The BIS Innovation Hubs in Europe and Singapore have released a report on Project Rialto, a foreign exchange (FX) solution for retail cross border payments. The project involved the central banks of France, Italy, Malaysia and Singapore and used distributed ledger technology, an automated market maker (AMM) for FX, and tokenized central bank money. It built on several previous BIS projects, including Project Nexus that interconnects faster payment systems in different countries and Project Mariana that also used an AMM for foreign exchange transactions.
As context for the work, the G20 aims to reduce the cost of cross border payments incurred on $800 billion of retail payments annually. There is diverging data about the extent to which FX contributes to the high costs. Private data has indicated that foreign exchange is the largest contributor. By contrast, the paper quotes a Financial Stability Board report based on a World Bank survey. It indicates that FX costs amount to 2% of the payment, whereas fees can be from 2.3% to 6%.
The Project Rialto work involved simulating a retail cross border payment, one that involved a bilateral FX transaction, and another using an intermediate currency, where a currency is less liquid and hence the FX cost is often higher. The solution included two parts. One module interlinked the separate instant payment systems, with transactions processed, cleared and settled in fiat money. The other module, XDN, is a distributed ledger technology network that executed the foreign exchange using tokenized central bank money as a payment versus payment (PvP) transaction. The FX exchange was executed using an AMM.
The trial was thought-provoking with clever aspects. However, for a solution designed to reduce costs and address the frictions of correspondent banking, there were a surprising number of intermediaries involved.
Many payment service providers involved in instant payment systems lack access to central bank money, so the first set of intermediaries are settlement access providers (SAPs). These are banks that convert received funds into tokenized central bank money to participate in the XDN FX system. These banks also engage as liquidity providers in the AMM.
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