The Bank for International Settlements (BIS) Innovation Hub and the South African Reserve Bank have announced the completion of a prototype system enabling international settlements using central bank digital currencies.
Nicknamed ‘Project Dunbar’, the prototype system allows direct transactions in central bank digital currencies, or CBDCs, between institutions, while reducing time and cost.
The Reserve Bank of Australia, Bank Negara Malaysia, and the Monetary Authority of Singapore also took part in the project. Today, the correspondent banking model is used, where banks hold foreign currency accounts with each other. To complete a single cross-border transfer, multiple correspondent banks may be involved, with transactions recorded on multiple ledgers on multiple systems built on different technologies and communicating in different message formats.
A single cross-border payment might pass through multiple correspondent banks using the foreign currencies held with them. Each leg of the overall transaction takes time and effort to process, with fees levied that add up quickly and are passed on to customers, resulting in slow and costly cross-border payments.
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