In a significant milestone for the world of decentralized finance (DeFi) and foreign exchange (FX), the central banks of France, Switzerland, and Singapore have successfully completed their wholesale Central Bank Digital Currency (CBDC) trial, known as Project Mariana. The Bank for International Settlements (BIS) unveiled the final report on this pioneering experiment, which explored the potential of wholesale CBDCs in facilitating cross-border payments and FX transactions. The participating central banks included the Banque de France, the Swiss National Bank, and the Monetary Authority of Singapore (MAS).
The global foreign exchange market, valued at a staggering $7.5 trillion daily, is not only vast but also fraught with settlement risks. Blockchain technology, renowned for its capabilities in near-instant settlement and payment-versus-payment (PvP) mechanisms, emerged as a solution to mitigate these substantial risks. However, the introduction of automated market makers (AMMs) raised concerns regarding liquidity requirements.
Project Mariana operated on a fundamental premise: a commercial bank, situated in, for instance, France, would initiate a request for wholesale CBDC from the central bank. Subsequently, the commercial bank would utilize the central bank’s bridge to transfer the wholesale CBDC onto the public blockchain. Once there, the digital euro would be exchanged for wholesale Singapore dollars using AMMs, and the resulting assets would be conveyed to the Singaporean bank for further cross-border payment processing.
Key Findings from Project Mariana
As highlighted in the interim report released in June, Project Mariana uncovered several noteworthy insights. Among them, a central bank can effectively implement governance at the token level without asserting control over the underlying public blockchain, which, in this case, was the Ethereum testnet. Ethereum’s ERC-20 token standard played a pivotal role in ensuring interoperability among various wholesale CBDCs.
In the final report, attention was drawn to the heightened liquidity requirements associated with automated market makers (AMMs). Conventional FX markets typically rely on market makers and traditional bid-and-offer mechanisms to establish transaction prices. In contrast, AMMs leverage liquidity pools and algorithms to determine transaction pricing. While the primary motivation behind this model was to reduce public blockchain gas charges, it also introduced the potential for 24/7 automation.
However, it’s worth noting that AMM transactions necessitate pre-funding, unlike the prevalent practice in most FX transactions, which typically employ deferred net settlement. The round-the-clock availability of a wholesale CBDC introduces complexities, including the consistent remuneration of various forms of central bank money and the security risks inherent in smart contracts.
The successful completion of Project Mariana marks a significant step forward in exploring the integration of wholesale CBDCs, DeFi, and blockchain technology into the global FX market. It sheds light on both the opportunities and challenges associated with this transformative endeavor, with potential implications for the broader financial landscape.
