The Monetary Authority of Singapore (MAS) and Bank of Canada have completed "a successful experiment" on cross-border payments using central bank digital currencies, tapping distributed ledger technology or blockchain with the aim to achieve faster, cheaper, and more secured transactions. The two central banks also discuss their learnings in a report that suggests design options for cross-border settlement systems and details limitations of a technique used, called Hashed Time-Locked Contracts (HTLC).
Marking the first such pilot between both agencies, the blockchain-based implementation showed potential to improve efficiencies and reduce risks for cross-border payments, they said in a joint statement released Thursday.
"Cross-border payments today are often slow and costly. They rely on a correspondent banking network that is subject to counter-party risk, inefficient liquidity management, and cumbersome reconciliation," they noted.
Both central banks had linked up their respective test domestic payment networks, both of which were built on different distributed ledger technology platforms. The partners used HTLC has a way to connect both networks and facilitate Payment versus Payment2 (PvP) settlements without the need for a trusted third-party to act as an intermediary.
To sum, the technique synchronises all actions required to process a cross-border payment so either all must occur or none would proceed. This is established through the use of smart contracts on the two blockchain platforms to lock or restrict the assets to be transferred, complete transactions on both platforms when a common secret is used, or release the locked or restricted asset on both platforms back to their original owners if the common secret is not used within the pre-agreed time period, or a timeout.
In their report, the cent...