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A new project tests how DeFi can power the trillion-dollar currency market in ‘future tokenised world’

A new project tests how DeFi can power the trillion-dollar currency market in ‘future tokenised world’
DeFiMarkets
Curve technology was used by the BIS and partner banks to design and test a CBDC trading system.
  • The BIS and three central banks are studying the benefit of pairing blockchain technology with central bank digital currencies, or CBDCs.
  • Curve founder Michael Egorov said it’s a “no-brainer” to use a decentralised exchange to test cross-border CBDC trading.
  • The report comes amid a European Union proposal to introduce a digital euro.

In a “future tokenised world,” technology from decentralised finance networks could power the world’s trillion-dollar foreign exchange market, according to a new report from the Bank of International Settlements.

Researchers at the BIS, the Banque de France, the Monetary Authority of Singapore and the Swiss National Bank are studying the benefit of pairing blockchain technology with wholesale — bank-to-bank — central bank digital currencies.

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That combination could combine foreign exchange trading and settlement “into a single instantaneous step,” according to the report’s authors, “eliminating credit and settlement risk.”

Their report is the latest to suggest that advances made by decentralised finance could power the world of traditional finance in the coming years.

‘This type of initiative will help firms like us bridge the gap between centralised and decentralised finance.’

—  Hirander Misra, chair and CEO of GMEX

Only 11 countries have launched a CBDC, according to the Atlantic Council, which tracks their development. But 19 of 20 G20 countries are in an “advanced stage” of CBDC development.

The report comes amid a European Union proposal to introduce a digital euro. Proponents have argued CBDCs could make payments faster and cheaper, but critics, including many in the crypto industry, have blasted it as government surveillance overreach.

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BIS researchers used test networks on Ethereum to trade digital euros, Swiss francs and Singapore dollars, and picked DeFi protocol Curve’s automated market maker to facilitate those trades. Curve is one of the largest decentralised exchanges, having processed almost $800 million in trade volume over the past seven days.

Curve founder Michael Egorov said it was a “no-brainer” to use a decentralised exchange to test cross-border trading of CBDCs.

‘They took their time to learn, and that’s very exciting.’

—  Curve founder Michael Egorov

“DeFi is the perfect [proof-of-concept] running with public stablecoins,” he told DL News. “This is something which is already tested and de-risked in many ways.”

Egorov said he brought the researchers’s attention to relevant public information about “testing and optimising Curve technology,” said he was impressed with their knowledge of blockchain technology.

“Essentially they can do what DeFi developers can do,” he said. “They took their time to learn, and that’s very exciting.”

There may be doubters.

“There are risks with everything, any technology that you take, and I’m not sure whether decentralised trust, community based technology is good for every digital service that the state is going to offer,” Damian Boeselager, member of European parliament, told DL News. He added that he is not commenting specifically about CBDCs.

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But Hirander Misra, chair and CEO of GMEX, a market infrastructure vendor, said DeFi community excitement over the project is warranted, as his industry tackles challenges of implementing “orchestration layers” in markets.

“We know the DEX part will be important too, but had not pulled the trigger on it pending regulatory clarity,” he told DL News.

“This type of initiative helps to drive acceptance and adoption, and will help firms like us bridge the gap between centralised and decentralised finance.”

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In their report, the researchers noted the tests were just that — tests. They did not endorse DeFi or Curve, and the participating countries were not necessarily on the cusp of releasing their own CBDCs.

A spokesperson for the BIS did not immediately respond to a request for comment.

“It’s early to say whether this actually happens as adoption,” Egorov said, “but still, it’s the first steps.”

Disclaimer: The two co-founders of DL News were previously core contributors to the Curve protocol.

Update, July 3: A previous version of this story said that Egorov helped the researchers design and test the technology. It has been amended to clarify that he brought the relevant public information to their attention.