1、In collaboration with AccentureModernizing Financial Markets with Wholesale Central Bank Digital Currency(wCBDC)A P R I L 2 0 2 4I N S I G H T R E P O R TThis report is interactiveLook out for this icon for pages that can be interacted with To ensure interactive capability,please download and open t

2、his PDF with Adobe Acrobat.Contents 2024 World Economic Forum.All rights reserved.No part of this publication may be reproduced or transmitted in any form or by any means,including photocopying and recording,or by any information storage and retrieval system.Disclaimer This document is published by

3、the World Economic Forum as a contribution to a project,insight area or interaction.The findings,interpretations and conclusions expressed herein are a result of a collaborative process facilitated and endorsed by the World Economic Forum but whose results do not necessarily represent the views of t

4、he World Economic Forum,nor the entirety of its Members,Partners or other stakeholders.Images:Getty Images,Midjourney,UnsplashForeword 03Preface 04Executive summary 05Introduction 061 Foundational key concepts 072 Wholesale financial markets use cases 103 The digital money continuum 124 wCBDC initia

5、tives 165 Industry challenges 196 Areas of differentiated value 227 Persistent industry challenges 418 Trade-offs and considerations 589 RTGS systems 6210 Alternative payment instruments 6411 Multi-token and multi-system future 73Conclusion 75Contributors 76Endnotes 79Modernizing Financial Markets w

6、ith Wholesale Central Bank Digital Currency2ContentsForewordOver 98%of the global economys central banks are researching,experimenting,piloting or deploying central bank digital currency(CBDC)to determine how to modernize the capabilities of and improve access to central bank money(CeBM).1 An opport

7、unity exists to make use of ongoing innovations in CeBM to modernize wholesale financial markets by enhancing systemically important payments between institutions.These markets demand secure and efficient settlement infrastructure from participants to promote financial stability,enable domestic and

8、international trade,and create economic opportunities.Central banks are modernizing real-time gross settlement(RTGS)systems the predominant wholesale funds transfer system and wholesale CBDC(wCBDC)represents an opportunity to address existing and emerging industry challenges across interbank payment

9、s and securities transactions.Meanwhile,non-CBDC payment instruments are arriving on the scene reserves-backed digital currencies(RBDCs),deposit tokens(DTs)and fiat-backed stablecoins(FBSs).These instruments are continually challenging our collective view of digital money.With this backdrop and a re

10、cent survey finding that there could be 24 live CBDCs by 2030,the importance of clarifying the role of CeBM and wCBDC in the next generation of wholesale financial markets is underscored,and this report intends to deliver upon that goal.2 Central banks,commercial banks and financial market infrastru

11、ctures(FMIs)like custodians,depository institutions,exchanges,clearinghouses and settlement agents seek to better understand wCBDCs value proposition.In this context,the World Economic Forum has collaborated with Accenture to articulate how a wCBDC might provide differentiated value.We took a holist

12、ic view of the relevant industry challenges to produce practical insights for policy-makers and the private sectors planning efforts to realize the full potential of wCBDC,if pursued.Importantly,deep public-private sector collaboration is necessary to modernize wholesale financial markets securely a

13、nd efficiently.David TreatSenior Managing Director,Innovation Incubation Group Lead,AccentureDrew PropsonHead,Technology and Innovation in Financial Services,World Economic Forum98%of global central banks are exploring CBDC to enhance CeBM access and modernization.24live CBDCs are projected by 2030,

14、underscoring the need to define CeBM and wCBDCs roles in future wholesale financial markets.wCBDC represents an opportunity to address challenges in interbank payments and securities.CBDCModernizing Financial Markets with Wholesale Central Bank Digital Currency3ContentsPrefaceWhile wCBDCs are alread

15、y being used in limited cases,wCBDC systems are still a new concept.The broad availability of wCBDC systems will depend on policy choices focused on financial stability and safe and sound market practices.The legal and regulatory elements that will govern the possibility of widespread use of wCBDC h

16、ave an unknown timeframe.Thus,private-sector solutions may grow alongside wCBDC development,and the outcome of regulations will influence the future mix of payment instruments.The financial sector is on the precipice of the next phase of wholesale central bank digital currency(wCBDC).In late 2023,Sw

17、itzerland saw the first-ever live wCBDC issued to settle a digital bond transaction as part of a limited-phase pilot.In Asia and the Middle East,Project mBridge is redefining cross-border payments using wCBDC by expanding its observing members to 25 central banks and institutions ahead of its minimu

18、m viable product launch this year.The European Central Bank(ECB)has also begun testing wCBDC on distributed ledger technology for securities and foreign exchange transactions.The Bank for International Settlements(BIS)general manager,Agustn Carstens,stated that wCBDC should be“taken for granted”,not

19、ing its expected broad adoption.3 With more than 200 central banks,over 130 regulated financial market infrastructures(FMIs)and a large proportion of economic activity that relies on wholesale financial markets,the question of wCBDCs value proposition comes to the forefront.Modernizing Financial Mar

20、kets with Wholesale Central Bank Digital Currency4ContentsFour areas of differentiated value for wCBDCs are highlighted:Mutualizing data across parties by securely transmitting settlement data across parties and jurisdictions to support automation,reduce settlement risk,and enhance trade and post-tr

21、ade activities.Expanding payment-versus-payment arrangements through cost-effective solutions that can support a diversity of currencies to enhance currency liquidity.Tokenizing credit risk-free settlement media for settling tokenized securities and supporting emerging tokenized payment instruments.

22、Central bank money(CeBM)is crucial for interbank payments and securities transactions because it is virtually free of credit and liquidity risk,enables institutions to reach settlement finality and promotes financial stability.CeBM is ideal for systemically important transactions despite the emergen

23、ce of alternative payment instruments.Wholesale central bank digital currency(wCBDC)is a form of CeBM that could unlock new economic models and integration points that are not possible today.wCBDCs promise to preserve the role of CeBM as a credit risk-free payment instrument by providing a foundatio

24、nal layer for digital payments in the next generation of financial markets.These findings suggest wCBDC systems are well-positioned to modernize cross-border transactions,especially those involving multiple parties and assets like FX or securities.There is a set of persistent industry challenges tha

25、t require modernization beyond introducing a new payment innovation.Further evidence is needed to conclude whether wCBDC can effectively address:liquidity management optimization,CeBM accessibility,compliance by design and new and existing system interoperability.This report offers a set of calls to

26、 action for the industry to consider and continue advancing the global dialogue in these areas.Real-time gross settlement(RTGS)systems and legacy infrastructure are being modernized to meet evolving demands,and these systems will exist in parallel with wCBDC.Likewise,privately issued reserves-backed

27、 digital currencies(RBDCs),deposit tokens(DTs)and fiat-backed stablecoins(FBSs)are examined to distinguish their potential role with wCBDCs and envision a digital payments ecosystem where a diverse set of payment options coexist.Policy-makers,financial market infrastructures and private sector leade

28、rs should apply these insights to their respective jurisdictions to ensure a more efficient,responsible and secure financial future.Executive summaryRealizing a global settlement window by harmonizing foreign exchange(FX)and securities markets settlement times to overcome operational hour disparitie

29、s among key trading corridors.This report explores the potential of wholesale central bank digital currency to address challenges in financial markets through a global multistakeholder approach.Modernizing Financial Markets with Wholesale Central Bank Digital Currency5ContentsIntroductionThrough a g

30、lobal multistakeholder approach,this report explores how wholesale central bank digital currency could address challenges in financial markets.Select the tabs to cycle between textsthat analysed 200+industry reports to establish a baseline of findings.of ten leaders from leading institutions to advi

31、se on strategic direction.with more than 50 experts representing public and private sector stakeholders.of over 100 expert members representing more than 60 institutions.Research methods:Community:Desk researchSteering committeeExpert interviewsCommunityScope:This report proposes areas where wholesa

32、le central bank digital currency(wCBDC)could uniquely generate differentiated value and considers what role other emerging payment systems may play.Modernizing Financial Markets with Wholesale Central Bank Digital Currency6This report willwill not Examine industry challenges related to interbank pay

33、ments and securities transactions.Advise in what areas wCBDC systems could modernize and provide differentiated value.Outline the key trade-offs and considerations of wCBDC system design.Consider the roles of non-CBDC stable value digital assets:reserves-backed digital currencies(RBDCs),deposit toke

34、ns(DTs)and fiat-backed stablecoins(FBSs).This report willContentsFoundational key concepts1Modernizing Financial Markets with Wholesale Central Bank Digital Currency7ContentsThis report mentions a wide range of industry terms that are summarized here in alphabetical order.The Bank for International

35、Settlements(BIS)defines atomic settlement as the“use of a smart contract to link two assets to ensure that the transfer of one asset occurs if and only if the transfer of the other asset also occurs.”4 It is important to note that atomic settlement includes both the instant and simultaneous transfer

36、 of assets.Atomic settlement can also be achieved without distributed ledger technology(DLT)through programmatic functions and codified rules.The two types of atomic settlement relevant for this report are:Delivery versus payment(DvP):the exchange or concurrent transfer of an asset like a security(d

37、elivery)for a cash leg(payment).Payment versus payment(PvP):the exchange or concurrent transfer of two cash legs,typically foreign exchange(FX).The BIS states,“A central bank issues public money via banknotes and central bank reserves.”5 Central bank money(CeBM),in the wholesale context,exists in th

38、e form of reserves held at a central bank on behalf of institutions and is accessed through an electronic system that manages participant obligations.M0 money includes CeBM and is the ultimate and final form of settlement because it is virtually free of credit risk,except for sovereign credit risk(e

39、.g.a government could be unable or unwilling to meet its credit obligations,which impacts the value of its currency).With the proper legal backing to govern the transactions,commercial banks and other financial institutions(FIs)use CeBM to facilitate settlement finality.A commercial bank liability i

40、n the form of deposits held at the commercial bank,which can be used for settlement purposes.6 This money constitutes a significant portion of the global money supply and is a form of private money created when banks extend loans.7For this report,deposit tokens are defined as a form of money that is

41、 a commercial bank liability and represented as a token that operates within the know-your-customer(KYC)boundaries of the issuing bank(s).This instrument is reserved for commercial and retail use,intra-bank payments,such as a bank making internal book entries,and payments between two or more banks.A

42、tomic settlementCentral bank moneyCommercial bank moneyDeposit tokensModernizing Financial Markets with Wholesale Central Bank Digital Currency8Contents CBDC A form of privately issued money representing fiat currency values commonly found on blockchains(distributed ledgers).They maintain 1:1 conver

43、tibility with the underlying currency through the issuer.This instrument is backed 1:1 by reserves of high quality and liquid cash-like assets such as short-term treasury bills(T-bills),treasury repurchase agreements(repos)and balances at commercial bank deposits.The total supply of the tokens will

44、at least match how much they have backed by cash and cash equivalents(backing can have an additional capital buffer).8A privately issued payment instrument backed 1:1 by central bank reserves,and a bankruptcy-remote digital currency secure from other creditors in the case of operator and participant

45、 default.Sometimes colloquially known as a“synthetic CBDC”,which is a misleading term because it implies central bank backing.RBDC is not CeBM.Per its community,this report proposes a more accurate designation:reserves-backed digital currency.The predominant central bank-supervised or-operated settl

46、ement system type that achieves settlement in CeBM in real-time and transaction-by-transaction.9There are multiple definitions of wCBDC,but for this report,a wCBDC is defined as a tokenized CBDC designed for interbank payments and securities transactions between commercial banks,financial institutio

47、ns and possibly certain global corporations.Fiat-backed stablecoinsReserves-backed digital currencies Real-time gross settlement(RTGS)systemWholesale CBDCModernizing Financial Markets with Wholesale Central Bank Digital Currency9ContentsWholesale financial markets use cases2Modernizing Financial Mar

48、kets with Wholesale Central Bank Digital Currency10ContentsTo examine opportunities to modernize financial markets,this report focuses on interbank payments and securities transactions.Interbank payments involve payments in CeBM made between FIs.1Domestic paymentsSettle payment obligations between b

49、anks and other FIs within a jurisdiction,whether a single payment leg(P)or two payment legs(PvP).2Cross-border payments via nostro accountsSettle cross-border payments between central banks,banks and other FIs located in different jurisdictions(P,PvP).3Cross-border payments via central bank accounts

50、 Provide currency liquidity across jurisdictions using central bank infrastructure arranged by a market maker or dealer to fund cross-border payments(PvP).Securities transactions represent payments in CeBM as the“cash leg”in transactions.1DvP for securities settlementSettle securities trade activiti

51、es involving equities and fixed-income instruments domestically and cross-border,including tokenized securities(DvP).2Collateral and liquidity managementServe as a payment instrument to be posted as collateral or used to purchase or acquire intraday liquidity(PvP,DvP).3Post-trade operations Facilita

52、te post-trade settlement and operations for securities,which is a core subsequent process to DvP for securities settlement(PvP,DvP).Interbank paymentsSecurities transactionsWhile there are many relevant use cases,this report focuses on two wCBDC use case areas:interbank payments and securities trans

53、actions because these represent fundamental areas of wholesale financial markets.2 Wholesale financial markets use casesModernizing Financial Markets with Wholesale Central Bank Digital Currency11ContentsThe digital money continuum3Modernizing Financial Markets with Wholesale Central Bank Digital Cu

54、rrency12ContentsMoney takes many forms,and the ongoing digitization of cash is creating alternative payment instruments that are increasingly challenging the status quo.Money is often considered a payment instrument issued by a sovereign entity,like a central bank issuing public money.However,money

55、can also be private,including when commercial banks take customer deposits and extend credit for loans,thus creating commercial bank money.Further,non-bank money is another form of private money whereby licenced FIs,like money transmitters,can issue money.CeBM is most suitable for interbank payments

56、 and securities transactions because it:Carries no credit or liquidity risk:The Principles for Financial Market Infrastructures(PFMI)advises CeBM for systemically important transactions where practical and available to avoid credit and liquidity risks.10 Facilitates settlement finality:A bankruptcy-

57、remote payment instrument with the proper legal backing governs the transactions to facilitate settlement finality,which is the irrevocable and unconditional transfer of an asset or financial instrument.11 Maintains financial stability:CeBM promotes the relevance and role of a virtually credit-risk-

58、free payment instrument in financial transactions and supports existing credit creation processes.TA B L E 1The digital money continuumPublic moneyPrivate moneyCentral bank moneyReserve-backed moneyCommercial bank moneyNon-bank moneyDescriptionA central bank liability can be used for settlement purp

59、oses in both physical and digital formats.A liability of a licenced non-bank FI or commercial bank backed by reserves in an omnibus account held at a central bank.A commercial bank liability in the form of deposits held at the bank,which can be used for payment purposes.A liability of a non-bank FI

60、that holds a licence to issue e-money and can be used to settle commercial transactions.Issuer/operatorCentral banksCommercial banks or non-bank FIsCommercial banksNon-bank FIsRiskVirtually credit risk-freeBankruptcy-remoteCarries credit and liquidity riskCarries credit and liquidity riskUsers Gener

61、al public FIs Bank customers(commercial and retail)Financial institutions Financial market infrastructures(FMIs)Bank customers(commercial and retail)General public Examples RTGS systems Wholesale CBDC Reserves-backed digital currency*Deposit token Fiat-backed stablecoinNote:This table represents an

62、aspirational classification of digital monies that are pegged to fiat currencies.The exact designation of digital monies will vary depending on the relevant rules and regulations in a given jurisdiction.Many instruments,such as crypto-assets,are intentionally excluded.*Reserves-backed money incorpor

63、ates elements of both public and private money.While they are categorized as private money in this table,given that the issuing parties would be private entities,the issuance is backed by public money,comprising central bank reserves that are part of the banks balance sheet.3 The digital money conti

64、nuumModernizing Financial Markets with Wholesale Central Bank Digital Currency13ContentsConsidering a tokenized wholesale CBDCWhile there are still several views on this topic,this report proposes that tokenization differentiates wCBDC from conventional systems.Tokenization generally refers to using

65、 technology to create digital tokens representing an asset or an underlying asset that can then be issued,traded and managed on compatible platforms.DLT and blockchain are often conflated with tokenization;however,tokenization is also possible through centralized techniques.The desired business outc

66、omes driven by tokenization are:Proof of value:Provides evidence or verification that an asset has a certain value or uniqueness.Proof of ownership:Establishes unambiguous ownership and assigns agency of the asset to the rightful owner.Proof of transaction:Produces a verifiable record to provide tra

67、nsaction history and evidence of settlement.TA B L E 2Conventional vs tokenized transactionsConventional Tokenized Proof of valueValue is proven through the transfer of physical assets or electronic book entries facilitated by trusted intermediaries.Value is established by ownership and transfer of

68、digital tokens,which are validated programmatically.Proof of ownershipOwnership is evidenced by legal documents or centralized databases maintained by trusted intermediaries.Ownership is encoded in digital tokens,ensuring permissioned access to the transfer records.Proof of transactionTransaction pr

69、oof is generated through receipts or records by centralized entities like banks or payment processors.Transactions are recorded on a shared system,providing evidence of occurrence to the involved parties.3 The digital money continuumModernizing Financial Markets with Wholesale Central Bank Digital C

70、urrency14Contents wholesale payment and settlementUsers of a book-entry-based RTGS system with designated accounts can initiate and submit transactions to the central bank-operated settlement infrastructure for validation.The central bank validates the transactions and updates respective participant

71、 balances in the RTGS system,resulting in each participant updating their internal books and core banking systems.Node operators of a token-based system can initiate and complete transactions among each other and validated natively by the network.The central bank-operated infrastructure authorizes t

72、ransactions based on the balances in the participants institutional wallets or vaults,resulting in the transfer of value.Commercial bank BCommercial bank AFMI AFMI BCentral bank-operated infrastructureTokens sentTokens receivedCentral bankRTGS systemDebitscreditsCommercial bank ACommercial bank BFMI

73、 AFMI BConventionalTokenizedwholesale payment and settlementF I G U R E 1Conventional vs tokenized wholesale payment and settlementNote:This stylized diagram simplifies the comparison between conventional and tokenized by comparing the two in a domestic context.Also,the distinction between central b

74、ank-operated and-supervised infrastructure is jurisdiction-dependent.Modernizing Financial Markets with Wholesale Central Bank Digital Currency15ContentswCBDC initiatives4Modernizing Financial Markets with Wholesale Central Bank Digital Currency16ContentsFrom 2017 to today,wholesale CBDC programmes

75、are continuing to redefine financial markets.Proof-of-conceptPrototypePilotProject Hamilton|2022Federal Reserve Bank of New YorkProject Lithium|2022Digital Dollar Project,Depository Trust and Clearing CorporationProject Cedar(P2)x Ubin|2023Federal Reserve Bank of New York,Monetary Authority of Singa

76、poreProject Jasper(phases I,II,III and IV)|2017-2019Bank of CanadaPilot Drex|2023Central Bank of BrazilProject Khokha(phase I and II)|2018South Africa Reserve Bank(SARB)Project Helvetia(phases I,II,and III)2020-presentSwiss National Bank,BIS Innovation HubProject Atom|2021Reserve Bank of AustraliaPr

77、oject Jura|2021Swiss National BankBank of FranceProject Mariana|2022Bank of France,Swiss National Bank,Monetary Authority of SingaporeLiquid-Share Consortium|2021Euroclear Consortium|2021HSBC Partnership|2021Iznes Partnership|2021SEBA Bank|2021Bank of FranceTechnical Experimentation|2023Bank of Spai

78、nProsperUs Consortium|2021Bank of France,Central Bank of TunisiaTechnical Experimentation|2021Project Onyx|2021Bank of France,Monetary Authority of SingaporeTechnical Exploration|2023-presentEuropean Central BankProject Venus|2022Bank of FranceCentral Bank of LuxembourgSWIFT CBDC Sandbox(phase I)|20

79、23Hong Kong Monetary Authority,National Bank of Kazakhstan and othersProject Stella|2016-2020Bank of Japan,European Central BankProject mBridge|2021-presentDigital Currency Institute of the Peoples Bank of China,Hong Kong Monetary Authority,Bank of Thailand,Central Bank of the United Arab Emirates,B

80、IS Innovation HubProject CBDCPh|2022Republic of the PhilippinesProject Ubin(phase I and II)|2017wCBDC Pilot|2024Monetary Authority of SingaporeProject Garuda|2022Bank of IndonesiaProject Aber|2019Saudi Central BankCentral Bank of the United Arab EmiratesDigital Rupee Pilot|2022Reserve Bank of IndiaP

81、roject Digital Ngultrum|2021Royal Monetary Authority of BhutanProject Inthanon-LionRock|2019Hong Kong Monetary Authority,Bank of ThailandProject Dunbar|2022Reserve Bank of Australia,Monetary Authority of Singapore,South African Reserve Bank,Central Bank of Malaysia,BIS Innovation HubSWIFT CBDC Sandb

82、ox(phase II)|2024Reserve Bank of Australia,Deutsche Bundesbank,Hong Kong Monetary Authority,Bank of Thailand,Bank of Canada and othersInnovations in how CeBM is delivered are driven by a need to keep pace with the diversity of modern payment technology,address problems with current infrastructures a

83、nd meet international standards(e.g.Committee on Payments and Market Infrastructures(CPMI)International Organization of Securities Commissions(IOSCO)PFMI)for using CeBM in systemically important systems.F I G U R E 2Global wCBDC efforts4 wCBDC initiativesModernizing Financial Markets with Wholesale

84、Central Bank Digital Currency17ContentsA 2022 BIS survey found that there will likely be at least nine wCBDCs circulating by 2030,and the Swiss National Bank(SNB)issued a live Swiss Franc wCBDC to settle digital securities transactions as part of a limited-time pilot in December 2023.12 In November

85、2023,the Monetary Authority of Singapore announced that they would pilot the live issuance and use of a wCBDC in 2024 to facilitate domestic interbank payments.13 Another notable initiative is Project mBridge(BIS Innovation Hub et al.),which has begun its MVP phase,and has transacted with real value

86、 wCBDC across the four jurisdictions in scope.Most wCBDC experiments have focused on cross-border payments(e.g.Jura,mBridge,Dunbar,Mariana),as cross-border use cases are believed to be the strongest for transformation,including elements like governance,KYC/anti-money laundering(AML)/countering the f

87、inancing of terrorism(CFT),data privacy,capital flows,monetary policies,cybersecurity and financial stability.According to the 2022 BIS survey of 86 central banks,advanced economies(AEs)and emerging market and developing economies(EMDEs)reported cross-border payments efficiencies as the primary moti

88、vation for pursuing wCBDC.4 wCBDC initiativesModernizing Financial Markets with Wholesale Central Bank Digital Currency18AEsEMDEs8040602000As a percentage of respondents conducting work on CBDCs,20221Limited operating hoursLongtransaction chainsLegacy technology platformsFragmented and truncated dat

89、a formatsFunding costsWeak competitionUnclearFX rates and/or feesComplex processing of compliance checksIn the same survey,it was discovered that central banks identified limited operating hours,long transaction chains,legacy platforms and complex processing of compliance checks as principal pain po

90、ints to be addressed using wCBDCs.These elements are further explored in the following sections.Several projects have covered domestic wCBDC applications:Project Helvetia with the SNB,Project Jasper with the Bank of Canada and the recent focus by the European Central Bank(ECB)on securities settlemen

91、t.14 The Banque de France(BdF)recently announced its findings from its multi-year pilot using DLT to issue wCBDC,indicating a willingness to continue experimentation with other institutions like the BIS.15 The governor of the BdF recently underscored the importance of wCBDCs by advocating for its pu

92、rpose:1)maintaining CeBM as a“safety pivot”in a tokenized world,and 2)enhancing cross-border payments.16Note:1.The sample includes jurisdictions that consider efficiency in cross-border payments as a somewhat important,important,and very important driver of their CBDC engagement.Source:Kosse,Anneke

93、and Ilaria Mattei,Making headway Results of the 2022 BIS survey on central bank digital currencies and crypto,BIS,2023.AEsEMDEsWholeslae228920222Financial stabilityMonetary policy implementationFinancial inclusionPayments efficiency(domestic)Pay

94、ments efficiency(cross-border)Payments safety/robustnessAverage importance,1(not so important)4(very important)Source:Kosse,Anneke and Ilaria Mattei,Making headway Results of the 2022 BIS survey on central bank digital currencies and crypto,BIS,2023.F I G U R E 4Cross-border frictions that a wholesa

95、le CBDC could addressF I G U R E 3Motivations for issuing a wholesale CBDCF I G U R E 3Motivations for issuing a wholesale CBDCF I G U R E 4Cross-border frictions that a wholesale CBDC could addressContentsIndustry challenges5Modernizing Financial Markets with Wholesale Central Bank Digital Currency

96、19Contents5 Industry challengesEight industry challenges were analysed to determine corresponding opportunities for wCBDC to address key pain points in financial markets.Taking a holistic approach,this report analyses the relevant challenges for wCBDC systems to derive insights into where and how di

97、fferentiated value can be activated.F I G U R E 5Identified financial markets industry challengesInterbank payments Securities transactions1.Disparate settlement cyclesWhile designed to eliminate risk,reducing global settlement times could inadvertently increase settlement,counterparty and technolog

98、y risk.5.Instant settlement could increase liquidity riskInstant and atomic settlement may increase liquidity demands and risks already raised by the shift to gross settlement.3.Growing FX settlement riskLimited affordability and accessibility of PvP arrangements and a rise in the usage of non-CLS-e

99、ligible currencies are driving growing FX settlement risk.7.Slow cross-border payments in high-risk regionsDe-risking and cost-cutting measures are reducing the number of correspondent banks globally,limiting accessibility to cross-border payments for users worldwide.4.No tokenized credit risk-free

100、settlement mediumThe growth in the tokenization of assets underscores the need for commensurate tokenized cash to promote the role of CeBM.8.Lack of secure technical interoperabilityA flurry of new systems could lead to a disconnection between DLT and conventional systems,resulting in increased risk

101、 and liquidity fragmentation.2.Operational risk and settlement failuresAn amalgam of data quality challenges,limited interoperability and manual processes lead to settlement failures in securities markets.6.Disjointed regulatory interoperabilityA divergence in policy,rules and regulations creates in

102、consistencies between jurisdictions,resulting in friction for cross-border use cases.Modernizing Financial Markets with Wholesale Central Bank Digital Currency20ContentsSummary of findingsEach of these industry challenges were evaluated and a commensurate area for modernization was identified.Table

103、3 captures a summary of the findings for each area for modernization and discerns the persistent challenges from the areas of differentiated value.An area of differentiated value is an identified challenge that wCBDC could uniquely address given its generally-understood core capabilities.A persisten

104、t challenge is a barrier resulting from a challenge rooted in more than just the payment instrument but can include elements like regulation,compliance,geopolitics and long-standing trade-offs.5 Industry challengesTA B L E 3Summary of areas of differentiated value and persistent challengesIndustry c

105、hallenge Area for modernizationFindingDisparate settlement cyclesRealizing a global settlement windowArea of differentiated valueOperational risk and settlement failuresMutualizing data sharingGrowing FX settlement riskExpanding PvP arrangementsNo tokenized credit risk-free settlement mediumTokenizi

106、ng credit risk-free settlement mediaInstant settlement could increase liquidity riskOptimizing liquidity managementPersistent industry challengeDisjointed regulatory interoperabilityEnsuring compliance-by-designSlow cross-border payments in high-risk regionsAccessing central bank money Lack of secur

107、e technical interoperabilityInteroperating with new and existing systemsModernizing Financial Markets with Wholesale Central Bank Digital Currency21ContentsAreas of differentiated value6Modernizing Financial Markets with Wholesale Central Bank Digital Currency22Contents6 Areas of differentiated valu

108、eAreas of differentiated value were identified as ripe for modernization using wCBDC and should be considered as near-term focus area.Disparate settlement cyclesWhile designed to eliminate risk,reducing global settlement times could inadvertently increase settlement,counterparty and technology risk.

109、Lack of a“global settlement window”The global nature of capital markets has resulted in a need for harmonized settlement cycles across regions.“Settlement cycle”refers to the time elapsed between the date a trade is made(or executed)and the settlement date(when participants receive cash or the secur

110、ity that was purchased),at which point the transaction is deemed final.For example,when a trade occurs in Europe and aims to settle in Asia,there is a limited time zone overlap(2-4 hours)during RTGS sytem operating hours,complicating trade and post-trade processes.This disparity across regions can b

111、e attributed to operating-hour gaps due to policy objectives,time-zone differences,operational constraints and cultural differences in working hours.For example,some Islamic countries observe working days between Sunday and Thursday.Extending RTGS systems hours globally could help meet the G20s ambi

112、tion of enhancing cross-border payments.However,just four of the 82 CPMI jurisdictions surveyed reported having RTGS operating hours 24/7 or near 24/7.This gap impacts securities settlement and FX transactions;the former could benefit from wider settlement windows,while the latter calls into questio

113、n the ability to hold overnight wCBDC(without any access to intraday overdrafts)to address the transmission of cash around the clock.The BIS proposed the concept of a“global settlement window”to address this disparity.Figure 6 illustrates the limited overlap in RTGS operating hours between jurisdict

114、ions and the global window under discussion(6:00-11:00 GMT),which is a five-hour period where the highest number of RTGS systems operate concurrently across all jurisdictions in the survey.17 While not an explicit target,extending hours comes with personnel,system feasibility and challenges related

115、to policy restrictions.While some technology limitations are at play,market norms are the predominant reason for limited 24/7 operations.Click on an icon below to find out more about each area of differentiated valueModernizing Financial Markets with Wholesale Central Bank Digital Currency23Contents

116、RUINIDSGHKCNKRJPAUHours of day(GMT)Aspirational global settlement windowEMEA06223ARBRGBSEEACHZASATRCLSMXCAUSAPACAM246 Areas of differentiated valueF I G U R E 6RTGS system operating hours on working days for CPMI jurisdictionsNotes:AM=Americas;APAC=Asia-Pacific;AR=Ar

117、gentina;AU=Australia;BR=Brazil;CA=Canada;CH=Switzerland;CLS=CLS Bank;CN=China;EA=euro area;EMEA=Europe,Middle East and Africa;GB=United Kingdom;HK=Hong Kong SAR;ID=Indonesia;IN=India;JP=Japan;KR=Korea;MX=Mexico;RU=Russia;SA=Saudi Arabia;SE=Sweden;SG=Singapore;TR=Turkey;US=United States;ZA=South Afri

118、ca.Source:Committee on Payments and Market Infrastructures,Extending and aligning payment system operating hours for cross-border payments,2022.Click on an icon below to find out more about each area of differentiated valueModernizing Financial Markets with Wholesale Central Bank Digital Currency24C

119、ontents6 Areas of differentiated valueThe race to T+1T+is a convention used to denote a duration of time from T(trading day or the day a transaction took place)until settlement,where all parties obligations are met.Conventional securities transactions follow a T+2 settlement cycle,settling two days

120、after the trading day.This is primarily due to standard market practices and operational constraints.Challenges today include delayed pre-trade information,limited operational hours,counterparty risk and manual processing.Efforts to reduce market risk by shortening the settlement cycle have led to I

121、ndia adopting T+1 in 2023 and Mexico,the United States and Canada preparing for T+1 by May 2024.The UK and the Eurozone are also exploring T+1 and T+0.Reducing the settlement cycle from T+2 to T+1 promises to:18 Increase the availability of liquidity and the efficiency of deployed capital Decrease t

122、he length of exposure to counterparties and reduce counterparty risk Reduce daily margin requirements for clearing participants(T+1 could reduce this by 41%19)Lower market and liquidity risk.PhilippinesT+3 to T+224 August 2023AustraliaT+2 to T+1Ongoing market consultationsIndiaT+2 to T+127 January 2

123、023MexicoT+2 to T+128 May 2024(pending confirmation)CanadaT+2 to T+127 May 2024UKT+2 to T+1 Accelerated Task Force established and due to deliver findings in 2024USAT+2 to T+128 May 2024F I G U R E 7Timeline of the implementation of compressed global settlement cyclesSource:Citibank,Securities Servi

124、ces Evolution 2023:Disruption and transformation in financial market infrastructures,2023.Click on an icon below to find out more about each area of differentiated valueModernizing Financial Markets with Wholesale Central Bank Digital Currency25Contents6 Areas of differentiated valueHowever,shorteni

125、ng settlement windows strains post-trade operations and legacy systems attempting to meet the newfound demands for speed.Compressing the settlement window is also a risk-reward-based decision for each jurisdiction.Factoring in time zones relative to the sources of capital inflows for a jurisdiction

126、could dictate to what degree settlement windows should be shortened.This would be to not unduly constrain or limit inflows by creating frictions on the time allowed to settle or locate liquidity,which can strain foreign investors.The Securities and Exchange Commission estimates US industry investmen

127、ts of$3.5-4.95 billion to achieve T+1,with compliance costs at$5.5 million per institution.20 Citibank found that accelerated settlements and updating legacy technology platforms are top priorities for FMIs.21T+0 as the likely next stepMany market participants anticipate T+0 as a possible industry s

128、tandard for settlement windows once global markets have harmonized towards T+1.Broadly,there are three variations of T+0:gross,intraday and end-of-day,as illustrated in Figure 8.T+0 intraday and end-of-day are both forms of netted T+0.T+0 gross Like instant settlement,T+0 gross achieves settlement i

129、mmediately on the trading day and relies on pre-funded accounts and securities to be on hand.T+0 intraday(netted)A form of netted T+0 intraday settlement refers to setting transactions within the same trading day,but in predefined intervals or cycles.T+0 end-of-day(netted)Involves a batch processing

130、 approach where transactions are bundled and settled at the end of the day using bulk settlement and netting.Accelerated securities settlement:T+0 considerations24-hour trading day0622324T+0 grossT+0 intradayT+0 end-of-daySettlementIllustrative placement of settlemen

131、t timesF I G U R E 8T+0 considerationsClick on an icon below to find out more about each area of differentiated valueModernizing Financial Markets with Wholesale Central Bank Digital Currency26Contents6 Areas of differentiated valueT+0 gross settlement would theoretically demand the most pre-funding

132、 and liquidity,representing a major business model shift for stakeholders,especially with todays legacy infrastructure.While instantaneous settlement is possible at the central securities depository(CSD)level,according to State Street,instantaneous settlement is not possible down the custodial chain

133、,and to achieve T+0,new technologies like DLT may be required to support features like atomic settlement.22 Additionally,pre-trade,trade and post-trade activities must be combined,and manual processes like trade matching must be automated.RTGS services would need to operate around the clock to suppo

134、rt this degree of compression.Additionally,a fundamental overhaul of global clearing,payment,and settlement systems would be required to handle the increased pressure on liquidity and systems.23 Therefore,implementing T+0 is likely not a near-term phenomenon but a trend worth considering in the spir

135、it of future-proofing systems.Realizing a global settlement window using wCBDCwCBDC could enable the aspirational 6:00-11:00 GMT global settlement window.Settlement windows globally pertain to three general areas:FX and PvP(also covered in detail later in this report),securities transactions and DvP

136、(jurisdiction-specific),and derivative-related transactions.wCBDC systems could represent a liquidity storage mechanism that runs 24/7 and addresses use cases without a limitation related to time zones or jurisdictional boundaries.For example,Project Jura demonstrated that wCBDC could be used to set

137、tle tokenized securities transactions across borders.In addition to around-the-clock operations,wCBDC could also support programmable payments and be designed to upgrade while operational.For example,Fedwire cannot upgrade while operational,a key constraint when discussing expanding from the current

138、 22 hours five days per week to operations on a 24/7-basis.In contrast,the new retail and commercial real-time fast payment system(FPS)FedNow can be upgraded online because of its modern architecture and capabilities.Enabling 24/7 operations,programmable payments and upgradeability could provide sev

139、eral areas of benefits,including:Reducing liquidity and credit risk by eliminating the need for overnight credit extensions Maximizing the availability of settlement windows to meet variable requirements Allowing system upgrades to occur while the system is operational(around the clock)Maintaining l

140、iquidity bridges for inter-regional trade to optimize collateral deployment Orchestrating multi-asset and multi-party transactions across jurisdictions.Differentiated valueWhile efforts are under way to enable RTGS systems to run at or near 24/7,wCBDC represents an opportunity to reach settlement fi

141、nality at any time of day as a supplement to RTGS systems,if designed with this feature of automatic operations at its core,much like how many retail and commercial FPSs operate.It is worth noting that FPSs are generally intended for retail and commercial use cases only;thus,enabling 24/7 operations

142、 via FPSs has benefits limited to the jurisdiction in which it is deployed(e.g.FedNow in the United States and Unified Payments Interface in India).A key requirement to realize this value is the need for overnight wCBDC to support the around-the-clock settlement windows.Enabling a 24/7 or near-24/7

143、wCBDC system will also support jurisdictional policy objectives of shortening settlement cycles,like T+1 and eventually T+0.Certain regions may benefit from 24/7 operations,including major economic centres facilitating cross-border transactions or serving as bridge currencies in FX markets.Click on

144、an icon below to find out more about each area of differentiated valueModernizing Financial Markets with Wholesale Central Bank Digital Currency27Contents6 Areas of differentiated valueOperational risk and settlement failuresAn amalgam of data quality challenges,limited interoperability and manual p

145、rocesses lead to settlement failures in securities markets.Settlement delays,failures and costsWhile there have been improvements in the straight-through processing of securities transactions,challenges remain.Based on data from the Swift network covering cross-border settlement,about one out of eve

146、ry ten securities transactions requires correcting or will fail:4.9%of settlement instructions are cancelled before or on the settlement date,and 4.8%of settlements are delayed.24 These incidents are increasing,with a 9%growth in cancelled instruction rate and a 16%increase in late settlements from

147、2020 to 2022.25 There are four causes of settlement failures:26 Information asymmetry and poor-quality data related to incomplete standing settlement instructions(SSIs)whereby counterparties to a transaction do not have shared visibility into error(s)encountered.Market volatility in times of increas

148、ed trading volumes creates strain for exception-based trades(trades requiring manual intervention)and can drive counterparty and credit risks to rise substantially,challenging the securing of cash in time to settle on time.Liquidity constraints where cash or securities are unavailable,especially in

149、transactions involving FX.Legacy systems focused on post-trade operations that suffer from many manual processes.Some systems require downtime for end-of-day or end-of-period batch processing.Settlement window closures like this could cause transactions to get“caught”waiting for the relevant RTGS sy

150、stem to open.According to Swift,settlement failures and delays are on the rise because of unstable market conditions,heightened geopolitical tensions,cross-border transactions with long intermediary chains(more points of failure),multiple regulatory jurisdictions(covered later in this report)and inc

151、ongruent messaging formats and data standards.Lastly,human error is another reason for increased failures or delays(e.g.keying in the wrong data for an SSI).Less time to reconcile errorsTransitioning from T+2 to T+1 may not simply result in a 50%reduction in post-trade process time to mitigate settl

152、ement failures;it could yield an 83%reduction(12 hours today compared to two under T+1),which significantly reduces time to reconcile errors,locate funding and match trades.27 Settlement costs are also rising in the form of funding and capital costs.Estimates suggest that settlement costs are rising

153、 approximately 14%each year,and 5-10%of trades fail each day,driven by Click on an icon below to find out more about each area of differentiated valueModernizing Financial Markets with Wholesale Central Bank Digital Currency28Contents6 Areas of differentiated valuehuman error and the seven non-inter

154、operable systems for which the average trade is routed.28 These costs lead to operational risks for FIs,like penalties and manual reconciliation,and regulatory risks,like costly mandatory buy-ins.RTGS system outagesRTGS system outages stem from software glitches and infrastructural or operational co

155、nstraints.These disruptions lead to transaction delays,financial losses and increased vulnerabilities.Maintenance activities,hardware failures,transaction volume constraints and other external factors are often the leading contributors to such disruptions.Consequences include compromised integrity,p

156、articipant confidence erosion and possible economic repercussions.Mitigating risks through cybersecurity measures,contingency planning,system reviews,stress testing,intraday monitoring and regulatory compliance is crucial for RTGS system reliability.1990s1999European Central Bank(EU),6 hours1999Euro

157、pean Central Bank,unspecified duration2003European Central Bank(EU),4 hours2003Bank of England(UK),6 hours2005European Central Bank(EU),5 hours2008European Central Bank(EU),3 hours2008European Central Bank(EU),4 hours2015Reserve Bank of Australia(AU),6 hours2014Bank of England(UK),9 hours2015Reserve

158、 Bank of Australia(AU),7 hours2019Federal Reserve(US),3 hours2020Reserve Bank of India(IN),3+hours2020Reserve Bank of Australia(AUS),2 hours2020Reserve Bank of India(IN),12 hours 2021Federal Reserve(US),4 hours2022Reserve Bank of Australia(AU),5 hours2020European Central Bank(EU),10 hours2021Europea

159、n Central Bank(EU),10 hours2023Bank of England(UK),6 hours2000s2010s2020sSoftwareInfrastructureOperationalF I G U R E 9Key RTGS system outages(1990-2023)Click on an icon below to find out more about each area of differentiated valueModernizing Financial Markets with Wholesale Central Bank Digital Cu

160、rrency29Contents6 Areas of differentiated value Mutualizing data sharing using wCBDCMarket participants could benefit from a trusted,operationally resilient platform that mutualizes(makes available across multiple parties)data to achieve settlement finality.As observed,a fundamental barrier to ensur

161、ing more effective settlement of securities is the information asymmetry of SSIs between counterparties,particularly when reconciliations are needed to rectify errors in the data.In todays systems,high-quality SSI data is imperative to correctly transmit payment instructions and other important para

162、meters generated during a trade and used during post-trade.It is often difficult to access when multiple parties are involved,as each party can only access their respective aspect of the instructions.A single source of truth has the potential to remove inefficiencies and reconciliation and ultimatel

163、y accelerate the settlement cycle.Trusted,neutral FMIs interacting with wCBDC could address operational and settlement risk by:Mutualizing necessary data to facilitate compatibility of trade and post-trade across institutions Combining and automating trade and post-trade process automation technique

164、s Ensuring access to necessary SSI data by applying robust permissions Mitigating the need for manual reconciliation caused by errors or data discrepancies Preserving privacy at all levels of a transaction to regulate and control access.The BdF announced the lessons learned from its wCBDC experiment

165、ation involving using a cash DLT system to settle tokenized transactions.It found that DLT could enhance the straight-through processing of trade and post-trade activities and strengthen financial stability.29 The Depository Trust and Clearing Corporation(DTCC),the Digital Dollar Project and Accentu

166、re found,as part of a CBDC pilot,that DLT offers the potential to achieve operational efficiencies and enhance transparency and reporting capabilities for securities transactions by facilitating orchestration between two networks:securities and cash.30 This research also found that DLT could be uniq

167、uely positioned to bolster system recovery by“sharding”data across multiple nodes in the network.Sharding is a technique in data storage where large databases are partitioned into smaller,more manageable pieces(shards)distributed across multiple nodes or storage locations to improve scalability and

168、performance.To preserve privacy,Project Tourbillon showed that central banks can monitor the aggregate use of CBDCs in real time without seeing any personal information.31 Other elements,such as operational resilience and scalable performance in an outage,are foundational to addressing operational a

169、nd settlement risks,ensuring smoother data-sharing processes and applying permissions.Differentiated valueGiven the propensity of settlement risk and failures in securities markets and reliance on M0 settlement infrastructure by banks and FMIs,wCBDC could provide a differentiated solution for addres

170、sing errors driven by data quality issues.Using a central bank-operated or-supervised infrastructure trusted among its participants,wCBDC could enhance trade and post-trade operations by permissioning access to necessary parties through trusted rails.Click on an icon below to find out more about eac

171、h area of differentiated valueModernizing Financial Markets with Wholesale Central Bank Digital Currency30Contents6 Areas of differentiated valueGrowing FX settlement riskLimited affordability and accessibility of PvP arrangements and a rise in the usage of non-continuous linked settlement-eligible(

172、non-CLS-eligible)currencies are driving growing FX settlement risk.C A S E S T U D Y 1Herstatt and FX settlement riskThe bankruptcy of Bankhaus Herstatt in 1974 marks a seminal event in the history of FX settlement risk and its importance.According to the International Monetary Fund,FX settlement ri

173、sk equals the purchase currencys full amount.It lasts from when a payment instruction for the currency sold can only be cancelled if the currency purchased is received with finality.32 When it closed,Bankhaus Herstatt had already received payments in Deutsche mark but not yet sent US dollar payments

174、 this unsynchronized FX activity led counterparties to incur losses.The failure highlighted FX settlement risk,also known as Herstatt risk.33 The event caused panic in the market and was one of many bank failures that led to the formation of The Basel Committee on Bank Supervision.34 The public sect

175、or called to mitigate FX settlement risk globally,and the industry established CLS in 2002 to provide PvP arrangements and allow the payment legs of FX trades to settle simultaneously.CLSs settlement service provides settlement risk mitigation through PvP for 18 of the leading currencies.It offers m

176、ultilateral netting and liquidity-saving features enabled by the daily settlement window.In December 2023,CLS announced that it settled a record value of$16.3 trillion of FX payment instructions with 99.5%net funding efficiency(less than 1%liquidity cost).35 However,nearly 50 years after Herstatt,an

177、d as of 2022,nearly a third of FX turnover($2.2 trillion)remains subject to settlement risk.(The total FX turnover in 2022 was an estimated$7.5 trillion,up from 6.6 trillion three years earlier.)This is an increase from an estimated$1.9 trillion at risk calculated in April 2019.36 FX settlement risk

178、 occurs because:A lack of affordable PvP arrangements,and market participants make cost-benefit decisions as to the risk exposure versus the value of the transaction.Limited accessibility to PvP arrangements based on time zone,peak liquidity hours and currency pairing.37 This point materializes from

179、 an increased demand for emerging market economy(EME)currencies,which are largely not CLS-eligible.Click on an icon below to find out more about each area of differentiated valueModernizing Financial Markets with Wholesale Central Bank Digital Currency31Contents6 Areas of differentiated valueIncreas

180、ed EME currency turnoverBetween 2016 and 2019,the average daily turnover of EME currencies,particularly in Asia-Pacific,surged by nearly 60%to nearly$1.6 trillion.The trading in currencies like the Chinese renminbi,Indian rupee,Indonesian rupiah and Philippine peso more than doubled.38 Yet,EME curre

181、ncies face limited access to PvP arrangements,high volatility,low liquidity(due to limited availability)and dependence on bridge currencies,like dollars,to facilitate trades,creating reliance on another currency.This challenge is further exacerbated by de-risking,which is discussed later.Some curren

182、cies have capital(regulatory)controls applied to them,which hinder their ability to be traded freely in markets.Some jurisdictions are exploring CBDCs to improve speed and efficiency,reduce settlement risk(via PvP),and use local currencies for trade(e.g.Project mBridge).5%10%15%20%25%0192

183、20%CNYHKDSGDOther Asian EMEsLatin AmericaOther EMEsF I G U R E 1 0Total FX turnover in EME currencies(2001-22)Notes:CNY(Chinese yuan),HKD(Hong Kong dollars),SGD(Singaporean dollars).Source:Caballero,Julin,et al.,“The internationalisation of EME currency trading”,Bank for International Settlements,20

184、22.Click on an icon below to find out more about each area of differentiated valueModernizing Financial Markets with Wholesale Central Bank Digital Currency32Contents6 Areas of differentiated valueThe importance and declining use of PvPThe proportion of FX transactions settled on a PvP basis has ste

185、adily fallen from 50%in 2013 to 40%in 2019,increasing FX settlement risk.39 Expert opinion indicates that it is plausible that many FX transactions occur“on-us”and are not captured in the global FX settlement risk statistics.These on-us orders include inter-affiliate book entries,clearing house book

186、 transfers and other methods.While the total number of FX transactions in both PvP and non-PvP is growing year-on-year,the percentage using PvP is declining.This can be attributed to an increased turnover in non-CLS-eligible and EME currencies,which settle a higher proportion of trades on a non-PvP

187、basis.40,41 Countries with non-CLS-eligible currencies(around 10%of FX market value)42 report higher rates of FX settlement risk.43Market participants have several options to reduce and mitigate FX settlement risk,such as:Pre-settlement netting and bilaterally offsets payment obligations between par

188、ticipants On-us settlement to settle payment obligations across the books of the same legal entity or banking group PvP arrangements where the final payment of currency A occurs if the corresponding payment in currency B is fulfilled.PvP eliminates settlement risk because of atomic settlement.While

189、these options exist,the principal reason for a desire to conduct FX transactions on a PvP basis is the reduction of counterparty and credit risk.44 Due to its ability to be applied to a wider set of trading scenarios than pre-settlement netting and on-us,it is more attractive to scale.40%of FX trans

190、actions were settled via PvP in 2019,a decrease from 50%in 2013.10%of the FX market involves non-CLS-eligible currencies,which involve higher settlement risk.FX transactions grow annually,but PvP settlement use is declining.Click on an icon below to find out more about each area of differentiated va

191、lueModernizing Financial Markets with Wholesale Central Bank Digital Currency33Contents20406080100Settlement of foreign exchange turnover As a percentage of deliverable turnover A.By settlement method over time 0320192022Via PvP arrangementsVia on-us without exposure to settlement riskVia

192、 on-us with exposure to settlement riskVia other non-PvP arrangementsSettlement:Without exposure to settlement risk:Potentially at risk:Pre-settlement nettingVia on-us lacking information on exposure to settlement risk6 Areas of differentiated valueF I G U R E 1 1Settlement risk of FX turnoverSource

193、:Bank for International Settlements,Facilitating increased adoption of payment versus payment(PvP),2023.Expanding PvP arrangements using wCBDCFX settlement risk is growing because of the limited accessibility and affordability of PvP arrangements globally in the face of increased turnover of EME or

194、less liquid currencies not supported on highly efficient platforms.Despite this efficient model,EME regions often take on settlement risk when they use EME currencies.A wCBDC could help optimize FX markets by:Facilitating affordable and accessible multilateral PvP arrangement mechanisms (if done cos

195、t-effectively)Reducing the barrier to entry for central banks and their respective banking communities Supporting flexible currency conversion arrangements for EME currencies Expanding access to non-domestic and non-bank institutions to trade currencies Facilitating simple onboarding and integration

196、s with existing systems to manage liquidity Supporting variable settlement windows to expand access to various regions.Click on an icon below to find out more about each area of differentiated valueModernizing Financial Markets with Wholesale Central Bank Digital Currency34Contents6 Areas of differe

197、ntiated valueWhile CLSNet supports more than 120 currencies,there are opportunities to gain additional efficiencies for EME currencies.Project mBridge shows that wCBDC could increase accessibility to PvP arrangements by facilitating direct bilateral connectivity between banks,supporting local curren

198、cies by allowing central banks to easily issue/redeem tokens and create liquidity pools,interoperating with conventional infrastructure,and reducing settlement risk.Project Mariana was a proof-of-concept to uncover the benefits of automated market makers(AMM)for currency liquidity.45 Using a transna

199、tional network to integrate domestic platforms,Mariana found AMMs can:Combine FX trading and settlement into one step(atomic)to lower settlement risk Establish a common shared platform to optimize wCBDC liquidity Reduce reliance on settlement intermediaries to access currency liquidity Enable multi-

200、token liquidity pools to expand currency liquidity.Further,in the stablecoin context,Circle and Uniswap jointly found that AMMs can enhance currency liquidity and price discovery by enabling passive asset owners to act as liquidity providers.46 However,AMMs typically carry front-running trading stra

201、tegies,smart contract risks and high slippage costs,which is the difference between the expected and actual trade prices due to limited liquidity.Considering relevant policies and regulations is paramount.In many scenarios,the use of a bridge currency,like dollars or euros,might still be necessary f

202、or compliance reasons.This requirement can lead to increased costs.The regional scope of solutions may lead to liquidity fragmentation,require pre-funding and do not offer optimal liquidity-saving features.A central intermediary may still be necessary for dispute resolution.Lastly,intermediaries reg

203、ulatory status impacts the degree to which they can onboard new currencies,such as banks under stricter supervisory rules than non-bank entities.Differentiated valuewCBDC could offer a unique value model for accelerating the diversification of currencies if the costs to implement and adopt such PvP

204、arrangements remain low.Click on an icon below to find out more about each area of differentiated valueModernizing Financial Markets with Wholesale Central Bank Digital Currency35Contents6 Areas of differentiated valueNo tokenized credit risk-free settlement mediumThe growth in the tokenization of a

205、ssets underscores the need for commensurate tokenized cash to promote the role of CeBM.Dematerialization and tokenization of assetsBefore the advent of computer-based systems,the ownership of securities was indicated by who held its physical certificate.Dematerialization is an ongoing trend but can

206、be traced back to the 1960s when industry participants recognized the benefits of electronically recording security ownership on a computerized ledger.47 By dematerializing securities,the industry saw efficiencies and improved security for investors.Different jurisdictions have adopted different mod

207、els and paces for dematerialization.In 2024,His Majestys Treasurys Digitization Taskforce will report on using full dematerialization to further wider policy goals,including improving access to shareholder rights.48 The City of London Law Society noted that dematerialization proposes to replace the

208、legal function of signed stock transfer form and paper certificates,but that other interactions between companies and shareholders,like dividend payments and proxy appointments,must also be improved.49 In assessing the means for affecting dematerialization,some have regarded it as too dramatic of a

209、change to garner widespread market adoption,informed by the experience in Australia of its re-building of the CHESS settlement system.50 As with the Bank of Englands(BOE)RTGS modernization programme,the intention is to introduce a fully digitized securities system that is future-proofed for incremen

210、tal adoption of DLT.The tokenization of assets involves creating digital tokens representing underlying assets like real estate,equities,digital art,intellectual property and even cash.Tokenization is a key use case for blockchain,with some estimates pointing towards$4-5 trillion in tokenized securi

211、ties on DLT by 2030.51 The primary drivers are the 24/7 accessibility of tokenized systems and the ability to democratize financial services by fractionalizing assets into more affordable units.The BIS proposed two models for bringing tokenization into the monetary system:1)Bring CBDCs,DTs and token

212、ized assets on to a common unified ledger,and 2)pursue incremental progress by creating interlinking systems.52 They determined the latter option was more feasible given that the former requires a reimagination of financial systems.Experimentation with the unified ledger concept is ongoing.Click on

213、an icon below to find out more about each area of differentiated valueModernizing Financial Markets with Wholesale Central Bank Digital Currency36ContentsF I G U R E 1 2Tokenization total addressable market6 Areas of differentiated valueOpportunityTokenization total addressable market($,trillion)203

214、0non-financial corporate and quasi-sovereign debt2030 real estate funds2030private equity/venture capital2030 securities financing and collateral2030 trade finance2030 estimate$1.6 trilliontokenized2030 estimate$0.7 trilliontokenized2030 estimate$1.9 trilliontokenized2030 estimate$1.0 trilliontokeni

215、zed2030 estimate$0.5-1.0 trilliontokenized$187 trillion$20 trillion$7 trillion$12 trillion$42 trillionSource:Citibank,Money,Tokens,and Games:Blockchains Next Billion Users and Trillions in Value,2023.Click on an icon below to find out more about each area of differentiated valueModernizing Financial

216、 Markets with Wholesale Central Bank Digital Currency37Contents6 Areas of differentiated valueTokenized assets gain tractionThe bond market has seen an uptick in adoption,with tokenized bonds reaching$3.9 billion globally,with nine-tenths of them issued between 2021 and 2023.53 A leading example is

217、Project Genesis 1.0,led by the Hong Kong Monetary Authority(HKMA)and BIS Innovation Hub(BISIH).These are two prototype digital platforms that aimed to enable investment in Hong Kong green bonds with higher transparency and greater access to retail investors were successfully developed.In Project Gen

218、esis 2.0,the HKMA and BISIH explored using blockchain,smart contracts and other related technologies to demonstrate the technical feasibility of tracking,delivering and transferring digitized carbon forwards(also known as mitigation outcome interests).54 Building on the success of Project Genesis 1.

219、0,the HKMA commenced Project Evergreen in 2022,which used DLT to settle securities tokens on a DvP-basis.These transactions represented the green bond issued by the government(security token)and cash tokens representing a claim for Hong Kong dollars(HKD).55 Additional examples in other regions inclu

220、de IDB Groups bond issuances in Colombia and Spain.There are more global examples of regulators clarifying the role of tokenization.In February 2023,the Korean Financial Services Commission announced its plan to authorize issuing and circulating security tokens with strong private-sector interest in

221、 capitalizing on this nascent space.56 In Indonesia,a new regulation was signed into law in early 2023,which transferred crypto regulatory powers from the commodities watchdog to the Financial Services Authority(Otoritas Jasa Keuangan),the countrys securities regulator.This indicated an acknowledgem

222、ent that these digital assets could be treated as securities.57 Money market funds(MMFs)are also seeing growth in tokenization,with Franklin Templetons tokenized MMF surpassing$270 million in assets under management in April 2023.58 The asset manager is pursuing a strategy to tokenize MMFs on multip

223、le blockchains,including Polygon.59 Further,the Bank of New York Mellon reported that 97%of institutional investors believe tokenization will revolutionize asset management by increasing efficiencies,reducing costs,fractionalizing ownership and broadening access.60In 2021,Euroclear led a consortium

224、of banks to successfully deliver an experiment with the BdF involving the DvP settlement of a sovereign bond against a CBDC and POC,which laid the groundwork for the 2023 launch of a Digital Securities Issuance(D-SI)service,inaugurated with the issuance of a 100 million World Bank sustainable bond.S

225、uch initiatives have confirmed the potential of DLT to deliver some efficiencies to capital markets by,for example,removing part of the reconciliation workload,helping the identification of end investors and reducing the settlement cycle.A core attribute of the D-SI is its full adherence to the EUs

226、Central Securities Depositories(CSD)regulation.To mitigate liquidity fragmentation caused by DLT systems,a D-SI issuance is fully integrated into conventional systems to support secondary trading.In the case of the World Banks issuance,trading was helped in secondary markets within minutes of primar

227、y distribution,and the bonds entered the collateral management systems that form the backbone of fixed-income flows.International CSDs Clearstream,DTCC and Euroclear are working towards production-grade interoperable systems that facilitate cross-border capital flows based on DLT.Observing that“indi

228、vidual and private explorations of DLTs potential now need to become an industry-wide effort to consolidate and connect liquidity,based on common standards and processes,”61 these infrastructures have committed to tackling:Driving open market feedback around the required characteristics of DLT netwo

229、rks,data access,privacy and smart contracts Enabling greater interoperability across DLT protocols through the adoption of standards Enhancing operational resilience Accelerating production scaleClick on an icon below to find out more about each area of differentiated valueModernizing Financial Mark

230、ets with Wholesale Central Bank Digital Currency38Contents6 Areas of differentiated valueC A S E S T U D Y 2SDXs tCHF tokenSIX Digital Exchange AG(SDX)offers a robust platform for primary and secondary digital securities markets as a digital central securities depository and exchange regulated by th

231、e Swiss Financial Market Supervisory Authority(FINMA).Since its launch in November 2021,62 SDX has issued almost a billion CHF worth of digital securities,including UBSs tokenized bond issuance on the SDX platform in November 2022,valued at CHF 375 million(Swiss francs).63 To enable the settlement o

232、f digital securities transactions on chain,SDX issues its Swiss franc token called“tCHF”(tokenized CHF),which is created based on deposits SDX holds in a central bank account at the SNB.While tCHF acts like an RBDC,being backed by central bank reserves,it is different in that it is not fully bankrup

233、tcy remote.SDX tCHF is a tokenized claim against SIX Digital Exchange AG,fully backed by central bank reserves and allows participants to deposit tCHF tokens and use them to trade intermediated securities within the SDX network.SDX participants can acquire tCHF tokens by transferring funds from thei

234、r account in the Swiss Interbank Clearing(SIC)RTGS system to SDXs SIC omnibus account(RTGS system transfer)and receive that amount of tCHF tokens on the network to trade and settle tokenized securities.All participant funds are held collectively and frozen until participants detokenize their tCHF to

235、kens,upon which the equivalent funds are transferred to the participants SIC account.While the SDX tCHF model is cutting-edge and offers customers a proxy to CeBM,the collateral paid into SDXs SIC account is a risk-exposed position and must be risk-weighted accordingly.This results in capital charge

236、s imposed by regulations,which are costs associated with banks needing a buffer to absorb potential losses.This configuration results in a limitation observed by corporate treasuries as the funds are not completely riskless.While still beneficial,a challenge persists:no credit risk-free cash is avai

237、lable to settle tokenized asset transactions.64 To address this,the Swiss National Bank,with SDX,is undergoing phase three of Project Helvetia,where for a limited time,intraday wCBDC CHF is being used for selected primary market transactions on the SDX platform.The first transactions were completed

238、in December 2023,and the project will continue through mid-2024.65,66 This is an intraday,not an overnight wCBDC.Intraday implies the wCBDC would be converted back to traditional reserves held at the central bank at the end of the.Meanwhile,overnight implies the token would remain intact and carry o

239、ver to the next day in the same format,remaining a central bank liability.Click on an icon below to find out more about each area of differentiated valueModernizing Financial Markets with Wholesale Central Bank Digital Currency39Contents6 Areas of differentiated value Tokenizing credit risk-free set

240、tlement mediaTokenized CeBM could derive value by traversing between regulated settlement platforms.wCBDC allows participants,including digital CSDs and digital asset exchanges,to deliver composable and programmable credit risk-free cash to eliminate counterparty risk.wCBDC could realize value by:Co

241、mplying with the PFMI principle to use CeBM for tokenized transactions Settling large-value tokenized securities transactions natively and credit risk-free Promoting the singleness of money by expanding the role of CeBM Ensuring financial stability by serving credit risk-free composable money for tr

242、ansactions Interoperating with private DLT platforms natively,including reading/writing cryptographic proofs Providing evidence of transaction completeness to counterparties and possible intermediaries Reducing capital charges and bankruptcy risks associated with commercial bank money.Project Helvet

243、ia has proven the feasibility of settling tokenized securities using a real,limited-phase wCBDC to eliminate credit risk and support system stability.The BdF experimented with the full interoperability solution to enable securities transactions with wCBDC,representing an innovative approach to inter

244、operating with conventional systems.67 For cross-border securities settlement,Project Jura in 2021 demonstrated the feasibility of clearing foreign currency as part of cross-border payments and securities transactions,signifying a transformative use of CeBM across jurisdictions.Additionally,Project

245、Jura found that subnetworks and dual notaries can enable the safe issuance of wCBDC on private DLT platforms.68Differentiated valueAs tokenized CeBM,wCBDC could offer immediate benefits for the growing tokenized securities market.wCBDC could provide M0 settlement for tokenized securities transaction

246、s to improve financial stability and reduce costs for market players who rely on privately issued monies,which are not bankruptcy-remote and carry capital charges.Click on an icon below to find out more about each area of differentiated valueModernizing Financial Markets with Wholesale Central Bank

247、Digital Currency40ContentsPersistent industry challenges7Modernizing Financial Markets with Wholesale Central Bank Digital Currency41Contents7 Persistent industry challengesRTGS systems backgroundBefore the 1990s,deferred net settlement systems boosted liquidity efficiency but introduced credit and

248、counterparty risk if a party could not meet its obligations.To address these credit concerns,central banks transitioned to RTGS systems to ensure the settlement of each transaction individually(gross settlement)and minimize the risks associated with netting.Since their introduction in the 1990s,RTGS

249、 systems have grown to support payments in over 160 countries.69 This approach reduced counterparty risk but heightened liquidity risk(i.e.insufficient funds to settle payments),necessitating increased pre-funding for intraday transactions,incurring additional bank costs.70Liquidity saving mechanism

250、sEffectively managing intraday liquidity prompted the development of liquidity-saving mechanisms(LSMs)to augment RTGS systems and help banks reduce their liquidity risks and costs.71 LSMs are financial tools that provide payment queuing facilities.72 LSMs allow banks to condition the release of queu

251、ed payments upon receipt of offsetting payments,thus significantly reducing liquidity costs for participating banks.LSMs addressed growing liquidity needs through transaction netting,queuing and offsetting.Despite LSMs,banks still hold excess liquidity for unforeseen events,resulting in idle funds t

252、hat could prove costly in high-interest-rate environments with elevated borrowing costs.The industry continues to minimize intraday liquidity costs and risks while balancing settlement finality with liquidity optimization,like the provisioning of intraday liquidity by central banks in response to th

253、e needs of RTGS systems.Exacerbating liquidity riskInnovative settlement systems reinforce the value of instant and atomic settlement,73 where transactions with multiple components settle instantly and simultaneously in seconds.While this approach offers advantages like concurrent transfers of an in

254、terbank payment for security(i.e.DvP),it can increase liquidity demands for certain trading scenarios as the point from trade to settlement is within seconds rather than days.If instant and atomic settlement is universally applied,it could increase the demand for cash and assets to pre-fund accounts

255、 for settlement.If deemed desirable for a trading scenario,instant settlement requires an increase of the cash holding limits to support increased liquidity demand.Conventional netting,queuing and novel methods like Click on an icon below to find out more about each Persistent industry challengeInst

256、ant settlement could increase liquidity riskInstant and atomic settlement may increase liquidity demands and risks already raised by the shift to gross settlement.Persistent industry challenges were identified as areas that require more than a digital payment instrument enhancement because they are

257、dependent on elements like regulation,compliance and geopolitics.Modernizing Financial Markets with Wholesale Central Bank Digital Currency42ContentsClick on an icon below to find out more about each Persistent industry challengeresequencing may be necessary to mitigate these risks and costs and acc

258、ommodate different trading scenarios.74 However,more evidence of novel liquidity-saving techniques,such as instant and atomic settlement,is needed to conclude their efficacy.Instant and atomic settlement represents a model whereby CeBM(P,for payment of cash)and an asset(D,for delivery of asset like

259、a security)can be immediately and simultaneously exchanged,thus reducing counterparty and credit risk.This allows wholesale payment and settlement systems to facilitate more than just cash settlement by facilitating composability with assets.Optimizing liquidity managementNetting,queuing and offsett

260、ing are fundamental in reducing liquidity costs,while intraday liquidity buffers will likely remain necessary.Certain trading scenarios,like FX,benefit from multilateral PvP.In contrast,others,like securities transactions that touch multiple parties,possibly across jurisdictions and asset types,may

261、benefit from instant and atomic settlement to mitigate counterparty and liquidity risk.Due to limited consensus on the efficacy of instant and atomic settlement in resolving Net settlementFewer payments are made between parties because of the netting of obligations via LSMs,like queuing and netting

262、typically,a T+2 settlement window.Party AParty BParty CParty D2 daysCash(P)Gross settlementMore payments are made between parties because each transaction is treated individually if no LSM is applied this can be achieved the same day.Party AParty BParty CParty D1 daysCash(P)Like gross settlement,mor

263、e payments are made instantly in exchange for the delivery of an asset,like a security can be achieved through netted T+0.Party AParty BParty CParty DInstant and atomic settlementImmediateCash(P)Asset(D)F I G U R E 1 3Stylized evolution from net to instant and atomic settlementSource:Accenture.7 Per

264、sistent industry challengesModernizing Financial Markets with Wholesale Central Bank Digital Currency43ContentsClick on an icon below to find out more about each Persistent industry challengelong-standing liquidity challenges,this report proposes areas where more research is needed to determine wCBD

265、Cs efficacy in mitigating liquidity risk:Test the efficacy of instant and atomic settlement to realize liquidity savings compared with traditional like netting and emerging techniques like resequencing75 under trading scenarios that involve multiple parties,multiple assets and jurisdictions(i.e.cros

266、s-border)Explore whether LSMs,including privately operated LSMs,should be applied to wCBDC systems to offer settlement variability to market participants based on the trading scenario(the availability of techniques will vary by jurisdictional legal frameworks).There is an ongoing debate about whethe

267、r LSMs should be applied to wCBDC because it is envisioned to address a new set of use cases like atomic settlement.In 2021,BdF experimented with Euroclear France,Agence France Trsor,and primary dealers,where LSMs,such as recycling and auto-collateralization,have been successfully tested.76 RTGS sys

268、tems are often short-liquidity likely because they address a wide set of use cases;wCBDC systems could address fewer,specialized use cases and be more focused.However,it is unclear if wCBDC could alleviate liquidity risks,and this report proposes methods to advance discussions.Any modernization woul

269、d depend on policy-makers determining the appropriate balance between liquidity efficiency(permitting more LSM techniques)and system stability(reducing the number of interdependent relationships and,thus,points of failure).Persistent industry challengeHistorical liquidity risk challenges are likely

270、to persist,and more evidence is needed to clarify how wCBDC or other methods of FMI modernization could alleviate these risks.7 Persistent industry challengesModernizing Financial Markets with Wholesale Central Bank Digital Currency44ContentsCross-border regulatory frictionsInconsistent regulations

271、and regulatory hurdles are another important challenge facing the industry regarding efficiency and speed.It is acknowledged that true and complete harmonization from a regulatory perspective is not achievable due to jurisdictions sovereignty.In line with the ongoing efforts by the G20 and Financial

272、 Stability Board(FSB)to optimize wholesale financial transactions,regulatory friction is identified as a key hurdle to achieving harmonious and efficient cross-border payments.In a 2023 survey,the World Economic Forum identified four regulatory frictions:77 Differences in regulatory and oversight fr

273、ameworks can be particularly pronounced for areas of innovation like using blockchain-based payments or for non-bank entities seeking to capture new market share.Compliance with AML/CFT requirements is a key driver for the de-risking phenomenon influencing the decline of correspondent banks willing

274、to absorb the risk of non-compliant payments and face zero-tolerance enforcement.Data privacy and security regulations create challenges for banks and non-bank FIs to securely share data across borders to comply with AML/CFT rules while balancing requirements like data localization.This friction cou

275、ld be especially pronounced when CBDC is traded across borders and held in foreign jurisdictions where the question of who has access to what data is underscored.Regulatory barriers to accessing payment systems and infrastructure,including 1)regulations may directly exclude non-bank FIs from partici

276、pating in national payment systems,2)regulations may set out eligibility requirements that non-bank FIs cannot meet(e.g.banking licence),and 3)access is often limited to FIs that hold licences locally.Examples of players experiencing frictions Shariah-compliant finance is an example of a difference

277、in oversight frameworks,as credit in its traditional sense is not allowed,and instead,a partnership model is required.Varied processing times for regional beneficiary leg transactions highlight diverse capital controls and checks.Relying on agencies like the Financial Action Task Disjointed regulato

278、ry interoperabilityA divergence in policy,rules and regulations creates inconsistencies between jurisdictions,resulting in friction for cross-border use cases.Click on an icon below to find out more about each Persistent industry challenge7 Persistent industry challengesModernizing Financial Markets

279、 with Wholesale Central Bank Digital Currency45ContentsClick on an icon below to find out more about each Persistent industry challengeForce(FATF)for country risk reviews is time-consuming and costly.Correspondent banks,facing limited profitability and compliance risks,often bear the burden of these

280、 reviews,contributing to industry exits.China,Thailand,Indonesia and Sri Lanka are implementing comprehensive privacy laws for the first time,while others like Australia and Japan are amending theirs to be more globally aligned.78 Money transfer operators like MoneyGram and Western Union experience

281、these challenges when facilitating cross-border remittances.Compliance-by-designThe BISIH has examined these regulatory frictions in initiatives like Project Dunbar,which was focused on optimizing international settlements through a common multi-CBDC platform.The challenges related to governance,leg

282、al and compliance for cross-border payments are broader than regulatory frictions.Creating efficiencies in compliance proves challenging because requirements vary by jurisdiction,such as domestic watchlists or certain institutions being given access to national payment systems to alleviate friction.

283、Therefore,centralizing common processes might create process efficiencies but could introduce other gaps,such as missed checks.79 To build upon Project Dunbar,the BIS Innovation Hub launched Project Mandala in October 2023,a proof-of-concept to explore the feasibility of jurisdiction-specific policy

284、 and regulatory requirements into a common protocol for cross-border use cases also known as compliance-by-design architecture.This architectural model aims to automate compliance procedures,monitor real-time transactions and increase transparency and visibility into country-specific policies.80 Add

285、itionally,disputes between institutions or inter-jurisdictional issues should be handled according to jurisdiction-specific requirements and by designated authorities.Ensuring compliance-by-designLexisNexis reported that in key global markets alone,annual expenditures on financial crime compliance e

286、xceeded$274 billion in 2022,with labour costs of compliance teams representing the largest portion.81 Novel approaches are unlocking opportunities to enable more efficient regulatory interoperability while safeguarding participants and the system through automation and embedded supervision.There is

287、no widely accepted governance framework or 7 Persistent industry challengesModernizing Financial Markets with Wholesale Central Bank Digital Currency46ContentsClick on an icon below to find out more about each Persistent industry challengemodel for cross-border use cases using CBDC.The system should

288、 offer flexibility to grant varying degrees of access for providers like orchestration service providers that can facilitate atomic settlement and possibly global corporations in jurisdictions where it is permitted.Disjointed regulatory interoperability is an ongoing challenge;thus,this report propo

289、ses areas where wCBDC systems should explore supporting in order to address this challenge.Continue codifying supervisory functions and build rulebooks to integrate legal procedures,automate corridor-specific compliance checks and build escalation protocols to remediate issues.Explore facilitating m

290、ultiple access tiers to CeBM to configure permissions to grant access safely.While these remain open questions,efforts are under way to establish compliance-by-design.The mBridge platform allows the governance of access to enforce legal aspects of cross-border trade and payments.It embeds compliance

291、 rules,such as balance and transaction limits set,into the underlying custom DLT through smart contracts.Embedded supervision is a model that uses DLT and smart contracts to automate financing and trading processes and data permissions while embedding checks to verify compliance.82 While these effor

292、ts 7 Persistent industry challengesare ongoing,policy-makers determine the advancements in progress.Persistent industry challengeInter-jurisdictional regulatory and policy interoperability complexities are not solvable overnight.Rulebooks and embedded supervision are concepts discussed in this repor

293、t that could automate compliance checks and harmonize the market.However,these solutions largely require collaboration beyond wCBDC or other FMI modernizations.Modernizing Financial Markets with Wholesale Central Bank Digital Currency47ContentsClick on an icon below to find out more about each Persi

294、stent industry challengeCorrespondent banking and access constraintsThe total value of global cross-border payments was$150 trillion in 2017 and is projected to reach$250 trillion by 2027.83 For context,the World Bank estimated the global gross domestic product(GDP)to be$100.88 trillion in 2022.84 C

295、orrespondent banking involves banks holding accounts with each other and using central banks as settlement agents to achieve cross-border payments.According to the BIS,“correspondent banking requires the opening of accounts by respondent banks in the correspondent banks books and the exchange of mes

296、sages to settle transactions by crediting and debiting those accounts.”85 This ensures compliance but lacks efficiency by requiring the holding of liquidity in nostro accounts.“Nostro”and“vostro”are two different terms used to describe the same bank account.The terms are used when one bank has anoth

297、er banks money on deposit.Correspondent banking services are costly,with$120 billion spent by global corporates on cross-border transactions,excluding FX costs.86 Other costs stem from trapped liquidity,treasury operations,FX fees and compliance.InitiatingProcessingProcessingInformedOriginator legIn

298、-fight legBeneficiary legBeneficiary bankOriginating bankIntermediary bank(s)/FMI(s)Ordering customerEnd customerProcessingElapsedF I G U R E 1 4Stylized process of a cross-border payment on SWIFT gpiNote:Data from the Swift gpi Observer track the in-flight and beneficiary legs,the blue and red part

299、s of the processing time and elapsed time,respectively.Source:BIS,SWIFT gpi data indicate drivers of fast cross-border payments,2022.7 Persistent industry challengesSlow cross-border payments in high-risk regionsDe-risking and cost-cutting measures are reducing the number of correspondent banks glob

300、ally,limiting accessibility to cross-border payments for users worldwide.Modernizing Financial Markets with Wholesale Central Bank Digital Currency48ContentsClick on an icon below to find out more about each Persistent industry challengeAnother challenge to cross-border payments observed by this res

301、earch is the limited accessibility of CeBM for foreign institutions and possibly global corporations that conduct significant international trade in key markets like oil and gas.The correspondent banking model was designed to facilitate a conduit between non-domestic and non-bank entities with the b

302、anking system because banks and FMIs are traditionally the only ones with access to CeBM.“De-risking”:declining correspondent banksBanks reduced these correspondent relationships after the 2008 financial crisis,which disproportionately affected smaller economies.87 Between 2011 and 2019,the number o

303、f correspondent banks decreased by 22%,even as payment values increased.88 This decline was due to correspondent banks shouldering regulatory and reputational risks,pushing correspondent banks towards“de-risking”,or exiting the industry.89 This was prompted by valid concerns,including the estimated$

304、1.6 trillion(approximately 2.7%of global GDP)in annual illicit financial activities.90 There were ongoing cutbacks in correspondent banking relationships driven by a lack of profitability to cover compliance costs,exits from regions deemed to be too risky.Risky regions include jurisdictions where cu

305、stomer bases or products and services pose a higher risk for AML/CFT compliance.91 A high-risk region is a jurisdiction with more strict KYC/AML/CFT rules,resulting in additional checks and criteria that could slow processing times.To mitigate the risk of facilitating illicit payments,larger banks w

306、ithdraw from high-risk markets due to AML/CFT compliance worries,profitability issues and cyberthreats.Smaller banks now have fewer cross-border payment options,forcing reliance on more intermediaries,driving costs and hindering competition.A 2023 FSB report reveals that 84.3%of wholesale payments w

307、ith larger banks do not have an intermediary or have only one,indicating a concentration of influence.92 De-risking disproportionately affects developing nations and could hinder financial inclusion and interoperability.93 Moreover,“shadow payments”through unregulated channels can increase.94 Agains

308、t this backdrop,multilateral initiatives have emerged to address these concerns.For example,Project mBridge aims to tackle this pain point by creating a multi-country shared public good technology that could connect many countries,thereby addressing the reduced footprint of correspondents due to de-

309、risking and other benefits.95Slow beneficiary regionsCross-border payment processing has improved,with 89%completing within an hour,surpassing the G20s target of 75%by 2027.96 However,these are global averages,and de-risking has led to slower processing times in the Middle East,North Africa and Cent

310、ral Asia because of 1)fewer intermediaries willing to facilitate payments there because of the disproportionate compliance risks(outweighing the profit opportunity),and 2)additional manual processes to perform the appropriate screening on beneficiaries.From an economic perspective,these reasons are

311、tightly correlated,as with fewer actors competing,there is less incentive to innovate.Technology differences and resource limitations also contribute to disenfranchisement,as payment system upgrades are costly.Countries with stricter capital controls,offline beneficiary banks and lower per capita in

312、come experience longer beneficiary legs(see Figure 15).97 The decline in correspondent banks and local constraints affects higher-risk regions,slowing processing times.7 Persistent industry challengesModernizing Financial Markets with Wholesale Central Bank Digital Currency49ContentsClick on an icon

313、 below to find out more about each Persistent industry challenge0-15 minutes15 minites-2 hours2-4 hours4-6 hours6-12 hours12-24 hours0h12m1h29m2h32m0h5m0h39m10h18m4h20m2h53m22h45m22h4m2h12m2h5m5h44m2h47m0h35mF I G U R E 1 5Median end-to-end processing time by beneficiary regionSource:BIS,SWIFT gpi d

314、ata indicate drivers of fast cross-border payments,2022.7 Persistent industry challengesModernizing Financial Markets with Wholesale Central Bank Digital Currency50ContentsClick on an icon below to find out more about each Persistent industry challenge Accessing central bank moneyThe challenge of cr

315、editing beneficiaries in high-risk regions relates much to regulatory interoperability,as there can be incongruent compliance processes and differences in policies regarding CeBM access.Illicit activity cannot be entirely thwarted by introducing a new payment rail.Therefore,for wCBDC systems to addr

316、ess slow cross-border payments in high risk regions,they should:Form regional and corridor-specific collaborative efforts to advance capabilities related to embedded supervision,including automating compliance checks and monitoring transactions.Use digital identity frameworks could enhance complianc

317、e with KYC/AML/CFT while preserving privacy.Dismantle barriers to entry by exploring the expansion of access to non-bank and foreign entities(policy permitting)to enhance financial inclusion(e.g.stablecoin issuers).Enable 24/7 access to CeBM to support beneficiary banks in servicing customers.The sp

318、eed of cross-border payments is not limited to technological or regulatory challenges but also economic incentives and competition the fewer financial services providers that have access to CeBM,the more costly and slow the services in the market.98 Public-private cooperation with agencies like FATF

319、 and the Office of Foreign Assets Control(OFAC)will be paramount to mitigating illicit activity and supporting regions where cross-border payments move at a slower pace.Persistent industry challengeDe-risking and its impacts on the cross-border payments market is widely recognized as a source of ine

320、fficiency,particularly impacting high-risk regions.Expanding access is a policy decision that central banks must consider the benefits and risks of.7 Persistent industry challengesModernizing Financial Markets with Wholesale Central Bank Digital Currency51ContentsInteroperability in paymentsLimited

321、technical interoperability has been attributed to legacy systems built on jurisdiction-specific standards,causing discrepancies between data standards and communication formats.The BIS defines payment system interoperability as the seamless interaction of proprietary acceptance and processing platfo

322、rms,aiming to promote competition,reduce fixed costs and enhance user convenience.99 ISO 20022,a universal financial message scheme format,seeks to standardize communications among FIs.A 2023 World Economic Forum report emphasizes the need to ensure the interoperability of CBDC systems with conventi

323、onal payment infrastructures.100 A recent Swift report acknowledges the benefits of tokenization but warns of potential asset fragmentation across networks,prompting the exploration of technical interoperability by connecting public and private blockchains and non-blockchain networks.Two approaches

324、are being pursued:Swifts CBDC Connector and Chainlinks Cross-Chain Interoperability Protocol,which demonstrated the ability of Swifts connectivity and messaging to access tokenized instruments.101 Both Swift and Chainlink are messaging systems rather than settlement systems.Click on an icon below to

325、 find out more about each Persistent industry challenge7 Persistent industry challengesLack of secure technical interoperabilityA flurry of new systems could lead to a disconnection between DLT and conventional systems,resulting in increased risk and liquidity fragmentation.Modernizing Financial Mar

326、kets with Wholesale Central Bank Digital Currency52ContentsInteroperabilitySingle SystemCompatibleHigh-level models of interoperabilityHigh-level models of interlinkingInterlinkingSingle access pointBilateral linkHub and spokeF I G U R E 1 6High-level models of interoperability and interlinking of C

327、BDC systemsSource:BIS,Options for access to and interoperability of CBDCs for cross-border payments,2022.Click on an icon below to find out more about each Persistent industry challenge7 Persistent industry challengesCBDC interoperability modelsA key anticipated challenge of multiple CBDC networks i

328、s interoperability among themselves and between jurisdictions.The BIS outlined several CBDC interoperability models,which inform the future industry options:102 1 Compatibility:A model whereby individual systems use common interoperability standards.Analogies could be drawn to industry standards lik

329、e ISO 20022.2 Interlinking:The solution could emulate Swifts,which acts as a supranational network with which institutions could integrate.Project Icebreaker is experimenting with this model by interlinking three retail CBDC systems through a hub-and-spoke model.103 Swift is experimenting with this

330、interoperability model in a CBDC context with more than 30 FIs and central banks.1043 Single system:An example of a single system is mBridge,which uses a common platform model for cross-border payments and FX among participant financial institutions settled in CBDCs issued by their central banks.Ano

331、ther example is the Regulated Liability Network(RLN)initiative,conceptualizing a common platform for central banks and FIs with settlement in CBDC.105Modernizing Financial Markets with Wholesale Central Bank Digital Currency53ContentsEnterprise XXYABEnterprise YBank AA88KBBank BAsset chainTrigger ch

332、ainTarget 2Click on an icon below to find out more about each Persistent industry challengeBundesbank and TARGET Instant Payment System(TIPS)for the solution supported by the Banca dItalia)and a wCBDC solution offered by the BdF.106 A gap with todays RTGS systems is a lack of DLT interoperability be

333、cause of the challenge of reading and writing cryptographic proofs(e.g.proof of funds).In 2017,the BOE tested DLT interoperability with its RTGS system,Clearing House Automated Payments System(CHAPS),and identified that CHAPS could not natively produce cryptographic proofs.1077 Persistent industry challengesDLT interoperabilityNotably,the ECB launched exploratory work on how wholesale financial tr