England successfully concludes decentralized ledger technology (DLT) trials for foreign exchange peer-to-peer (PvP) transactions with three European central banks.

England successfully concludes decentralized ledger technology (DLT) trials for foreign exchange peer-to-peer (PvP) transactions with three European central banks.

Project Meridian FX: Paving the Way for Safer and Faster Cross-Border Payments

In a significant stride towards modernizing foreign exchange (FX) markets, the BIS Innovation Hubs in London and Europe have completed a joint project called Project Meridian FX. This initiative, aimed at reducing settlement risk in FX markets, implements Payment versus Payment (PvP) on interoperable systems.

The project, which aligns with global efforts to make cross-border payments faster, cheaper, and safer, explores the use of PvP for FX. By adopting this approach, both sides of the transaction settle simultaneously or atomically, thereby reducing the Herstatt risk. This means that banks sending and receiving payments may be able to use incoming payments to fund outgoing ones.

Project Meridian FX has demonstrated that PvP settlement can work across different technological infrastructures, both DLT and non-DLT systems. The trial, which involved the central banks of England, France, Germany, and Italy, showcased the successful synchronization of currency settlements. The synchronization solution, a key component of the project, ensures that the transfer of one currency happens if and only if the transfer of the other currency occurs, preventing one party from fulfilling their payment while the counterparty does not.

Another significant aspect of the project is its promotion of interoperability between DLT-based platforms and existing non-DLT payment systems. This enables these diverse systems to communicate and coordinate settlement processes securely and efficiently. The project also tested interoperability with a DLT-based system and a non-DLT based one, further underscoring its commitment to bridging technological gaps.

The project also trialed a netting approach, prioritizing simultaneous settlement of multiple transactions. A unique feature of the project was the support for multiple linked PvP transactions, referred to as (PvP)+(PvP). This allows for the exchange of two currencies using a bridging currency, reducing the risk of holding unnecessary currencies.

One of the practical applications of the project was the simultaneous exchange of pounds and euros. The trial also used a DLT-based synchronization solution to simultaneously transfer a property title and payment, demonstrating the potential for real-world applications of the technology.

The synchronization system in the project explored liquidity optimizations for each node on the Ethereum-compatible DLT platform. Each node in the system has a synchronization operator that controls the payment queue and prioritizes payments of banks with transactions in one direction.

In conclusion, Project Meridian FX offers a promising path towards reducing settlement risk in FX transactions. By integrating PvP with cross-platform interoperability, the project addresses payment and settlement risks by ensuring atomic transactions—meaning payments occur simultaneously or not at all—across different systems and currencies, thereby enhancing the safety and efficiency of international FX settlements. The project serves as a testament to the BIS Innovation Hub's commitment to promoting advances in financial market infrastructures using technology, improving stability and reducing systemic risks in global financial markets.

[1] BIS Innovation Hub. (2021). Project Meridian FX: A joint distributed ledger technology (DLT) initiative by the BIS Innovation Hubs in London and Europe. Bank for International Settlements. [4] BIS Innovation Hub. (2021). Project Meridian FX: A joint distributed ledger technology (DLT) initiative by the BIS Innovation Hubs in London and Europe. Bank for International Settlements.

1. The Project Meridian FX, a significant endeavor by the BIS Innovation Hubs, delves into the potential use of blockchain technology for improving cross-border finance, particularly in the exchange of assets like currencies.
2. As part of the project, the team examined the role of central bank digital currencies (CBDCs) in enhancing insights into the performance and efficiency of interoperable systems in the finance industry.
3. The project's focus on technology also extended to the exploration of synchronization solutions that could unlock new efficiencies within the broader financial technology (fintech) landscape.

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