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The Bank for International Settlements (BIS) Innovation Hub and the and the central banks of Israel, Norway and Sweden,  concluded Project Icebreaker, which studied the potential benefits and challenges of using retail central bank digital currencies (CBDCs) for cross-border payments. In the Icebreaker model, a cross-border transaction is broken up into two domestic payments, one in each domestic system, so the CBDC never leaves its own domestic system. Foreign exchange (FX) providers buy one currency in one system and sell the other currency in the other system. Settlement is via a coordinated payment-versus-payment (PvP) arrangement using hash time locked contracts (HTLC), going a long way towards eliminating counterparty risk in the FX transaction. FX providers submit FX rates to the Icebreaker hub, which selects the best rate to be presented to the payer for each payment request. The number of connections between retail CBDC systems are kept to a minimum by the hub-and-spoke approach. The Icebreaker hub only routes payment messages and does not act upon them. The only information it acts upon is the data from FX providers, which are used when identifying and selecting the best FX rates for the payer.

Circle Financial and Uniswap Labs staff published the results of their studies of the use of distributed ledger technology (DLT) in the trading and settlement of foreign exchange (FX) on public blockchains. They compared the traditional trading and settlement of FX with DLT-based implementations using stablecoins and automated market makers. Using public blockchain data, they quantified the liquidity, stability, and transaction costs of on-chain FX transactions in early adoption. They found consistency between on-chain FX exchange rate and those observed through traditional trading venues and stable on-chain liquidity throughout all times of the day and weekends. Their estimates suggest that on-chain FX can reduce the cost of remittance by as much as 80 percent.

The Bank for International Settlements (BIS) published the results of the Project Meridian FX experiment that demonstrated the atomic settlement of FX transactions between different wholesale payment infrastructures across jurisdictions, and between an RTGS system and a DLT platform. Using an emulated UK real-time gross settlement (RTGS) system, the project connected to three experimental interoperability solutions from the Eurosystem: DL3S (developed by the Bank of France), TIPS Hash-Link (developed by the Bank of Italy) and the Trigger Solution (developed by the Deutsche Bundesbank). In each case, payment-versus-payment (PvP) FX settlements were successfully orchestrated.

The Bank for International Settlements (BIS) Innovation Hub and Bank of England have launched Project Meridian FX to experiment with FX transaction synchronization concepts. This will be achieved via a "synchronization operator" (SO) that uses distributed ledger technology (DLT) to interlink central bank settlement (RTGS) systems, and orchestrate the settlement of a payment versus payment (PvP) FX transactions. The experiments, which will take place towards the end of 2024, will connect Meridian FX's SO to the three solutions being explored as part of the Eurosystem's broader exploratory work on wholesale settlement.

Partior completed a proof of concept for FX payment versus payment (PvP) settlement using its blockchain network, with JP Morgan, DBS Bank and Mizuho. The trial showcased the effectiveness of Partior's FX PvP solution in eliminating FX settlement risk across both emerging market and advanced economy currencies, and same-day-value trades, with 24x7 real-time and atomic settlement. It also highlighted the solution's capability to provide just-in-time liquidity across these currencies as well as real-time visibility and status throughout the transaction life cycles for participants.

FX Derivatives (FXD) participants face a tricky choice across a patchwork of clearing and uncleared optimization techniques, trading off funding and capital usage with infrastructure spend and operational risk. In earlier posts, we showed you how FX IM optimization via NDFs and FX Options clearing developed in Q1 2019.  Here I update the volumes for Q2 2019 and set the trends alongside other emerging techniques in FXD counterparty risk reduction.

A group of 11 banks, including NatWest and Deutsche Bank, have been trialling a distributed ledger technology (DLT) based platform for intraday FX swaps. The trial used technology from Finteum, which has been working on a DLT-based intraday FX swaps platform first announced with R3 and Fnality in 2019. During the trial, the banks engaged in simulated trading and discussion sessions. The plan now is to move to live transactions later this year or early in 2022.

It looks like Ripple's much ballyhooed relationship with MoneyGram was just for show. "MoneyGram has had a commercial agreement with Ripple since June 2019; this agreement represents the use of Ripple's foreign exchange (FX) blockchain trading platform (ODL) for the purchase or sale of four currencies. MoneyGram has continued to utilize its other traditional FX trading counterparties throughout the term of the agreement with Ripple, and is not dependent on the Ripple platform to accomplish its FX trading needs. As a reminder, MoneyGram does not utilize the ODL platform or RippleNet for direct transfers of consumer funds - digital or otherwise."

R3 published a report on the application of automated market makers (AMMs) to cross-border and cross-currency central bank digital currency (CBDC). AMM structures, which are are common in the decentralized finance (DeFi) ecosystem, increase price transparency, work for low liquidity instruments, and bring the process of trading and settlement closer together. Such outcomes could benefit segments of today's FX market. However, adapting AMM to  spot FX markets will need to answer questions including: who would run it, what formula might be appropriate for larger transactions, and how to incentivize participants.

This article seems to sppeculate that the Libra Association will effectively run open market FX operations to maintain the stability of the Libra against the currency basket. Although the article doesn't mention it, I guess it's implicit that the huge cash balances of Facebook ($50B+) and other Association members are in effect FX reserves for these purposes.

Santander said the solution, One Pay FX, will be coming to Mexico "in early 2020." Initially launched in 2018, One Pay FX is a money transfer solution and leverages RippleNet (formerly xCurrent) to settle cross-border transactions. It does not use XRP.

Some Nigerians are becoming reliant on using bitcoin as a way to trade internationally, and are finding bitcoin has significant benefits over legacy financial systems. Nigeria's economy is heavily import dependent and China is a major import partner to Nigeria. Nigerians have to struggle with this process, though. Access to FX for importation by Nigerian business owners is highly limited because the Central Bank of Nigeria has been rationing foreign exchange in efforts to protect the local currency amid the crash in oil prices and coronavirus outbreak. So importers typically rely on the black market for the additional FX needed and that comes at a very high price. But Chinese exporters have expressed willingness to accept bitcoin payments for their goods; hence, many business people in Nigeria find it more convenient to make such payments with bitcoin.

The Monetary Authority of Singapore (MAS) launched Ubin+, an expanded collaboration with international partners on cross-border foreign exchange (FX) settlement using wholesale central bank digital currency (CBDC).  Ubin+ will develop technical standards and infrastructure to support cross-border connectivity, interoperability and atomic settlement of digital currency transactions across platforms using distributed ledger technology (DLT), and non-DLT based financial market infrastructures. It will also evaluate the efficiency and risk implications of such platforms, and establish the related policy frameworks. (The BIS Innovation Hub led Project Mariana that is investigating the use of decentralized finance (DeFi) protocols and automated market makers (AMMs) to automate FX trading and settlement, is part of Ubin+.)

The IMF published a working paper that presents a vision for a multilateral platform that could improve cross-border payments, as well as related FX transactions, risk sharing, and more generally, financial contracting. It proposes a design that centralizes payments and settlement and that integrates functionality needed for cross-border transactions: streamlining compliance, reducing the cost of FX conversion, and better managing financial risks. The paper also shows how new technologies can be leveraged to better organize payments and associated financial markets. These new technologies are ledgers with unique states, programmability that allows for smart contracts, and encryption which ensures privacy, and can alleviate the underlying obstacles to trade. These technologies allow the design of a multilateral exchange system where participants can truthfully share information with smart contracts but can retain privacy relative to other parties.

The European Central Bank (ECB) published a paper that describes current visions of how to eventually find the holy grail of immediate, cheap, universal cross-border payments settled in a secure settlement medium. It focuses on six potential solutions; (i) modernized correspondent banking; (ii) emerging cross-border FinTech solutions; (iii) Bitcoin; (iv) global stablecoins; (v) interlinked instant payment systems with FX conversion layer; (vi) interlinked CBDC with FX conversion layer. For each, settlement mechanics are explained, and an assessment is provided on its potential to be the holy grail of cross-border payments. Several solutions are suitable for improving cross-border payments significantly, and some could even be the holy grail.

The Financial Stability Board (FSB) published its inaugural annual report on key performance indicators (KPIs) for meeting the targets for cross-border payments and a consolidated report on progress under the roadmap. They provide a quantitative and qualitative overview about the challenges facing cross-border payments, the progress being made on the G20's priority actions, and public and private sector projects underway globally to enhance cross-border payments. The data confirms that user experiences differ substantially across regions. For example, payments involving some, typically lower income, regions tend to be among the furthest from the cost and speed targets across market segments. Furthermore, whereas in the retail segment, foreign exchange (FX) costs seem to be the largest component of total costs, the degree to which this is true differs across regions and use-cases; by contrast, in the remittances segment, other fees tend to be larger than FX costs.

The Committee on Payments and Market Infrastructures (CPMI) published the final report on the facilitation of increased adoption of payment versus payment (PvP) to reduce foreign exchange (FX) settlement risk and improve cross-border payments. It analyses the causes of non-PvP settlement, takes stock of existing and proposed new PvP solutions and suggests roles for the private and public sectors to facilitate increased adoption of PvP. The report finds that existing PvP arrangements have been successful at reducing settlement risk for much of the FX market, but certain market segments remain exposed to risk: PvP arrangements are not available for all currencies and may not be the preferred solution of some market participants or for settling certain trades. New PvP solutions can complement the existing arrangements by providing flexibility and functionalities such as real-time settlement or 24/7 operations, expanding coverage to the retail market, and supporting emerging market currencies.

"The holy grail of cross-border payments is a solution allowing cross-border payments to be immediate, cheap, universal, and settled in a secure settlement medium. The search for such a solution is as old as international commerce and the implied need to pay. This paper describes current visions how to eventually find this holy grail within the next decade, namely through (i) modernized correspondent banking; (ii) emerging cross-border FinTech solutions; (iii) Bitcoin; (iv) global stablecoins; (v) interlinked instant payment systems with FX conversion layer; (vi) interlinked CBDC with FX conversion layer. For each, settlement mechanics are explained, and an assessment is provided on its potential to be the holy grail of cross-border payments. Several solutions are suitable for improving cross-border payments significantly, and some could even be the holy grail. "

SWIFT says a new round of sandbox testing has found that its central bank digital currency interlinking technology can enable financial institutions to carry out a wide range of transactions using central bank digital currency (CBDC) and other forms of digital tokens, easily incorporating them into their business practices. Over six months, SWIFT worked with 38 global institutions and over 125 sandbox users, and made more than 750 transactions, including simulated digital trade, tokenized asset and FX networks, as well as CBDCs for payments. The testing showed that SWIFT's CBDC connector has the potential to simplify and speed up trade flows, unlock growth in tokenized securities markets, and enable efficient FX settlement, while allowing financial institutions to continue to make use of their existing infrastructure.

The IMF published a paper that shows how cryptocurrency markets can fuel cross-border capital flight by serving as marketplaces that match counterparts with and without (illicit) access to FX. In countries where international transactions are restricted, crypto exchanges effectively allow domestic agents to pay a premium to buy foreign currency. The counterparts to these transactions are agents with access to FX, who sell crypto holdings purchased abroad. A stylized model illustrates that restricted foreign currency amid economic imbalances incentivizes these transactions via persistent crypto premia in local relative to global markets. The analysis of relative crypto pricing data in several country case studies provides empirical support that crypto markets serve as marketplaces for capital flight that already took place, rather than a novel channel for capital flight.