DLT based Cross Border Payments - A POC
Project Aber by SAMA & CBUAE demonstrates viability of DLT as a mechanism for settlement and confirms the technical viability of a single digital currency issued by both central banks:
The central banks of Saudi Arabia and the United Arab Emirates have jointly released a comprehensive report on the year-long study they had undertaken to create a joint central bank digital currency (CBDC). The major highlight of the project - called Project Aber - is the relevance of blockchain technology in the future of global currencies.
The project, announced in January 2019, was initially intended to create a `proof of concept’ designed to “contribute in the body of knowledge in CBDC and DLT technologies’. A first of its kind study by 2 central banks, the project was aptly named Aber, meaning `crossing boundaries’, in Arabic. Divided into 3 distinct phases that progressively expanded the scope of the trial to 6 different commercial banks, the report notes that the project used a digital currency backed with real money in order to force “greater consideration” of issues surrounding security and existing payment systems.
The major conclusion in the report is that a dual-issued CBDC was “not only technically viable” for cross border payments, but CBDCs present “significant improvement over centralized payment systems in terms of architectural resilience’.
Among the major recommendations in the report are further research and policy, including adopting DLT to improve the security of existing systems, offering DLT-based payments rails, and expanding the scope of future trials to include more geographically dispersed partners as well as the settlement of other assets, like bonds.
FIRST OF ITS KIND
In a joint statement, the Central Bank of UAE and the Saudi Central Bank said they had launched `Aber’ Project as an innovative initiative which is considered one of the first of its kind internationally at the level of central banks. “This initiative aims to proof of concept for, study, understand, and evaluate the feasibility of issuing a digital currency for central banks,” they said.
They added that the Wholesale CBDC, which was fully covered and issued by them, will be used only by them, and the banks participating in the initiative, as a settlement unit for domestic as well as cross-border commercial bank transactions between Saudi Arabia and the UAE.
The findings of the study confirmed that a cross-border dual issued currency was technically viable and that it was possible to design a distributed payment system that offers the 2 countries significant improvement over centralized payment systems in terms of architectural resilience. The key requirements that were identified were all met, including complex requirements around privacy and decentralization, as well as requirements related to mitigating economic risks, such as central bank visibility of money supply and traceability of issued currency. The performance objectives that were originally set for the project were exceeded, proving that DLT technologies could offer high levels of performance whilst not compromising safety or privacy.
“As such, the project has confirmed the viability of DLT as a mechanism for both domestic and cross-border settlement and confirmed the technical viability of a single digital currency issued by both central banks,” the report said.
FUTURE AREAS OF APPLICATION
It is hoped that the findings could provide the basis for a backup to domestic and regional RTGS; providing a more distributed and potentially resilient alternative to the centralized systems that are implemented or being implemented today. Secondly, by offering a DLT-based payments rails, there is the possibility to expand to Delivery versus Payment (DvP) scenarios such as using the Aber network as a means of settlement for other forms of transaction, such as the sale of bonds or other dematerialized assets. Thirdly, there is the possibility of extending it geographically to include regional or other international central banks or linking heterogeneous networks together.
The report in its summary said “The project was successful in meeting its objectives, demonstrated possible incremental benefits of this new approach to payments, identified important lessons learned that can benefit other central banks exploring the field, and has identified several areas of future expansion that can be considered by either the participants in this project or other central banks. As such, we believe this project has made a material impact on industry understanding of the field and is a substantial contribution to the body of knowledge in how the emerging technology of DLT can be applied to cross-border and domestic payments.”
Six commercial banks (3 from each jurisdiction) participated in all the phases of the project, providing opportunity for them to have a first-hand experience of using and operating a distributed ledger based interbank payment solution. Another unique aspect was the use of `real money’ in the pilot project. This was achieved by commercial banks pledging real money from the deposits that they held with the central bank and using these funds to then fund their digital currency accounts on the distributed ledger.
The project addressed three high level use cases and was executed in 3 phases:
Use Case 1: Payment between central banks Use Case 2: Domestic Payments between commercial banks
Use Case 3: Cross-border Payments between Commercial banks