- BIS Innovation Hubs completed Project Meridian FX, exploring cross-border Payment versus Payment (PvP) settlement between multiple central banks.
- The project demonstrated that PvP settlement can work across different technologies, including both DLT and non-DLT systems.
- Innovations included liquidity optimization features and support for linked PvP transactions using a bridging currency.
The Bank for International Settlements (BIS) Innovation Hubs in London and Europe have successfully completed Project Meridian FX, a distributed ledger technology (DLT) initiative focused on cross-border payments. The project involved central banks from England, France, Germany, and Italy, demonstrating Payment versus Payment (PvP) settlement for foreign exchange transactions to reduce Herstatt risk – the danger that one party pays but doesn’t receive the corresponding currency.
Project Meridian FX built upon the earlier Project Meridian, which utilized DLT-based synchronization for real estate settlements through England’s Real Time Gross Settlement (RTGS) system. The new initiative aimed specifically at enabling simultaneous exchanges between British pounds and euros while proving the solution could operate across different technological platforms.
Technological Integration
A key achievement of the project was demonstrating interoperability between DLT and non-DLT systems. The project incorporated a feature called “earmarking” – essentially escrowing funds until payment conditions are met. Notably, the team discovered that only one transaction leg needed to support earmarking for the system to function properly.
The European central banks utilized platforms from their previous Eurosystem DLT settlement trials. Germany employed its Trigger Solution, France used the DL3S wholesale CBDC system, and Italy implemented its TIPS Hashlink solution. All these platforms connected with the Target 2 system, while the English side used a simulated RTGS system.
Advanced Features
The synchronization system explored several liquidity optimization approaches. Each node on the Ethereum-compatible DLT platform featured a synchronization operator controlling payment queues, allowing for prioritization of single-direction transactions and enabling banks to use incoming payments to fund outgoing ones.
Perhaps most innovative was the support for linked PvP transactions, described as “(PvP)+(PvP).” This capability enables exchanging two currencies through a bridging currency (such as Japanese Yen for Mexican Peso using GBP as the bridge) in a single atomic transaction, eliminating the risk of holding unwanted intermediate currencies.
By successfully demonstrating that PvP settlement can work across diverse technological infrastructures, Project Meridian FX represents a significant advancement in reducing settlement risk in foreign exchange markets, contributing to global efforts making cross-border payments faster, cheaper, and more secure.
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