Collaboration in finance sector develops prototype API for digital currency

The Bank for International Settlements (BIS) has proved that an application programming interface (API) layer could be used to connect financial infrastructures to enable everyday payments to be made using a central bank digital currency (CBDC).

Alongside the Bank of England, academics as well as private IT firms, the BIS hub developed 33 API that would connect central banks and private businesses, testing out 30 potential everyday life use cases for CBDCs.

Central bank-backed digital currencies are a digital coin issued by a central bank, linked to the country’s fiat currency. As such, it would always retain its value – unlike volatile cryptocurrencies – and would replicate the use of cash.

According to BIS, Project Rosaland, as the initiative is known, proved “a well-designed API layer could work with different private sector applications and central bank ledger designs and that a set of simple and standardised API functionalities could support a diverse range of use cases”.

The use cases explored included peer-to-peer transfers, retail payments for goods and services as well as small-value business transactions. Payment options tested included making retail CBDC payments online, in stores and offline.  

Francesca Hopwood Road, head of the BIS Innovation Hub London Centre, said the experiment advanced central bank innovation in two key areas. It explored how an API layer could support a retail CBDC system and how it could facilitate safe and secure CBDC payments through a range of different use cases.

“Active collaboration with the public and private sectors to identify and explore these use cases has been at the heart of this. We believe that Rosalind can make a significant contribution to how organisations across the globe are thinking about and engaging with the design of retail CBDC systems,” said Hopwood.

Martin Hargreaves, chief product officer at Blockchain company Quantt, which was involved in  the project, said it created real-world examples of how CBDCs could be integrated into day-to-day life.

“Each participating company suggested a few different use cases to test, and we worked to add innovations to the core of each suggestion,” said Hargreaves. “This collaboration meant we could create a lot of high-impact applications of CBDCs through our approach of implementing novel ideas and programming each use case uniquely.”

He said one firm demonstrated a checkout experience where a customer could use CBDC for payment, while a major bank completed an example transaction between a parent and their child’s account.

Quant’s CEO Gilbert Verdian said a CBDC will enable citizens and businesses to automate cumbersome payments and processes and to implement logic into money.

Scandinavia’s four central banks have also collaborated with BIS on CBDS projects.

Juniper Research recently released research that estimates that payments made using CBDCs will grow from $100m this year to a massive $200bn in 2030. The startling numbers from reveal a 260,000% increase over the next seven years.

The research firm said the CBDC sector is in its early stages of development with mainly pilot projects, but it expects government projects to boost financial inclusion will stimulate adoption. This will particularly be the case in emerging economies “where mobile penetration is significantly higher than banking penetration”. It said 92% of total CBDC transactions in 2030 will be domestic payments, compared to 100% in current pilots.

The Bank of England is recruiting a team to work on the development of a digital pound. The ongoing research and development around digital currencies will support the government as it faces a “profound decision” on the use of a CBDC, according to a recent statement from Bank of England governor Andrew Bailey.