ADB plans to make cross-border payments more efficient with blockchain
The Asian Development Bank (ADB) has begun tapping into the incredible potential of blockchain technology and has made a move towards decentralized finance (DeFi).
The multilateral development bank has partnered with ConsenSys, and three other blockchain companies, to develop a blockchain network to connect all the central banks and securities depositories among 13 countries in the Asia and Pacific region. The countries include the ten member states of the Association of Southeast Asian Nations, and Japan, China, and South Korea.
This ambitious project in Asia aims to connect different central banks and central securities depositories (CSDs) using blockchain technology, and builds on the work in cross-border payments that ConsenSys has engaged in in Asia, including the Hong Kong Monetary Authority, Bank of Thailand and Bank of Korea.
One of the building blocks of DeFi for central banks and CSDs is the tokenization of securities.
Currently, the process of trading securities is slow due to multi-day settlement cycles, does not provide equal access to all investors for different investment opportunities, and provides limited liquidity.
Tokenization can change all that. Imagine a small investor being able to bet on a part of an expensive piece of fine art or commercial real estate, which was so far only available to larger investors with deep pockets; or a portfolio manager inviting in new investors by issuing fractional shares in a new fund.
By allowing different assets to be fractionalized and then traded, tokenization increases liquidity in the market, and allows new asset classes to emerge. In addition, it allows investors to access liquidity outside of their domicile without having to go through the hoops with brokers and custodian banks in other countries.
The appeal of tokenization can be gauged from the fact that tokenized platforms are set to be equivalent in size to conventional securities exchanges in the coming five-ten years, according to the Future of Finance.
Here, we take a look at how ADB plans to leverage tokenization to make cross-border payments secure, and its partnership with ConsenSys.
Tokenization can make cross-border trades efficient
Tokenization is the process of creating digital versions of securities such as stocks and bonds. The ownership of a security is stored on a distributed ledger in the form of a digital token, and can be transferred only with the transfer of this digital token.
Tokenization facilitates a trade directly between a buyer and a seller, because it is powered by blockchains like Ethereum. Where trust was once placed in an intermediary to guarantee a trade, it has now moved to code. This lack of an intermediary ensures that trades are settled faster.
This swift settlement of trades is important when settling foreign exchange transactions across different time zones. According to the ADB, cross-border securities transactions in the 13 participating countries are “processed through a network of custodians and correspondent banks, which go through global centres in either the United States or Europe”. As a result, these transactions take at least two days to settle.
Tokenization of securities and trading these through a blockchain-based platform will allow the central banks in these 13 countries to settle these trades in almost real time.
Since the current process of settling cross-border transactions involves working with custodian banks and other financial institutions across different time zones, there is a risk that the trades may not be settled within the stipulated time frame. Settling cross-border trades in real time as a result of tokenization removes these settlement risks, and makes these transactions more secure.
ADB also plans to explore the viability of central bank digital currencies in the Asia and Pacific region through this project.
ConsenSys is helping ADB make cross-border trades better
For its blockchain project, ADB has partnered with ConsenSys, a leader in the fast-growing space of CBDCs and tokenization. ConsenSys has worked on projects with the South African Reserve Bank, and the Monetary Authority of Singapore. Some of the current CBDC projects that ConsenSys is a part of include those with the Bank of Korea, Reserve Bank of Australia, France’s Societe Generale, the Bank of Thailand, Central Bank of the United Arab Emirates and the Hong Kong Monetary Authority.
Our solutions leverage ConsenSys Quorum’s public-private blockchain interoperability to ensure high interoperability for confidential wholesale transfers and scalable retail transactions.
We will also rely on ConsenSys Codefi’s Assets platform, which allows users to create, distribute, and monetize digital assets. In addition, we will use ConsenSys Codefi’s Payments platform, which allows digital currency issuers to design and build digital currency settlement infrastructure, and for service providers to use the digital currency and build overlay services.