CBDC Cross-Border Projects: Project Dunbar
wCBDC Platform Developments led by the BIS
The Bank for International Settlements (BIS) is effectively a bank for central banks. Their mission statement is
"promoting global monetary and financial stability through international cooperation."
The BIS began operating in 1930. It was established as a way to promote cooperation for WWI and the war reparations set on Germany. It is owned by 63 other central banks that make up over 95% of global GDP, and acts as an intermediary for those central banks. thus “the bank for central banks”. They provide services to central banks like The Federal Reserve and The European Central Bank like Citi and JP Morgan provides services to their clients.
They promote monetary policy discussion, analysis, research, facilitate transactions between central banks and are a for-profit institution. They charge fees and collect commissions for their services. They provide research and insight on innovation and find ways to earn the best return, risk adjusted, on investment opportunities.
Background of the BIS
The BIS operates out of Basel, Switzerland (The Tower of Basel) and because of the WWI war reparations it was originally created out of the Treaty of Versailles of 1919. The BIS was formed out of the treaty and war reparations.
It was created by the governors of the Bank of England and Reichsbank, The German Central Bank 1876 - 1945. In fact, they're still protected by that international treaty. Giving them protection and power beyond national and international laws.
Operationally, the BIS has complete legal immunity in Switzerland. Everything that occurs within the BIS is protected and kept private. Consequently, every single employee (650 total) who works there is protected. None of them fall under any sort of legal jurisdiction, and none of them can have any of their assets seized. (Think about that.) They're also free of having to pay any sort of taxes on any profits they make.
These officials are immune under these "laws" for life. Not even the Swiss have the authority to set foot on the premises of the BIS. Nobody aside from other central bankers and those with "clearance" can set foot in or around the BIS. All because of the Treaty of Versailles.
Currently the BIS is managed under Agustin Carstens, the General Manager. He is responsible for the Board of Directors and all operations at the BIS. Some notable members of the Board are of course big names like Christine Lagarde and Jerome Powell. Carstens is the head of this Board at the BIS and is assisted by his Deputy Manager. The board is responsible for forming strategy and policy, and they meet 6 times a year.
Financial Innovation
The BIS Innovation Summit is where the BIS brings in panelists from central banks and large financial institutions to speak on technological innovation and global financial changes moving forward. They cover their ongoing objectives, research, and improving the global financial system.
3 months before the Innovation Summit the BIS put out a press release stating the focus is on CBDCs, DeFi, payment innovations and climate control initiatives in their "green finance" programs.
The objectives for 2022 were/are:
Launching new projects into CBDC developments
Expanding to support G20 efforts to improve cross-boarder payments
Next generation payment systems
Launch new projects into "green finance", regulatory and supervisory technology
Cyber security
Opening more centers across Europe and advancing the strategic partnership with the FED
Notable Statements from the BIS Innovation Summit
Federal Reserve Chairman Jerome Powell speech included remarks on the Russia/Ukraine geopolitical concerns, regulations, and the direction the pandemic caused policy leaders to move toward. He emphasized the dual mandate of the FED for stabilizing prices and promoting maximum employment.
Some of the more notable statements of his are as follows:
"In 5 - 10 years it is highly likely that digital financial activities outside of regulation will come under it"
"Digital innovation in the finance sector is here to stay, we are just at the beginning"
"We are examining CBDC issuance, have not made any decisions yet."
Christine Lagarde, the head of the European Central Bank, also spoke at the Innovation Summit. Back in Nov 2020, the ECB was in the beginning stages of their “experimentation” phase of a CBDC. Now they’re phasing into further developments, rapidly. Her statements continued to echo previous statements being dismissive of crypto and DeFi, and her focus was on distorting the "evading sanctions" and "illicit finance" narrative.
Some of the more notable statements this week are as follows:
"the amount of Russian rubles going into crypto and stablecoins have been on the rise"
"Crypto service providers may be an “accomplice to” circumventing sanctions against Russia, and crypto assets have been and remain a threat"
"We have taken steps to clearly signal to all those who are exchanging transacting offering services in relation to crypto assets... they are 'accomplices' to those trying to circumvent sanctions."
CBDCs and the BIS
A primary objective at the BIS is innovation, aka CBDCs.
"CBDCs and improvements in payments systems continue to be an area of exploratory focus, accounting for 13 out of 17 projects that were active in 2021 or will be launched in 2022. This reflects the interests and priorities of BIS member central banks"
Raphael Auer
In it’s newest project the BIS is currently working with 4 smaller central banks on developing their CBDCs with the current multi-CBDC platform project, Project Dunbar.
Project Dunbar
The Project Dunbar focus is to develop a shared platform that will provide efficient and effective cross-border payments by enabling "faster, cheaper, and safer" transactions. The objective being to reduce the cumbersome and costly experience of cross-border payments, so again, wholesale CBDC.
The project is a collaboration between the Bank for International Settlements (BIS) Innovation Hub Singapore Centre, the Reserve Bank of Australia, Bank Negara Malaysia, the Monetary Authority of Singapore, and the South African Reserve Bank.
As of March 2022 the project was successful with their 2 different prototypes, as well as the testing of several geographies and the efficacy of CBDCs. The biggest takeaways are of the benefits of "reduced reliance of intermediaries" and the "simplification of the settlement process", and "process automation with smart contracts".
Similar automated processes similar to atomic transactions, recall the Project Jasper findings in phase 4. By making transactions “atomic” 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.
CBDC Model: Hybrid
The prototype CBDC platforms in the project run off account based hybrid systems providing applications the ability to interact directly with the Central Banks and financial intermediaries, primarily large financial institutions making interbank payments. Hybrid, meaning not tokenized and not account based, but a hybrid of the two.
One major characteristic of the CBDC project is the multi-platform potential and user simplicity. The ability for banks to hold and transact in multiple CBDCs will enhance ease of use and improve efficiency.
The project intends to move forward by sticking with a hybrid model, like most CBDC projects, and will need technology developed that is able to process multiple CBDCs simultaneously.
Two Prototypes: Corda & Partior
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”.
The infrastructure needed for this is being built via AWS and Azure (Amazon and Microsoft). Below is an image of the Dunbar Network in Corda. The Corda Network is one of the prototypes of a multi-wholesale CBDC platform. It is made up of four separated networks that work in accordance with one another via the distributed nodes.
Partior
Partior is a blockchain based payments network in Signapore, and is getting involved in multi-CBDC projects.
“An open industry platform, developed to transform and accelerate interbank value movements in a digital era.”
Partior is founded by JP Morgan, DBS Bank, and Temasek. It has been part of two major projects already, JP Morgan’s Onyx and Project Dunbar. They’re an infrastructure and technology provider where the “focus now is on programmable money through CBDC.”
They say their 3-5 year timeframe is on tokenizing more assets and moving to tokenize debt, equity, and more. Which is the exact broad initiative at large among the entire developing space. Starting with building multi-currency/multi-CBDC applications, and builfing out applications and services to enhance real-time multi-currency transactions, trade, foreign exchange, and securities; all of which come with programmability.
Their network is completely permissioned, like Corda, with an emphasis on a tiered approach and full transaction lineage and traceability. Some transactions kept private, others fully transparent.
Their work beyond Onyx and Project Dunbar stretches to commercial banks, central banks, and tech companies like Amazon and Microsoft to build out infrastructure.
Summary
It's becoming easy to see how large of an implication crypto has on the traditional financial system. Project Dunbar is a massive step forward in the development of CBDCs.
Although still nascent, the direction is there and all major central banks are actively working on this. It won't be long until we see pilots take place in the US and EU.
Just remember the implications retail CBDC will have on your day-to-day!
What's the bottom line of CBDCs? Good, bad, ugly?