In The Great Payments Race, Will Collaboration Beat Competition

The financial world depends on a steady flow of cross-border payments, but current processes for facilitating them are afflicted by a multitude of pain points, such as long settlement periods, high fees, and intermediaries operating in different time zones. But the emergence of stablecoins, central bank digital currencies (CBDCs) and tokenized deposits could spark a revolution that reshapes financial transactions in ways that were unimaginable just a few years ago.

The launch of Project Agorá from the Bank for International Settlements (BIS) marks a deepening of collaboration between central banks and the private sector and a new era of exploration of how decentralized finance (deFi) can solve traditional finance (tradFi) pain points in cross-border payments.

Project Agorá, under the auspices of seven central banks, including the Bank of France, Bank of Japan, and Bank of England, will look at how tokenization of wholesale central bank money and commercial bank deposits on programmable platforms can make positive differences to the global monetary system.

Pictured  Edvards Margevics, Co-Partner of CONCRYT

Following the successful conclusion of BIS’ Project Mariana in 2023, which focused on cross-border settlement capabilities of wholesale CBDCs, Project Agorá also links back to the BIS’ “unified ledger” model, which proposes a structure where one decentralized ledger can hold tokenized deposits, central bank money, and other tokenized assets. This would also create the conditions for new functionality that can’t exist yet under the present structure of the monetary system.

Project Agorá (Greek for ‘marketplace’) highlights how collaboration, not competition, is inspiring new waves of innovation, and serves as an example of how working together for the common good, rather working in isolation to further one’s own interests, creates greater societal benefits.

“As central banks navigate the complexities of CBDCs, the fintech-driven private sector is committed to reinventing traditional payment methods and bringing forth new ones altogether.”

Tokenization can revolutionise monetary system functionality
If successful, Project Agorá heralds profound transformations in the way cross-border payments are conducted. Ground-breaking technologies like DLT and tokenization promise to eliminate a multitude of pain points that impede cross-border payments performance – including high fees and slow settlement timeframes. For the incumbent cross-border payment network Swift, the project also represents a serious and credible challenge to its business model.

The current monetary system, while functional, contains many inherent design flaws, resulting in frictions in the form of reliance on commercial correspondent banks, compliance costs, regulatory differences and different operating hours in different time zones which can cause delays in settlements. Another friction is that under the present model, transactions typically reside in siloed proprietary databases, located at the outer edges of communication networks. These databases must be connected through third-party messaging systems to be routed back and forth between counterparties. This means that transactions need to be reconciled separately before eventually being finally settled.

These frictions in current transaction flows results in bank and business participants not getting a clear view over their transactions. Workarounds like collateral or escrow can mitigate some of these frictions, but these solutions have their limits and are curtailed by their own inefficiencies. Tokenization has the potential to be an easier, quicker and more secure way of facilitating cross-border payments and improving the global monetary system.

The seven central banks and their private sector partners are now exploring how to integrate tokenized commercial bank deposits with wholesale central bank money in a programmable core financial platform. Leveraging blockchain-based smart contracts and programmability in this way could address several shortcomings.

What Project Agorá means for the financial industry
There is tangible excitement around Project Agorá and its potential to transform cross-border payments, and with good reason:

• Speedier atomic settlements: Instant, programmable transactions using smart contracts means settlement delays can be eliminated, aiding business cashflows and instilling more confidence in trading.
• Programmable money: Smart contracts can enable automated escrow releases or interest rate adjustments based on pre-defined conditions, ensures payments can be more accurately tracked and calculated, producing better forecasting and business agility.
• Central bank stability: CBDCs provide a trusted foundation for tokenized transactions. As the central bank is the issuer of the CBDC, businesses have the assurance that money will always be available.
• Seamless integration with unified ledgers: Breaking down silos between segregated ledgers means transactions can be enabled across different asset classes on a single platform, while tokenized deposits within the existing system preserve the “singleness of money” with added flexibility for banks.
• Enhanced security: Tokenized assets live on secure, tamper-proof ledgers, reducing the risk of fraud and unauthorized access. Blockchain-based transactions also offer full transparency and traceability, with each party in the transaction able to see where their money is at any given time. With shared infrastructure, the costs associated with processes like know-your-customer (KYC) and anti-money laundering (AML) checks could also be reduced.
• Assured regulatory compliance: Tokenization will enable compliance measures are embedded within smart contracts. This not only automates fast adherence to regulations but also creates auditable compliance trails, providing full transparency for regulators.

In conclusion
I am incredibly excited by the potential of Project Agorá to improve the way cross-border payments are made and the tangible benefits it could generate for banks and businesses everywhere. I applaud the growing participation of public and private sector players in such projects, and their shared willingness to experiment with new DeFi innovations to solve old TradFi problems.

As central banks navigate the complexities of CBDCs, the fintech-driven private sector is committed to reinventing traditional payment methods and bringing forth new ones altogether. The success of stablecoins like USDT, and their growing institutional usage globally, is evidence of that. What we’re seeing now is how traditional payment rails are also becoming ripe for reinvention.

Project Agora holds real potential to build a much more efficient, equitable, lower cost, and user-friendly financial future. In such a dynamic environment like payments, those forward-thinking entities who can navigate technological change, regulatory frameworks, and meet fast-changing customer demands will pave the way for the future of finance. Ultimately, it will not be a race between competitors striving for their own interests; it will be teamwork between purpose-led visionaries with collaboration at the core of their mission who will prove to be the real winners.