Group items tagged

"The 2020 coronavirus pandemic exposed weaknesses in supply-chain systems. Organizations globally (in both the public and private sectors) showed varying degrees of ability to respond. This revealed a breakdown in the collaboration required to track, trace, authenticate, finance and clear medical goods, supplies, etc. through trade channels in a trusted, verifiable and efficient manner. Such global events highlight the need for an interconnected and interoperable supply chain in a world after COVID-19. Contrary to common belief, this specific challenge is not only a technology problem, but also a problem in governance, data ownership and commercial business models in terms of how they incentivize ecosystem stakeholders to collaborate with each other. "

The Bank for International Settlements (BIS) published a paper on cross-border payment system interoperability. It illustrates the public and private sector options using four stylized models, ordered in increasing complexity and cost but also greater efficiency - a single access point, bilateral link, hub and spoke or a common platform (see below). The BIS Innovation Hub is putting theory into practice with several innovative projects to foster interoperability across the four stylized models.

The World Economic Forum (WEF) published a paper that identifies the main regulatory frictions hindering efficient and inclusive cross-border payments, including diverging regulatory frameworks, anti-money laundering compliance complexities, restrictive data regulations and inadequate access for non-bank players. It proposes recommendations to advance regulatory interoperability through enhanced cross-border collaborations, modernized frameworks, strengthened cooperation and public-private partnerships. Achieving interoperability will require the public and private sectors to come together in shaping a transparent, efficient and inclusive cross-border payments ecosystem.

The World Economic Forum (WEF) published a report that analyses CBDCs from a regional perspective, identifying unique aspects and areas of alignment among jurisdictions. It highlights key CBDC principles that will facilitate interoperability with various types of payment systems, technical standards, regulatory standards and legacy payment architecture and infrastructure, that will allow participants in different systems to conduct, clear and settle payments or financial transactions across systems without participating in multiple systems. The report calls for public-private cooperation, regulatory consistency, innovation and participation in standards development.

The Monetary Authority of Singapore (MAS) is launching a proof of concept (POC) for an interoperable Singapore Quick Response Code Scheme (SGQR+). The POC, to be conducted in November 2023, will explore the feasibility of enabling merchants in Singapore to accept QR payments from a variety of payment schemes through a single financial institution.

To reduce the risk of any single stablecoin becoming systemically dominant (and simply replacing a fiat hegemon with a digital one), there should be an emphasis on interoperability and frictionless exchange across blockchains. Blockchain interoperability can increase economic and transactional scalability, speed and security.

"A CBDC 2.0 will be issued and decentrally governed either on a national or on a supranational level, across multiple jurisdictions. This implies a different set of legal, monetary, and fiscal policies, some of them automated, required to be codified and put in place across nations... Decentralized governance will result in fast and cheap cross-border transactions, pseudonymity, personal data protection, and international operability. CBDC 2.0 will be interoperable at the protocol level so that data exchange and functionality should be easily accessible and transferable... The currency should be interoperable on a supranational level, meaning that emerging economies could suffer less from purchasing power inequality."

The Reserve Bank of India barred payment firms from issuing proprietary quick-response (QR) codes and asked them to switch to at least one interoperable QR code to improve ease of use by March 31, 2022. At present, only two interoperable codes exist: the Unified Payments Interface and Bhara. Payments firms also issue proprietary QR codes to merchants that accept digital payments from specific mobile applications, making them unusable for other customers. To curb this, the central bank said no new proprietary QR codes shall be launched by any payment system operator.

Visa's research and product teams are working on a universal payment channel (UPC) initiative, a blockchain interoperability hub that connects blockchain networks and allows for transfers of digital assets. The UPC hub would connect different blockchain networks by establishing dedicated payment channels between them - whether that means connecting central bank digital currency (CBDC) networks between countries or connecting CBDC networks with vetted private stablecoin networks. New, trusted blockchains could easily be added to the network of networks by creating new payment channels within the UPC hub.

On July 18, 2023 the European Central Bank (ECB) New Technologies for Wholesale settlement Contact Group (NTW-CG) held its second meeting. The Group is exploring how to settle DLT transactions with central bank money, including a wholesale CBDC. The pilots will be open to financial institutions with access to the TARGET payment system, with the onboarding to start later in 2023 and tests to commence in Q2 2024. Three interoperability-type solutions will be tested. Deutsche Bundesbank and Banca d'Italia will test two different non-CBDC solutions that initiate payments on TARGET and use trigger chains to instruct the DLT-based securities settlement platform to transfer ownership of securities as soon as payment is confirmed. The Banque de France will test a wholesale CBDC token option based on its previous trials, in which settlement will be enabled through interoperability with multiple other DLT ledgers.

The New York Fed's Innovation Center (NYIC) is participating in a proof-of-concept project along with members of the private sector to explore the feasibility of an interoperable network of digital central bank liabilities and commercial bank digital money using distributed ledger technology. In a 12-week proof-of-concept project-the Regulated Liability Network U.S. Pilot-the NYIC will experiment with the concept of a regulated liability network (RLN). RLN is a concept for a financial market infrastructure (FMI) facilitating digital asset transactions that connect deposits held at regulated financial institutions using distributed ledger technology. The proof-of-concept will build a prototype for a distributed ledger-based network and test the feasibility of payments between financial institutions using tokenized regulated liabilities on the RLN. The project will be conducted in a test environment and only use simulated data. Participants include BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, TD Bank, Truist, U.S. Bank and Wells Fargo. Swift, the global financial messaging service provider, is supporting interoperability across the international financial ecosystem.

The mission of the The Linux Foundation's Open Wallet Foundation (OWF), launched in September 2022, is to develop an open source engine to enable secure and interoperable multi-purpose wallets anyone can use to build solutions. The OWF aims to develop open source software, key building blocks, and best practices that anyone can use to build multi-platform, interoperable, secure, and privacy-protecting digital wallets that will support a wide variety of applications from identity credential to payments. The OWF community is currently working on its governance and structure with the goal of launching in early 2023.

Mitsubishi UFJ Financial Group (MUFG) plans to deploy and distribute bank-backed stablecoins on different public blockchains. The Japanese bank has partnered with Datachain, a blockchain interoperability company, and Toki, a cross-chain bridge, to allow the interoperation of these licensed stablecoins along several blockchains using its Progmat Coin protocol. The announcement comes after Japan's revised funds' settlement law passed in 2022 came into take effect to allow financial institutions to issue stablecoins. Stablecoin issuance on public blockchains doesn't seem to be explicitly covered in the legislation as summarized in a slide deck from Japan's Financial Services Agency (FSA) and this document, although a white paper published by the country's Liberal Democratic Party implies that clarity on this issue would be forthcoming, which I suppose has indeed arrived.

The European Central Bank (ECB) "new technologies for wholesale settlements contact group" held its first meeting on June 21, 2023, marking the start of the Eurosystem's exploratory work on how wholesale financial transactions recorded on distributed ledger technology (DLT) platforms could be settled in central bank money. Exploratory work is expected to begin in 2024 with trials or experiments to launch later in 2024. Initially, three types of interoperability solutions will be explored; the Deutsche Bundesbank's trigger, Banca d'Italia's TIPS Hash-Link, and the Banque de France's wholesale central bank digital currency (WCBDC) based full-DLT interoperability solutions.

The Bank for International Settlements Innovation Hub, Committee on Payments and Market Infrastructures, International Monetary Fund and the World Bank assessed different options for cross-border access and interoperability of central bank digital currencies (CBDCs). They highlight that CBDCs currently have a key benefit in being able to consider cross-border functionality already during the initial development phase, but this "clean slate" advantage has an expiry date. International cooperation and coordination are needed in the early stages of CBDC design. In addition, any system must be built with the flexibility to adapt both to a changing world and the different CBDC designs likely to be chosen by central banks.

The Banco Central do Brasil (BCB) announced the short list of eight projects selected in the 2022 Laboratory of Financial and Technological (LIFT). One of them is a proposal to convert a stablecoin on the Celo blockchain into Real Digital, studying the interoperability between the public blockchain that runs on the EVM (Ethereum Virtual Machine) and the central bank digital currency (CBDC), in addition to the possible interoperability with Pix.

The Journal of Payments Strategy & Systems published a paper by Gieseke+Devrient's Lars Hupel that describes the state of the art for interoperability between different digital ecosystems, including bridges, exchanges and wrappers. The precise design of such solutions is highly context-dependent and requires careful analysis of use cases, stakeholders, and operational concerns. With regards to central bank digital currency (CBDC) the challenges relate to the multiple connection points, and the absence of a single technological means to address all of them uniformly. The paper puts forward some suggestions around different CBDC design options and potential use cases, and discusses some case studies.

The Financial Stability Board (FSB) published a report setting out priority actions for achieving the G20 targets for enhancing cross-border payments. They focus on three interrelated priority themes; (i) payment system interoperability and extension, including the extension of real-time gross settlement (RTGS) operating hours and access policies and improving payment system interoperability, (ii) the promotion of an efficient legal, regulatory and supervisory environment for cross-border payments while maintaining their safety, security and integrity, and (iii) facilitating cross-border data exchange and increasing the use of standardized messaging formats. https://www.fsb.org/2023/02/g20-roadmap-for-enhancing-cross-border-payments-priority-actions-for-achieving-the-g20-targets/

The IMF published a paper that introduces, and illustrates the use of, the ASAP (Access, Service, Asset, Platform) conceptual Digital Asset Platforms (DAP) model. Just as the utilization of a seven-layer TCP/IP model has been fundamental to the interoperability of the internet, it is anticipated that the four-layer ASAP DAP model will similarly promote cross-platform and cross-border interoperability. The model is illustrated through examples and use cases, such as asset tokenization and the concept of purpose bound money (PBM) being explored by the Monetary Authority of Singapore (MAS).

The Banque de France (BdF) and the Hong Kong Monetary Authority (HKMA) have launched a collaboration relating to wholesale central bank digital currency (CBDC). They will delve into the study of interoperability between their wholesale CBDC infrastructure, i.e. the BDF's DL3S and the HKMA's Project Ensemble Sandbox, with the main focus on real-time cross-border and cross-currency payments. The cross-border experiment aims to explore how to optimize settlement efficiency of cross-border transactions, and facilitate interoperability between financial market infrastructures in different jurisdictions.