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Banque de France, HSBC, IBM test interoperability of wholesale CBDC

Following experiments demonstrating that DLT can be used with existing networks to complete CBDC financial transactions in real-time, Banque de France, HSBC and IBM have published a paper exploring their key findings.

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Banque de France, HSBC, IBM test interoperability of wholesale CBDC

Editorial

This content has been selected, created and edited by the Finextra editorial team based upon its relevance and interest to our community.

Around the world, central banks are considering the viability of their own digital currency. Further, the efficiency and security that CBDC affords could bolster payments in developed countries and promote financial inclusion in emerging markets.

Ahead of the Banque de France CBDC experiments, HSBC launched its Digital Vault Service, which can hold securities and process and manage delivery versus payment (DvP) and payment versus payment (PvP) settlements.

HSBC also uses blockchain for its FX Everywhere service, a DLT solution for the netting and settlement of FX transactions and payments.

In May 2020, HSBC partnered with IBM to propose a series of experiments for the Banque de France’s wholesale CBDC programme.

While previous trials and test had shown how CBDC, digital securities or FX could work on DLT, this experiment covered the full end-to-end transactional lifecycle and was conducted in a hybrid cloud environment of public and private clouds, using on-premises data sources.

In a statement, HSBC says: “The success of this experiment is a milestone in showing interoperability across different DLTs and technologies, and how CBDCs could save time, reduce market risk and improve security for transactions between central banks, commercial banks and clients all over the world.”

For a fictional customer named Startmint, which has local manufacturing capabilities but international consumers, HSBC, IBM and the central bank took four months to set up a testing environment for this use case.

The three scenarios that were selected to test the capabilities and benefits of a wholesale CBDC implementation were:

  • Issuance and distribution of CBDC denominated debt instruments
  • Initiation of bond subscriptions in the primary market and settlement of trades in the secondary market followed by coupon payment
  • Execution of cross-border, cross-currency, cross technology (DLT and non-DLT) and cross-network payments.

All three scenarios were combined into a single experiment as a proof of concept, successfully executed in a highly complex environment which included multiple ledgers, technology stacks and control frameworks.

Even though Banque de France and HSBC run separate DLT infrastructures, they can be connected via bridging software that enables interoperable transactions and cross-network DLT consistency. Distributed ledgers based on Hyperledger Fabric and R3’s Corda were also integrated using the Weaver interoperability tool.

HSBC then took ownership of the eBond, to then transfer some of it to Startmint under its custody, issue Startmint its coupon payment in XXX currency and then execute an FX hedge transaction for euro/XXX.
The statement continues: “The success of the experiment is a significant achievement. Not only does it show how CBDC and DLT can be useful to businesses in the real world that resemble the fictitious business Startmint, but it also showcased partnership and collaboration between central banks, commercial banks, and technology providers in a challenging timeframe.

“Experiments like these will provide the framework that allows central banks all over the world to confidentially issue CBDCs, something that we at HSBC anticipate is likely to happen within the next 15 years. The most likely solution at the moment is that they will be indirect, with the CBDCs being distributed via commercial banks like HSBC. This makes it all the more important for commercial banks to be part of designing and testing these new currencies.”

Finextra has recently launched the inaugural Financial Cloud Summit, scheduled to take place on 2 March 2023. For more information and to register for this event, please visit the event page here.

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