Today the Bank for International Settlements (BIS) unveiled Project Nexus, a platform to link domestic faster payment systems for instant cross border payments. Nexus builds on a project between Singapore and Thailand which links the two country’s faster payment systems allowing cross border payments with just a phone number. Apart from instant payments, it enables cheaper and more transparent transfers.
A year ago, the BIS published a paper for the G20 with a roadmap for addressing cross border payment challenges. One focus area was to explore new payment infrastructures and arrangements. That included central bank digital currencies (CBDCs), stablecoins, and new multilateral platforms such as Project Nexus.
How it could work
The challenge with the Singapore – Thai solution is expanding the concept to many countries, with more than 60 faster payments systems operational around the world. If Singapore and Thailand wanted to connect to all the other countries, each would need to perform 59 integrations. Such bilateral connections are slow and painful to both implement and maintain.
That’s where the Project Nexus concept comes in. Each faster payment system would integrate once with the Nexus platform and get access to all the other connected faster payment networks. In many ways, this sounds like a routing network. However, cross border payments have additional complexities such as foreign exchange and sanctions screening.
A key point is that Project Nexus does away with the concept of correspondent banking accounts. Well, the vast majority of them. Many banks are likely to have a preferred foreign exchange provider, sometimes that might be themselves. That foreign exchange provider either needs to be a participant in both faster payment systems, or they need to use a liquidity provider that is a participant, which is rather like a correspondent bank. However, the liquidity provider just needs to be a participant in the destination faster payment system. They don’t need to have an account at the destination bank.
What’s the plan?
So far, there have been 25 working groups to flesh out the Project Nexus idea. The report was supported by the Monetary Authority of Singapore (MAS) and the National Payments Corporation of India (NPCI).
How to implement the project is up for grabs. One possibility is for three faster payment systems to collaborate and try out the Nexus blueprint. Another is for several faster payment systems to develop open standards and protocols. And the third, which the BIS describes as ‘ambitious’, is to provide seed funding for an ‘implementation entity’ that would create the system as a public good.
One question is how long it might take to launch Project Nexus? The MAS/Thailand project started in 2019 and launched in April 2021. Our wild guess would put Nexus in the 3-5 year timeframe.
A race with stablecoins
Circling back to the G20 cross border roadmap, it’s worth exploring each option’s potential speed of execution. Stablecoins are already up and running. Although they are heavily dollarized and not yet mainstream beyond the cryptocurrency world. But they’re likely to be more widely adopted in well under three years, especially when Diem finally launches, with its link to Facebook.
Multiple CBDC launches are probably 4-5 years away for domestic use, with multi-currency use at scale quite a bit further out. However, the digital yuan and other Asian countries (Korea, Thailand, Hong Kong, India) could be much sooner. So Project Nexus, if it takes off, will probably come somewhere between stablecoins and CBDCs.