Today the Bank for International Settlements (BIS) published an interim report on Project Mariana, a wholesale central bank digital currency (CBDC) trial involving the central banks of France, Singapore and Switzerland. In the proof of concept, commercial banks could transact with wholesale CBDC for foreign exchange transactions.
While the central banks each issued their CBDC on permissioned Ethereum blockchains, the international platform for foreign exchange (FX) transactions was the public Ethereum testnet (Sepolia). However, the report had a caveat that this should not be seen as an endorsement of DeFi or particular solutions.
Stepping back to the motivations, central banks have conducted numerous CBDC trials, but cross border CBDC and FX are both topics receiving significant attention. Cross border payments are too expensive, slow and unpredictable, and there’s a desire to see CBDC address these challenges. By using DeFi, 24/7 transactions are potentially feasible.
A significant proportion of the daily $7.5 trillion foreign exchange transactions carry substantial settlement risks that can be resolved with more or less immediate settlement, commonly known as payment versus payment (PvP).
Mariana addresses both of these topics and more.
Project Mariana functionality
At a functional level the trial supported each of the central banks issuing a wholesale CBDC to commercial banks on their domestic platforms. These domestic platforms were linked to an international platform through bridges made up of smart contracts controlled by the central banks.
A novel aspect for a central bank is implementing governance at the token level without controlling the underlying platform, in this case the Ethereum testnet.
The commercial banks then used the wholesale CBDC for FX transactions using a decentralized exchange.
DeFi and DEX with wholesale CBDC
Decentralized exchanges (DEX) on public blockhains such as Uniswap use automated market makers (AMM) to enable transactions using algorithms. While the original DEX motivation was to avoid gas fees associated with bids and offers, the potential benefit in the real world is 24/7 operations.
AMMs use liquidity pools or buckets of currency to trade against each other automatically using simple algorithms. Instead of crypto, the Mariana trials exchange one wholesale CBDC for another to execute FX transactions.
Like any market, it is two sided. In a conventional market you would have market makers and traders. With an AMM, market makers are replaced by providers adding funds to liquidity pools. In this case the pools are the three currencies. Liquidity providers earn a cut of fees charged to those executing transactions. In reality both sides can incur other losses depending on the liquidity of the pools and the algorithm.
One thing not mentioned in this interim report is that AMMs (in the crypto world) can be more expensive compared to bid-offer marketplaces as the spreads are often wider.
This isn’t the only DeFi project in which the BIS is involved. Project Mariana extends a previous trial between the Banque de France and Monetary Authority of Singapore, which also used automated market makers. And the first and second iterations of Singapore’s Project Guardian also involve DeFi and public blockchains.