Interoperability between CBDCs, Crypto and legacy systems
TipTipInteroperability initiatives between CBDCs, public blockchains and legacy systems.
Authors: Andy Yee (University of Cambridge) - MSc in Engineering, Edmilson Rodrigues do Nascimento Júnior (CIn/UFPE) - ernj@cin.ufpe.br - MSc in Computer Science, Mikailu Samuel Nadro (Bayero University) - mikailu29@gmail.com - MsC Candidate
Abstract
Innovation in public blockchains, Central Bank Digital Currencies (CBDCs) and legacy systems is progressing exponentially. Interoperability between those value systems is important and has become increasingly subject of research and development from academicians, public organizations, governments and private companies. This paper does an exploratory analysis of 8 interoperability projects between CBDCs and public blockchains or legacy systems, and analyzes the publicly displayed information into 8 dimensions. It finalizes with the contribution of an initial database for an open source project called Interoperability Watch to monitor new initiatives in the important field of interoperability of CBDCs and other financial systems.
Keywords: Interoperability, CBDCs, public blockchains, legacy systems, financial systems
Introduction
Innovation in public blockchains, Central Bank Digital Currencies (CBDCs) and legacy systems is progressing steadily. Interoperability between those value systems is important and has become increasingly subject of research and development from academicians, public organizations, governments and private companies.
Legacy Systems, public blockchains and CBDCs are financial ecosystems in and of themselves that will need to be interoperable for the end user to be able to move value seamlessly between ecosystems.
For instance, Visa processed USD $11.6 trillion of payment volume in 2022, while SWIFT facilitated about USD $140 trillion of payment each year. These are huge compared with the global crypto market cap of around USD $1.2 trillion (according to CoinMarketCap). In addition, there are over 100 CBDC projects being developed around the world (CBDC tracker[1]).
Interoperating public cryptocurrencies and CBDCs with the legacy financial systems is important because customers can keep the same user experience which is important for mainstream adoption. In addition, cryptocurrencies/CBDCs can leverage the network effect and customer base of legacy systems so that they can grow and scale quickly.
This paper has the objective to map interoperability projects currently being developed around the world and create an initial database for an open source project called “Interoperability Watch”.
Methodology
Although a very interesting topic of analysis, this paper has the negative Scope of Interoperability initiatives between public blockchains, like Axelar, Layer Zero, Hyperlane, etc. We believe that this topic has been sufficiently covered by the literature. (Belchior et al, 2022).
Therefore, the projects analyzed promoted the interoperability between two of the three financial ecosystems: (a) public or private blockchains, (b) CBDCs and (c ) legacy financial systems.
Each project was analyzed according to one of the following dimensions:
- Countries involved.
- Organizations involved.
- Researchers Involved.
- Interoperability between: (a) CBDCs, (b) public cryptocurrencies, (c) Legacy Financial Systems.
- Interoperability methods: (a) APIs, (b) Bridges, (c) others?
- Performance indicators: (a) time to finality of transactions, (b) number of currencies/tokens
- CBDC Categories: (a) retail, (b) wholesale
- Examples of use cases
The projects analyzed were:
The database of projects can be found in this spreadsheet that can be exported in CSV. A table with the information from all projects can be found in the first tab. Interoperability Initiatives
Results
| Project Name: | Project Icebreaker |
| URL: | https://www.bis.org/publ/othp61.pdf |
| Analysis Dimensions | |
| Countries involved: | Israel, Norway, Sweden |
| Organizations involved: | Sveriges Riksbank, Norges Bank, Bank of Israel |
| Researchers Involved: | Bank of Israel Yoav Soffer, Digital Shekel Project Manager Tomer Mizrahi, CTO and Digital Shekel Technology Lead Amir Moshe, Digital Shekel Economist Daniel Skorikov, Senior Cloud Architect Avia Hollander, Senior Software Developer Ilan Matityahoo, Senior Software Developer Nawras Dahleh, Senior Software Developer Rachel Vashdi, Senior Software Developer Daniel Mirzakandov (technical consultant) BIS Innovation Hub Beju Shah, Nordic Centre Head Björn Segendorf, Adviser Daniel Eidan, Adviser and Solution Architect Darko Micic, Cloud Architect Grimur Sigurdarson, Adviser William Zhang, Adviser Norges Bank Knut Gulleik Sandal, Director Peder Østbye, Director of Analysis Lasse Meholm, Coordinator Suela Kristiansen, Senior Adviser Terje Åmås, Special Adviser Stefano Franz (technical consultant) Ørjan Monsen (technical consultant) Sveriges Riksbank Mithra Sundberg, Head of e-krona division André Reslow, Advisor David Lööv, Senior Economist Micael Lindgren, IT Architect Katarina Telander (technical consultant) Alisher Zaitov (technical consultant) Peter de Rooij (technical consultant) Miska Petoniemi (technical consultant) Lili Lehti (technical consultant) |
| Interoperability between: (a) CBDCs, (b) public cryptocurrencies, (c) Legacy Financial Systems | CBDCs and Legacy Financial Systems |
| Interoperability methods: (a) APIs, (b) Bridges, (c) others? | APIs |
| Types of Entities in the project: (a)Central Banks, (b) Private Organizations, (c) Public Organizations (Example: Think tanks or universities) | Private Organizations |
| Performance indicators: (a) time to finality of transactions, (b) number of currencies/tokens | Not specified |
| CBDC Categories: (a) retail, (b) wholesale | Retail |
| Examples of use cases: | FX |
| Project Name: | Project Harmonia |
| URL: | https://github.com/hyperledger-labs/harmonia |
| Analysis Dimensions | |
| Countries involved: | Not specified |
| Organizations involved: | Hyperledger Foundation, Adhara, R3 |
| Researchers Involved: | https://github.com/coeniebeyers - Adhara https://github.com/eierina - R3 https://github.com/fenryka - R3 https://github.com/gendal - R3 https://github.com/MarkOldfield - R3 https://github.com/MicheleCullinan - Adhara https://github.com/mkrielza - Adhara https://github.com/petermunnings - Adhara https://github.com/r3domfox - R3 |
| Interoperability between: (a) CBDCs, (b) public cryptocurrencies, (c) Legacy Financial Systems | CBDCs and EVM chains |
| Interoperability methods: (a) APIs, (b) Bridges, (c) others? | Not specified |
| Types of Entities in the project: (a)Central Banks, (b) Private Organizations, (c) Public Organizations (Example: Think tanks or universities) | Private Organizations |
| Performance indicators: (a) time to finality of transactions, (b) number of currencies/tokens | Not specified |
| CBDC Categories: (a) retail, (b) wholesale | Not specified |
| Examples of use cases: | Intraday XvP for Repos, FX Swaps and Equity/Bond Settlements. |
| Project Name: | Project Rosalind |
| URL: | https://www.bis.org/about/bisih/topics/cbdc/rosalind.htm?__cf_chl_rt_tk=XvK_rd_U_JuFr9LUwfNsZIHsjHxYqi1LFO6pmIOicqY-1687105923-0-gaNycGzNDZA |
| Analysis Dimensions | |
| Countries involved: | England |
| Organizations involved: | BIS Innovation Hub - England |
| Researchers Involved: | Amy Jiang, Adviser, BIS Innovation Hub London Centre Danny Russell, Principal Architect, CBDC, Bank of England Carmen Barandela, Lead Architect, CBDC, Bank of England (until end of December 2022) John Yeo, Adviser, BIS Innovation Hub London Centre |
| Interoperability between: (a) CBDCs, (b) public cryptocurrencies, (c) Legacy Financial Systems | CBDC |
| Interoperability methods: (a) APIs, (b) Bridges, (c) others? | API |
| Types of Entities in the project: (a)Central Banks, (b) Private Organizations, (c) Public Organizations (Example: Think tanks or universities) | BIS Innovation Hub + Private Entities |
| Performance indicators: (a) time to finality of transactions, (b) number of currencies/tokens | Not specified |
| CBDC Categories: (a) retail, (b) wholesale | Retail |
| Examples of use cases: | peer-to-peer transfers, retail payments for goods and services, and small-value business transactions including receiving commissions, paying salaries and supporting trade finance |
| Project Name: | Visa Digital Currency settlement Platform |
| URL: | https://usa.visa.com/visa-everywhere/blog/bdp/2021/03/26/digital-currency-comes-1616782388876.html |
| Analysis Dimensions | |
| Countries involved: | Not specified |
| Organizations involved: | Visa |
| Researchers Involved: | Not specified |
| Interoperability between: (a) CBDCs, (b) public cryptocurrencies, (c) Legacy Financial Systems | Digital currencies and Traditional payment methods |
| Interoperability methods: (a) APIs, (b) Bridges, (c) others? | Universal Payments Channel (UPC), Interledger Protocol (ILP) and RippleNet |
| Types of Entities in the project: (a)Central Banks, (b) Private Organizations, (c) Public Organizations (Example: Think tanks or universities) | Central banks and Private Organizations |
| Performance indicators: (a) time to finality of transactions, (b) number of currencies/tokens | Not specified |
| CBDC Categories: (a) retail, (b) wholesale | Not specified |
| Examples of use cases: | Micro payments, Retail payments and Cross-border payments |
| Project Name: | SWIFT Coalition |
| URL: | https://www.swift.com/news-events/news/swift-explores-blockchain-interoperability-remove-friction-tokenised-asset-settlement |
| Analysis Dimensions | |
| Countries involved: | USA, France, Australia, Luxembourg, Belgium, United Kingdom, Switzerland |
| Organizations involved: | Australia and New Zealand Banking Group Limited (ANZ), BNP Paribas, BNY Mellon, Citi, Clearstream, Euroclear, Lloyds Banking Group, SIX Digital Exchange (SDX) and The Depository Trust & Clearing Corporation (DTCC) |
| Researchers Involved: | Not specified |
| Interoperability between: (a) CBDCs, (b) public cryptocurrencies, (c) Legacy Financial Systems | Multiple Public and Private blockchains |
| Interoperability methods: (a) APIs, (b) Bridges, (c) others? | Gateways and Shared rulebook |
| Types of Entities in the project: (a)Central Banks, (b) Private Organizations, (c) Public Organizations (Example: Think tanks or universities) | Central banks, Private Organisations and Public Organisations |
| Performance indicators: (a) time to finality of transactions, (b) number of currencies/tokens | Not specified |
| CBDC Categories: (a) retail, (b) wholesale | Wholesale CBDC |
| Examples of use cases: | Cross border payment, tokenised securities and collateral management others from findings (SWIFT gpi, RTGS and CBDC) |
| Project Name: | Project mBridge |
| URL: | https://www.bis.org/about/bisih/topics/cbdc/mcbdc_bridge.htm |
| Analysis Dimensions | |
| Countries involved: | Hong Kong SAR, Thailand, China, United Atab Emirates |
| Organizations involved: | BIS Innovation Hub Hong Kong Centre |
| Researchers Involved: | See P.46-48 for the full team: https://www.bis.org/publ/othp59.pdf |
| Interoperability between: (a) CBDCs, (b) public cryptocurrencies, (c) Legacy Financial Systems | CBDC |
| Interoperability methods: (a) APIs, (b) Bridges, (c) others? | APIs |
| Types of Entities in the project: (a)Central Banks, (b) Private Organizations, (c) Public Organizations (Example: Think tanks or universities) | BIS Innovation Hub + 4 Central Banks + Private Entities |
| Performance indicators: (a) time to finality of transactions, (b) number of currencies/tokens | Number of transactions; total transaction value |
| CBDC Categories: (a) retail, (b) wholesale | Wholesale |
| Examples of use cases: | International trade settlement Remittances Tokenised bond issuance e-commerce |
| Project Name: | Project Guardian |
| URL: | https://www.mas.gov.sg/-/media/mas-media-library/development/fintech/project-guardian/project-guardian-open-interoperable-network.pdf |
| Analysis Dimensions | |
| Countries involved: | Singapore |
| Organizations involved: | BIS |
| Researchers Involved: | See P.44 in report for full team |
| Interoperability between: (a) CBDCs, (b) public cryptocurrencies, (c) Legacy Financial Systems | Tokenized representation of assets |
| Interoperability methods: (a) APIs, (b) Bridges, (c) others? | Bridges |
| Types of Entities in the project: (a)Central Banks, (b) Private Organizations, (c) Public Organizations (Example: Think tanks or universities) | MAS, BIS and Private Entities |
| Performance indicators: (a) time to finality of transactions, (b) number of currencies/tokens | Adherence to Principles for Financial Market Infrastructures |
| CBDC Categories: (a) retail, (b) wholesale | Wholesale |
| Examples of use cases: | Global Liquidity Pool Asset Backed Security Token with Underlying Trade and Working Capital Loans Digital Native Issuance of Structured Notes |
| Project Name: | Secure Asset Transfer Protocol (satp) |
| URL: | https://datatracker.ietf.org/group/satp/about/ |
| Analysis Dimensions | |
| Countries involved: | N/A |
| Organizations involved: | Internet Engineering Task Force |
| Researchers Involved: | Claire, Wes Hardaker, Murray Kucherawy, Paul Wouters |
| Interoperability between: (a) CBDCs, (b) public cryptocurrencies, (c) Legacy Financial Systems | Agnostic to type of asset |
| Interoperability methods: (a) APIs, (b) Bridges, (c) others? | Protocol and gateway paradigm |
| Types of Entities in the project: (a)Central Banks, (b) Private Organizations, (c) Public Organizations (Example: Think tanks or universities) | Public Organizations (IETF Working Groups) |
| Performance indicators: (a) time to finality of transactions, (b) number of currencies/tokens | Transfers will satisfy ACID properties |
| CBDC Categories: (a) retail, (b) wholesale | TBD |
| Examples of use cases: | Various real-world use-cases will be collected |
Conclusion
Interoperability between public and private blockchains, CBDCs and Legacy systems is a very important topic of research and development. Individuals, corporations and nations will need to move value between those ecosystems.
This paper conducted an analysis of the current interoperability initiatives and created an initial database for the creation of an Open Source initiative called “Interoperability Watch” to track the development of further interoperability standarts between the worlds of public blockchains, CBDCs and legacy systems.