CBDC Cross Border Projects: Project Jasper
The World's First Cross Border Wholesale CBDC Project
This is the first installment of Cross Border Wholesale CBDC Projects on CBDC Watch. The purpose of this mini series is to provide in depth coverage for all the major cross border projects, as opposed to covering them all in one newsletter.
Through the series you’ll probably notice most of these involve work the Bank for International Settlements (BIS). CBDCs are of the highest importance and focus across central banks and international financial institutions like the BIS, IMF, and the World Bank. Partnership with the BIS has been successful and effective for the development of CBDCs.
CBDCs pose capabilities for central banks to respond to crypto. International financial institutions are building applications enabling interoperability for both retail and wholesale CBDC.
The projects covered in these issues have done much in recent years to for changing the landscape and potential of wholesale CBDCs and improving the efficiency for the future of international settlements. Thereby improving things like trade.
The solutions that CBDCs will deliver go far beyond the bounds of enhancing payments. However, the improvements this technology will bring doesn’t compare to the negative consequences it brings.
Project Jasper
The first project of it’s kind, and the first time a central bank participated and experimented with distributed ledger technology (DLT). The project, led by Payments Canada, started in 2017 when the Bank of Canada launched Project Jasper to understand how DLT can transform the payments system in Canada, and across borders.
The white paper, released in 2017, prepared by Payments Canada, R3 and the Bank of Canada laid out the project for how DLT can transform the future of payments in Canada. Project Jasper in phase 4 involved cross-border testing with the Bank of England (BoE) and the Monetary Authority of Singapore.
The project started in March 2016, citing Bitcoin as an example of “a technology that has garnered the attention of financial institutions and payments organizations around the globe.” Starting out the goal for Project Jasper was innovating and modernizing the Canadian payments system. As they continued experimenting and testing, they discovered many more use cases.
Supporters of this initiative in the private sector range from Payments Canada, Bank of Canada, RBC, HSBC and more.
Phase 1
Phase 1 started with the words “tremendous opportunity.” The first phase started in Mar 2016 and ended in June 2016. It was a short investigative phase for discovering the utility of distributed ledger technology (DLT) for settling high value payments on the Jasper platform built by the Project Jasper team.
Their stated goal was to “better understand how the technology could transform the future of payments in Canada” and “promoting innovation.” When this project started Payments Canada was processing in total value approximately $50T in payments, and approximately $200B every business day. These both dealing in payments made by Canadian citizens and businesses completing interbank transactions.
Phase 1 ended in June 2016 with a payments demonstration of the Jasper at Payments Panorama. A three day conference meeting with innovators with the focus of modernizing and improving payments.
Phase 2
Lasted Dec 2016 - Apr 2017 and was focused high value settlements and developing, or partnering with, a new and better platform to improve efficiency and settle high value domestic interbank payments.
They wanted to test the feasibility of large interbank wholesale payments and improving the Jasper platform. Asset finality was the biggest gap in the demonstration of the first phase.
During the first two phases the testing went through rounds in an Ethereum platform and in R3’s Corda platform. They found the costliness and lack of oversight on the Ethereum platform to be unfit for CBDC utility, and the regulatory eco-system and institutional use for Corda to be what they need in their design considerations.
Corda
Corda is a Distributed Ledger Technology (DLT) platform, designed by R3. The platform is specific for financial institutions. The Corda platform provides very basic transaction confidentiality, even on peer-to-peer transactions. Any regulatory body will be able to identify data and information present. Corda wants to provide “full transaction lineage”.
Corda also has a service on the network that locates and identifies the identities of nodes on the network, reinforcing oversight of the network. The service is fully centralized, regardless of their attempt to build “CordApps” for “decentralized applications”.
If you ever see the word “decentralization” pertaining to CBDCs just laugh.
Phase 3
Phase 3 focused on experiments with securities and building out a financial market infrastructure using DLT. Anyone can see that infrastructure for securities and payments run separate from each other, and run through intermediaries.
“DLT enables an easier step forward by permitting a loose coupling of two separately governed systems without compromising the control of either authority over its system or assets. By issuing tokens using a DLT system, central bank-backed cash digital depository receipts can be used for settling securities transactions in the Proof of Concept (POC) environment without the further involvement of the central bank in verifying each transaction.” - (Project Jasper Phase 3 Excerpt 2018)
The collaboration of phase 3 involved some more big players, some being repeated partners. Members of this phase were Payments Canada, Bank of Canada, Accenture, R3, and TMX Group. TMX is a financial services company that operates equities, fixed income, derivatives, and energy markets exchanges
The Corda platform enabled a soft entry into an ecosystem built for a variety of financial products. Simple integrations with different systems added potential for different transaction types.
Phase 4
This phase involved the testing of cross-border payments with the Bank of England (BoE) and the Monetary Authority of Singapore.
The testing and pilot phases took place over the Corda and Quorum platforms. A private permissioned distributed ledger. The platform was part of a system building out a distributed database for wholesale interbank settlements. The distributed ledger allowed for transfers, record keeping, and broadcasting agreed upon changes that fell in line with consensus in real time. Sounds familiar, right?
A large part of the focus in phase 4 was designing the technical approach for cross-border transactions. Their approach was enabling atomicity of transactions with hashed time-locked contracts.
Atomicity: means that multiple operations can be grouped into a single logical entity, and other threads of control accessing the database will either see all of the changes or none of the changes.
The point here is to make transactions “atomic” so different transactions don’t disrupt each other, especially if you’re working across networks. A different number of networks can be included in a single transaction when working cross-border transactions. What enables this is the feature of hashed time-locked contracts.
Hashed-Time-Locked Contracts: a special feature that is used to create smart contracts that are able to modify payment channels. Technically, the HTLC feature enables the implementation of time-bound transactions between two users. In practice, the recipient of a HTLC transaction has to acknowledge the payment by submitting a cryptographic proof within a specified timeframe (number of blocks). If the recipient forfeits or fails to claim the payment, the funds will be returned to the original sender.
These hashed-time-locked contracts are currently used to allow swaps to take places across different chains, for example. Regarding wholesale CBDC cross-border transactions the protocol can be used to manage both parts of the transaction across networks (like the Corda and Quorum platforms) and geographies.
HTLC uses smart contracts and synchronizes the actions involved in a transaction(s), and either it is executed or not. All of this can get very technical ahead with design considerations when multiple CBDCs are included in cross-border direct transactions, or transactions including multiple parties, and/or different assets.
The phase was successful in the end. The demonstrations of cross-border, cross-currency, and cross-platform atomic transactions succeeded without the need for a third party. Trust enabled this success, trust required in the technical sense, not the third-party sense.
Conclusion
Private sector investments in distributed ledger technology (DLT) goes far beyond CBDC applications. The retail and wholesale use cases and applications show clear promise, but the potential and direction of the technology brings more capabilities. Securities, trade, regulations, all of it shows larger and long term plans.
This was the first installment of the Cross Border Projects, there are several more to come. Thanks for reading!
Of course Canada. Ward of the WEF.