Hong Kong and Thailand have completed digital currency prototype Inthanon-LionRock, which tested cross-border transactions between banks in Hong Kong and Thailand banks. The prototype was built to transform wholesale cross-border payments with a streamlined intermediation model, real-time transfers and atomic payment-versus-payment settlements.
The project was a joint initiative between the Hong Kong Monetary Authority (HKMA) and the Bank of Thailand (BOT). The participating 10 banks conducted fund transfers and foreign exchange transactions on a peer-to-peer basis, in the form of bundled transactions. This testing of the prototype allowed the banks to realize enhanced real-time and efficiency.
The learning from the testing of the prototype addressed pain areas in cross-border transactions, such as inefficiencies, high cost, limited traceability, and complex regulatory compliance.
The “Corridor Network” is introduced for cross-border settlement. The network participants are the participating banks from Inthanon network and LionRock network. To settle transactions in the corridor network, a special instrument called Depository Receipt (DR) is needed for transferring value amongst all participants in the corridor network.
To give an overview of the prototype:
- All participating banks operate their own nodes on local payment network and corridor network.
- The central banks operate two nodes in the local network and corridor network called operator node, whose control is shared by BOT and HMA.
- The operator node, for simplicity sake, acts as the foreign currency liquidity provider
- Participating bank nodes transfer DR tokens between each other, store assets in their vaults, run regulatory activities
- Central bank nodes or the oracle nodes create & destroys DR tokens, convert W-CBDC and DR-CBDC, provide MLSM, provides foreign currency liquidity.
- Consensus service (Notary) provides transaction finality
- The prototype adopts the segregated asset expansion model, for reasons that there is reduced layers of intermediaries.
- FX transactions can also be settled on an atomic PvP basis in a single platform.
- Domestic and cross-border transactions have been kept separate
- Participating banks can settle directly between each other through their own wallets without having to depend on escrow or bear settlement risks.
- Settlements take place directly between participating banks with atomic swaps and so there is no dependency on Hash Time Locked Contracts (HTLC).
- Liquidity management processes, which include Queueing Mechanism, Gridlock Resolution, and Liquidity Provisioning, are also introduced on the corridor network.
- The foreign currency liquidity providers provide foreign currency liquidity when a deadlock occurs.
- Each central bank will facilitate the conversion of W-CBDC to DR nominated in its domestic currency and vice versa.
Fund Transfer Scenarios covered:
- Sending DR-local currency funds to a foreign bank
- Sending DR-Foreign currency funds to another local bank
- Sending DR-Foreign currency funds to foreign bank
A sending bank can input a cross-border payment instruction with the required details such as the receiving bank’s name, amount, currency and transaction purpose. Once submitted the settlement will take place instantaneously subject to the liquidity availability.
FX execution scenario:
- All FX transactions are settled in an atomic PvP fashion
- Three different ways of doing this: Broad Rate, Request for Quote, Off-corridor Arrangement.