The International Monetary Fund (IMF) has presented the outlines of a new class of cross-border payment systems that use a single ledger to record central bank digital currency (CBDC) transactions. Such a system will enable programmability and improved information management. This cross-border payment and contracting (XC) platform could operate domestically using tokenized assets, including deposits with or without CBDCs.
On June 19th, 2023, the IMF officials revealed their new platform through a roundtable on CBDC policy. The event was organized in partnership with Morocco’s central bank, where the IMF’s Director of the Monetary and Capital Markets department, Tobias Adrian, talked about the potential advantages of the proposed system.
IMF Director’s Views
According to the IMF’s Director of Monetary and Capital Markets department, Tobias Adrian, the new XC platform could benefit individuals and institutional users through lower fees and faster transaction times.
To paint a picture and inspire others to pick up their brushes and continue to refine the painting, just like the remarkable artisans in Rabat’s Medina. According to Adrian, today’s new technologies allow the public sector to renew the infrastructure supporting cross-border payments and possibly domestic ones. Adrian mentioned that “this will bring people together through faster and cheaper payments, and countries together through a more stable and cohesive international monetary system.” Adrian highlighted that it’s about technology. However, it is also about governance which establishes the rule of the game. Adrian added, “These are tricky to establish, but an organization such as the IMF, with its wide membership, focus on macro-financial interactions, and well-oiled internal governance can help countries build consensus”.
He added, “Some of the 45 billion dollars paid to remittance providers every year may then go back into the pockets of the poor. The platform would help central banks intervene in foreign exchange markets, aggregate information on capital flows, and resolve disputes. The platform could also be adapted for domestic wholesale and retail CBDCs”.
Details About the XC Platform
Furthermore, details on the envisioned cross-border payment and contracting (XC) platform were laid out on the same day at the roundtable in an IMF Fintech Note detailing the platform’s design and how the XC operates, co-authored by Adrian. This Noted, “XC platforms offer a trusted single ledger – a document representing property rights — on which standardized digital representations of central bank reserves in any currency can be exchanged.”
Adrian noted that the trusted ledger could not exist in a vacuum. Instead, it has to exist in an environment that allows basic financial contracts to be customized and exchanged safely and efficiently. He added that “it must allow information to be carefully managed—so only those who need it can see it.”
Three Layers of the XC Platform
Settlement Layer
This platform would settle money-dominated in different currencies to reduce counterparty risks. Central bank reserves were proposed where each sits on the books in different accounting systems. Unique and standardised digital representations of them will be created on the platform to make them interchangeable. Adrian said, “To make a payment, participating banks would deposit their domestic central bank reserves in an escrow account controlled by the platform operator and,, in return, obtain a digital version to trade on the platform.”
According to Adrian,, the platform operator would control and settle the ledger. The single ledger would ensure that there is a unique description of who owns what so that no double spending could occur. According to him, settlement would be swift, conclusive, and secure. One crucial aspect is that XC platforms would enable implementing a multicurrency system without enforcing a singular or novel settlement asset. Participants would retain the freedom to decide which currencies to utilize on the platform. Moreover, central banks would retain complete control over determining which institution receives reserves initially. This approach eliminates the necessity for modifying existing systems, agreements, or institutions.
Programming Layer
The programming layer would offer the opportunity to innovate and customise services, allowing contracts to be automated. Adrian emphasised, “I am speaking here of programming one’s transactions with money, not the money itself. Once transacted, money would go right back to being perfectly fungible. Let us not confuse a programmed transaction with a voucher—money that can only be spent on a good”.
Information Management Layer
The Information management layer allows the unbundling of Settlement and non-settlement services, including compliance checks. The XC platform would contain anti-money laundering (AML) details necessary to meet trust conditions and privacy protections. Transactions on the XC platform can preserve users’ privacy but not their anonymity.
XC Governance
XC has a robust legal framework back-up, active oversight, and clear governing access, participation, and financing essentials. Adrian noted, “XC platforms offer key advantages. They ensure safety by settling with central bank reserves. They offer interoperability among national currencies—and with legacy systems. They bring innovation, efficiency, and safety to contracting. They help manage information flows to overcome economic frictions. And, importantly, they rest on transparent, rule-based governance consistent with the stability of the international monetary system”.
According to experts at Bitcoin decode on February 22nd 2023, the Bank for International Settlements General Manager Agustín Carstens proposed a similar concept in his speech.
The cross-border payment and contracting (XC) platform is designed with cross-border payments in mind, with a basic design sufficiently general to help domestic financial systems and would not require CBDCs. The XC platform demonstrates the increasing role of technology in modern finance.
