies and proposals provide promising opportunities but also challenges. One such field, where major transformations are taking place, is digital currencies. The revolution around digital currencies has started with the use of Bitcoin. Later, the technology behind this brand new cryptocurrency was explored, and several thousand other cryptocurrencies have emerged from day to day. Their market value has quickly reached trillions of US Dollars by now. In the meantime, a new form of private digital currency, stablecoins have entered the payment market, which are backed by fiat currencies and liquid assets. Meta’s (previously Facebook) Libra (previously Diem) provided a tipping point in this new evolution which meant a wake-up call to the central bank community and many regulators. Parallel to private digital currencies, central banks started their own journey with central bank digital currencies (CBDCs) that leverage similar distributed ledger technologies (DLT). In the field of CBDCs, China became the leading major economy which runs advanced pilots and might be closest to issuing such a digitalised fiat money. By now, we can experience a serious space race from the side of CBDCs and also private digital currencies. The latter ones will likely face growing scrutiny from regulators. However, digital currencies, both private and public, are intended to solve existing frictions and ineffectiveness in the current financial, monetary and payment systems. The case for them varies from country to country but several pain points need to be improved like financial inclusion and underbanking, resilience of the payment system, conducting cross-border transfers just to name a few.
Our team is deeply committed to improving the financial infrastructure of countries, private and public organizations. Taking into consideration the opportunities of digital currencies, we firmly believe that CBDCs could provide the safest and most effective remedies to the existing pain points. Domestic retail CBDC research and developments are widespread across the globe. What is less assessed, are the concrete benefits of CBDCs in cross-border implementation. The global monetary and financial system suffers from tremendous challenges that could be solved with CBDCs that incorporate international considerations. From them, we will focus on the cross-border payment side. The case for it is that the funds have to go a very long, costly and intransparent way in order to reach its final destination. Cross-border CBDCs might entail the potential to solve most of the problems that international transactions include and are listed below. An interoperable DLT platform could serve as a building stone for such experimentations. Improving cross-border payments is also part of the roadmap that has been provided by the G20 and the Financial Stability Board, and is an important motive for research.
In this project, we are dedicated to providing solutions for cross-border payment transactions in the wholesale area. To this end, we aim to establish a prototype for multi CBDC arrangements. Applying DLT could make international and foreign currency payments radically more effective compared to the current options. Our initiative from the private sector could greatly contribute to the huge effort of central banks, the G20 and the Financial Stability Board in improving cross-border payments in an effective and safe manner. Billions of people and millions of companies could benefit from a new-gen payment infrastructure that makes foreign trade and inbound remittance transfer easier and cheaper. On top of this tokenized money, a whole tokenized and DLT-based ecosystem could be built that could attract further capital and innovation.
Problem
Currently an international wire transfer has to go through a chain of correspondent banks to reach the beneficiary. This correspondent banking system has not changed much in the last 50 years. Cross-border money transfer faces serious frictions that have to be mitigated in order to stay competitive in the fight of stablecoins and other crypto assets. The most important correspondent banking frictions are the following:
- Limited transaction transparency: The payer is unable to gather information regarding the transaction processing time and where exactly the money is during an international transaction.
- Limited operating hours: Every country has different RTGS (Real Time Gross Settlement) systems with different operating hours. If a cross-border, cross-currency transaction is addressed to a beneficiary, whose account holder bank operates in another continent, the time zone difference might cause significant delays in the processing of that transaction, as it might have to wait for the receiving RTGS system to be open on the next business day.
- Interoperability capabilities are questionable: Interoperability and common messaging standards are key to connect and interlink payment systems in order to stay competitive. This capability falls far from expectations when it comes to the correspondent banking system, since every country operates an RTGS system with different operating standards.
- Unclear fees: Usually neither the FX conversion fee nor the correspondent banking fee is known in advance when initiating a cross-border, cross currency transaction. The transaction fee booking file might even take weeks to arrive at the initiator’s bank, where the payer is charged afterwards.
- Legacy technology platforms: The above-mentioned RTGS systems were introduced decades ago and since then, the operator central banks try to improve the feature set or performance of these systems to cope with the ever-changing user demand. Needless to say, these improvements only affect the legacy code instead of switching the core banking infrastructure to next-gen technologies.
These frictions make the current correspondent banking system ineffective compared to the unregulated stablecoin-based or other crypto-based payment systems. This poses a huge threat in the long run, since the lack of innovations might make the current system obsolete. As mentioned in the frictions part, technical improvements and interlinkages can mitigate problems for some time, but they are no permanent solutions. Legacy systems and legacy code/technology have limitations that cannot be overcome, therefore a full-scale technology and infrastructure change is needed. Commercial banks cannot (rationally) establish presence and comply with local regulation in each and every country to provide faster cross-border, cross-currency services on their own. Central banks also cannot develop message protocol converter modules and interfaces to connect to every other RTGS system.
There are some initiatives by the major stakeholders aiming to mitigate the long standing problems of international banking. SWIFT gpi is a new settlement service and standard from SWIFT, which enables its bank members to conduct cross-border payments in minutes. About 90% of these transactions are credited to the beneficiary within 30 minutes. SWIFT gpi also enables real-time transaction status tracking. The service improvements are significant, but right now only 40% of the SWIFT member banks have the capability to join the gpi community, which leaves the majority of the commercial banks out of this higher-end service.
The other initiative is driven by ECB, it is called TARGET Instant Payment Settlement (TIPS). It enables payment service providers to offer fund transfers to their customers in real time and around the clock, every day of the year. Currently TIPS is only an extension of TARGET2 and is able to settle funds in euro, which limits the usability solely to the Eurozone. EU transactions denominated in other currencies (like Swedish krona, Hungarian forint, etc.) have to use legacy solutions.
Wholesale CBDCs can be game changers in this debate.
Solution
Cross-border wholesale CBDC might provide a good solution to the problem. Typical use-cases like payment versus payment, or payment versus delivery provide solutions to cross-border and cross-national value exchange. It might be surprising though implementing such a use-case in an open-source fashion having DLT as core technology, as most the current crossborder payment systems run with direct message exchange protocols, like TARGET2 in a pretty private fashion. We believe however that DLT is actually the fastest developed transactional technology on the planet. With Hyperledger Besu efforts of both the Ethereum and Hyperledger communities are combined into one direction. Besides, other initiatives also exist for open-source CBDC systems, like the recently published OpenCBDC platform from M.I.T.
The scope of the challenge is to have a first working prototype up and running. We would like to implement a typical wholesale cross-border CBDC use-case, like payment versus payment with the help of Hyperledger Besu and solidity smart-contracts. During the development phase we focus on the functionalities of Besu, like transactional speed and privacy features without scaling much beyond its capabilities.
Our focus is on CBDCs but our solution is intended to provide an interoperable digital currency design that might be interchangeable with tokenized commercial bank money.
Accomplishment and Team
Adam Retkes - is an External CBDC Advisor establishing valuable partnerships between central banks and commercial banks to create next-gen payment systems focusing on cross-border wholesale central bank digital currencies. His main research area is implementing best practices of both retail and wholesale CBDCs.
Daniel Nagy - is an External CBDC Advisor who establishes valuable partnerships between central banks and commercial banks to create next-gen payment infrastructures focusing on cross-border wholesale central bank digital currencies. His main research area is implementing best practices of both retail and wholesale CBDCs along with the effects of digital currencies on the global macroeconomy and geopolitics. Previously as a director of institutional business, he gained extensive experience in wealth management and capital markets. Daniel is a co-founder and a member of CBDC Think Tank Budapest which is an independent think tank with the aim of establishing partnerships and working on CBDC-related projects, mostly focusing on cross-border type. Daniel regularly gives lectures at Corvinus University of Budapest, often talks about digital currencies, and publishes papers in the angles of macro-financial and geopolitical effects of CBDCs.
Daniel Szego - is a software architect specialized for different DLT technologies, including but not limited to Hyperledger Fabric and Ethereum. He gained multiple master degrees from both technology and business administration followed by 20 years of experience in the IT field and 5+ years experience with different blockchain technologies. He has been organizing the Hyperledger Budapest community for more than 4 years.
Balázs Héder - He is electric engineer with Ph.D. degree coming from the telecommunication industry. He is a blockchain enthusiast, passionate about the technology and about everything that blockchain means: Bitcoin and other cryptocurrencies, tokenization, smart contracts, DID, DeFi, NFT, industrial applications, new business models, public and consortium blockchain solutions, etc.
Mate Brezovszki - Economist by degree, with professional experience initially gained at Big4 financial consulting firms and top tier investment banks, which eventually was mixed up with disruptive finance applications and trends. Mate has been in the digital currency and blockchain space since 2017. He is the acting CEO of a core banking platform developer company, allowing the integration of new asset types and business models into the compliant operation of Neobanks and innovative financial institutions.
The core team has started to brainstorm on different CBDC and blockchain related use-cases in the summer of 2021, resulting in several online publications and a Hyperledger Meetup fully dedicated to CBDC and DLT (https://www.youtube.com/watch?v=hI46tTcnK3Q). Most of the investigation up to this timepoint happened however more on a theoretical side, without having parctcal or even experimental implementation.
Project Plan
The goal of this project is to create a community project for crossborder wholesale CBDC implementations. Out high-level project plan is the following:
Q2 - Q3.2022 Prototyping: As a result of Hyperledger Challenge, we would like to get a prototype version for a wholesale cross-border CBDC having at least a typical use-case, like payment versus payment up and running.
Q3 - Q4. 2022 Evaluation: In the challenge phase we mainly use Hyperledger Besu standard functionality. In this evaluation phase we assess possibly with potential users if the platform capabilities are adequate or if we have to consider extensions beyond standards. Further steps of the project plan might be strongly dependent on this evaluation result and additional to the following steps we might need a Scaling milestone as well. .
Q2. 2023. Extension: Implementation of further classical cross-border wholesale CBDC use-cases, like payment versus delivery.
Q4.2023. Integration: System integration and interoperability with ISO20022 compatible standard interfaces.