Today Visa unveiled a paper that outlines a blockchain interoperability approach for digital money. The aim is to enable someone that owns some central bank digital currency (CBDC) to seamlessly make a cross border payment where the recipient receives a different CBDC. The currencies could be either CBDCs or stablecoins, although it suggests that stablecoins would need permissioned access.
A key aim is to enable blockchains or account-based ledgers with different technologies to talk to each other.
Visa’s solution is a hub and spoke Universal Payment Channel (UPC) that processes transactions outside the blockchains to address scalability and the potentially high costs and delays involved in blockchain payments.
The UPC hub is essentially a server or set of servers. At one point, Visa described the UPC hub as a kind of universal correspondent bank. It touts the advantage of only needing to provide identity verification once as opposed to the identification challenges of setting up numerous banking relationships.
Wallet providers would set up channels with the UPC hub to enable cross border payments with multiple CBDCs. To do so, the wallet provider would need to provide identification and collateral. Then it can start executing interchain payments.
While the concept can work between both account-based ledgers and DLTs, it requires smart contracts. However, one does not need a DLT to use a smart contract. For example, Digital Asset’s smart contract language DAML supports databases.
One thing that will concern some people is the idea of having a centralized node authorizing transactions. However, the Visa paper states “clients register with a UPC hub to route their transactions to other clients. Note that this routing requires zero trust to be placed on the UPC hub (the UPC hub does not need to be trusted like a central intermediary).”
It says the UPC hub “acts as a gateway to receive payment requests from registered sending parties and routes them to registered recipient parties. The UPC hub is trusted to be highly available and process payment requests, and by design, its operation is fully transparent to any entity that can read the state of the two ledgers. Our protocol requires the UPC hub to authorize every payment that happens between the parties off the ledger.”
Getting a little more technical, the solution is based on digital signatures and hash-time locked contracts (HTLCs).
Meanwhile, the G20 outlined that CBDCs are one potential route to address the challenge of high cross border payment costs. As a result, more than one multi-CBDC experiment is in progress. This includes the M-CBDC Bridge project between Thailand, Hong Kong, China and UAE, and Project Dunbar, including Singapore, South Africa, Malaysia, and Australia. Another is Project Jura between France and Switzerland. All involve the BIS. Yesterday we reported that Citi also has a suggestion on how to address multiple CBDCs.