Central Banks Innovating Cross-Border Payments?
So far in 2019, the blockchain sector has been fundamentally growing faster than ever before. With scalable infrastructure emerging and more established corporations exploring the benefits of the technology, we are closer than ever to seeing real-world use cases of the blockchain take shape. Notably, cross-border payments are something central banks are keen to look into.
This week, two central banks conducted a successful experiment using blockchain technology and digital tokens to conduct trial cross-border payments.
The trial run was announced via a report with details outlining the test conducted by the Central Bank of Canada (PoC) and the Monetary Authority of Singapore (MAS). According to the report, the test was successful, it demonstrates the benefits of utilizing blockchain technology, and it’s the first trial of its kind between two central banks.
“Singapore, 2 May 2019… The Bank of Canada and the Monetary Authority of Singapore (MAS) have conducted a successful experiment on cross-border and cross-currency payments using central bank digital currencies. This is the first such trial between two central banks, and has great potential to increase efficiencies and reduce risks for cross-border payments.” – MAS announcement
The report also goes on to mention how JPMorgan is at the forefront of blockchain development, something that may not please many in the cryptocurrency community!
How Was the Experiment Conducted, and What Made it Unique?
Both of the respective banks have been working on their own separate experimental payment systems, Project Jasper and Project Ubin. What made this experiment so unique is the method used to connect one payment system with another using Hashed Time-Locked Contracts (HTLC).
“HTLC synchronise all the actions making up a payment, so that either they all happen, or none happen.
This is achieved through the use of smart contracts1 on the two DLT platforms to lock or encumber the assets to be transferred.
Complete transactions on both platforms when a common secret is used, or release the locked or encumbered asset on both platforms back to their original owners if the common secret is not used within the pre-agreed time period, i.e. upon timeout.” – MAS HTLC PDF
Due to the success of the experiment and using the Jasper and Ubin systems, the two central banks have now proposed a new architecture for cross-border systems in a detailed design paper.
The Future of Cross-Border Payments
Cross-border payments are something all financial institutions are looking at streamlining. HSBC settled $250 billion using blockchain-powered technology at the start of the year, and up-and-coming payment and technology companies like Ripple and R3 are also attempting to solve current hurdles and create an “Internet of value.”
In the future, the true value of this emerging technology may be derived from the ability to connect multiple payment rails together, connecting digital ecosystems with greater security, transparency, and cost-effectiveness, powering a system for cryptocurrencies, fiat currencies, commodities, and securities to be traded without the hurdles and waiting time!
This is not investment advice; please always do thorough research and only invest what you are willing to lose, especially in times of uncertainty.