BIS Innovation Hub Initiatives Transforming Finance

Transforming Finance:

BIS Innovation Hub Initiatives

Benedicte Nolens, BIS Innovation Hub, Hong Kong Centre Head

12 September 2023

Overview of CBDC Initiatives

BISIH CBDC Project Spectrum

Our CBDC projects span across a wide spectrum of investigation and experimentation.

https://www.bis.org/about/bisih/topics/cbdc.htm

A promising solution that seeks to overcome the limitations of correspondent banking through a multi-currency CBDC

technical platform that directly connects the CBDCs of multiple jurisdictions



ogether with the HKMA, the BOT, the

CBUAE, and the PBCDCI, the BISIH is developing such a platform – mBridge – using custom-built DLT to support real-

time, peer-to-peer, cross-border payments.

Multi-CBDC Bridge is…

•

Payments are typically made through a

global network of

correspondent banks

, involving multiple intermediaries that are

fragmented across different time zones and operating hours

•

As a result, they exhibit:



High costs



Low speed and transparency



Operational complexities



Limited access



Correspondent banks are also paring back their services worldwide,

leaving many smaller and emerging economies without sufficient or

affordable access to the global financial system, leading to a form of

“

jurisdiction financial exclusion”

In 2022, the project team moved mBridge from prototype to a pilot phase. Between August 15

th

 and September 23

rd

2022 a pilot focused on payments for international trade successfully took place on the mBridge platform,

executing

transactions among commercial banks from four jurisdictions – Hong Kong SAR, Mainland China, Thailand, and the

UAE.

mBridge went from prototype to pilot in 2022 and targets MVP in 2023

•

The pilot

set a record for multi-CBDC pilots

worldwide

in terms of the real value of

transactions, the number of participants, and

the nature of transactions



Twenty of the region’s largest commercial

banks participated in the pilot

, settling real

value on behalf of their corporate clients,

focusing primarily on settlement for

international trade



It represented the

first multi-CBDC project to

date to settle real-value, corporate

transactions

Summary report

Summary report

Exploration of Digital Trade Tokens

•

Project Dynamo delivered a prototype platform built by Linklogis, on which an anchor buyer and the suppliers

along its supply chain use stablecoins/payment tokens (collectively named Digital Trade Token (DTT) in Project

Dynamo) for making programmable payments

•

The project explored how the programmability and transferability of such tokens could encourage and facilitate the

provision of pre-shipment finance by institutional investors to SMEs in a supply chain

Prototype platform

Upon receiving the stablecoin/payment token, a supplier could:

•

hold the token till all conditions are fulfilled as programmed on the token and encash from the DTT Issuer; or

•

transfer all or part of the token to an upstream supplier to offset its debts or payables owed to the upstream supplier; or

•

finance all or part of the token with a funder (an institutional investor) before the conditions are fulfilled

Prototype platform

Use of electronic Bill of Lading for triggering payment

Use of ESG condition for triggering payment

eKYC

Green Finance Explorations

Green bond tokenization & Smart contract-based carbon credits

Two projects exploring the green art of the

possible with innovative

technology firms

partnering with

large financial institutions

to

deliver PoCs:



Project Genesis 1.0 (2021): Prototyping digital

platforms for tokenized green bonds



Project Genesis 2.0 (2022): Prototyping

attachment of smart contract-based carbon

credits to green bonds

Leveraged

blockchain, smart contracts,

and

internet-of-things

 technologies.

Genesis 2.0 –

Context

Proposed a

new green bond structure

appended with

mitigation outcome interests

 i.e. future contracts with a

commitment to deliver, at maturity, verified carbon credits

Genesis 2.0 –

Context

chieved two prototypes with functions to:



Digitally

track real-time mitigation outcome data

 linked to a bond

lifecycle



Thereby provide

transparency

 and reduce the risk of

green-washing



Achieve

smart contract-based delivery of mitigation outcome units

(i.e. carbon credits)



Enable

automated transfer and trading

 of the mitigation outcome

interests / mitigation outcome units (MOIs/MOUs i.e. carbon credits)

attached to a green bond



Conceptually linking up with the accounting for Nationally Determined

Contributions (NDCs) and the concept of ITMOs

Genesis 2.0 – Prototype 1:

Goldman Sachs, Allinfra, Digital Asset

Genesis 2.0 – Prototype

2:

InterOpera, Krungthai Bank, Samwoo Cement, Sungshin

Genesis 2.0 contained a reference sample termsheet drafted by King & Wood Mallesons

BIS Annual Economic Report

Thank you!

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The BIS Innovation Hub is driving forward initiatives to transform finance, focusing on Central Bank Digital Currency (CBDC) projects. One notable project is the multi-CBDC bridge, aiming to enhance cross-border payments by connecting CBDCs of various jurisdictions. The mBridge project progressed from prototype to pilot phase in 2022 and is targeting MVP status in 2023, achieving significant milestones in international trade settlements. This innovative solution addresses the limitations of correspondent banking, offering real-time, peer-to-peer transactions while overcoming operational complexities and jurisdiction financial exclusion.

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BISIH Unrestricted Transforming Finance: BIS Innovation Hub Initiatives Benedicte Nolens, BIS Innovation Hub, Hong Kong Centre Head 12 September 2023 Restricted

BISIH Unrestricted BIS Overview of CBDC Initiatives 2 Restricted

BISIH Unrestricted BISIH CBDC Project Spectrum Our CBDC projects span across a wide spectrum of investigation and experimentation. https://www.bis.org/about/bisih/topics/cbdc.htm Restricted

BISIH Unrestricted Multi-CBDC Bridge is A promising solution that seeks to overcome the limitations of correspondent banking through a multi-currency CBDC technical platform that directly connects the CBDCs of multiple jurisdictions together with the HKMA, the BOT, the CBUAE, and the PBCDCI, the BISIH is developing such a platform mBridge using custom-built DLT to support real- time, peer-to-peer, cross-border payments. Payments are typically made through a global network of correspondent banks, involving multiple intermediaries that are fragmented across different time zones and operating hours As a result, they exhibit: High costs Low speed and transparency Operational complexities Limited access Correspondent banks are also paring back their services worldwide, leaving many smaller and emerging economies without sufficient or affordable access to the global financial system, leading to a form of jurisdiction financial exclusion Restricted

BISIH Unrestricted mBridge went from prototype to pilot in 2022 and targets MVP in 2023 In 2022, the project team moved mBridge from prototype to a pilot phase. Between August 15th and September 23rd, 2022 a pilot focused on payments for international trade successfully took place on the mBridge platform, executing transactions among commercial banks from four jurisdictions Hong Kong SAR, Mainland China, Thailand, and the UAE. The pilot set a record for multi-CBDC pilots worldwide in terms of the real value of transactions, the number of participants, and the nature of transactions Twenty of the region s largest commercial banks participated in the pilot, settling real value on behalf of their corporate clients, focusing primarily on settlement for international trade It represented the first multi-CBDC project to date to settle real-value, corporate transactions Restricted 5

6 BISIH Unrestricted Summary report Restricted 6

7 BISIH Unrestricted Summary report Restricted 7

BISIH Unrestricted BIS Exploration of Digital Trade Tokens 8 Restricted

BISIH Unrestricted BISIH RESTRICTED Prototype platform Project Dynamo delivered a prototype platform built by Linklogis, on which an anchor buyer and the suppliers along its supply chain use stablecoins/payment tokens (collectively named Digital Trade Token (DTT) in Project Dynamo) for making programmable payments The project explored how the programmability and transferability of such tokens could encourage and facilitate the provision of pre-shipment finance by institutional investors to SMEs in a supply chain Restricted 9

BISIH Unrestricted BISIH RESTRICTED Prototype platform Upon receiving the stablecoin/payment token, a supplier could: hold the token till all conditions are fulfilled as programmed on the token and encash from the DTT Issuer; or transfer all or part of the token to an upstream supplier to offset its debts or payables owed to the upstream supplier; or finance all or part of the token with a funder (an institutional investor) before the conditions are fulfilled Restricted 10

BISIH Unrestricted BISIH RESTRICTED Use of electronic Bill of Lading for triggering payment Restricted 11

BISIH Unrestricted BISIH RESTRICTED Use of ESG condition for triggering payment Restricted 12

BISIH Unrestricted BISIH RESTRICTED eKYC Restricted 13

BISIH Unrestricted Green Finance Explorations Green bond tokenization & Smart contract-based carbon credits Restricted 14

15 BISIH Unrestricted The Genesis of Genesis Two projects exploring the green art of the possible with innovative technology firms partnering with large financial institutions to deliver PoCs: Project Genesis 1.0 (2021): Prototyping digital platforms for tokenized green bonds Project Genesis 2.0 (2022): Prototyping attachment of smart contract-based carbon credits to green bonds Leveraged blockchain, smart contracts, and internet-of-things technologies. Restricted 15

16 BISIH Unrestricted Genesis 2.0 Context Proposed a new green bond structure appended with mitigation outcome interests i.e. future contracts with a commitment to deliver, at maturity, verified carbon credits Restricted 16

17 BISIH Unrestricted Genesis 2.0 Context Achieved two prototypes with functions to: Digitally track real-time mitigation outcome data linked to a bond lifecycle Thereby provide transparency and reduce the risk of green-washing Achieve smart contract-based delivery of mitigation outcome units (i.e. carbon credits) Enable automated transfer and trading of the mitigation outcome interests / mitigation outcome units (MOIs/MOUs i.e. carbon credits) attached to a green bond Conceptually linking up with the accounting for Nationally Determined Contributions (NDCs) and the concept of ITMOs Restricted 17