## BULLET TRAIN

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**Canonical URL:** [BULLET TRAIN](https://www.imf.org/-/media/files/publications/fandd/article/2022/september/adrian.pdf)

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### Background: trust and cross-border payments
- Money is described as an IOU—a promise to pay—and its value lies in trust between issuer and holder.
- Within a country, central banks provide two public goods that bridge trust networks: reserves (accounts that banks hold at the central bank) and the settlement network over which reserves are traded.
- Across borders there is no commonly trusted asset or network, information is scarcer, and legal recourse is more difficult, making trust establishment costlier.
- Correspondent banking solves cross-border settlement by relying on bilateral trust between a small number of large banks; this creates high costs, slow speed, and opacity because establishing and monitoring trust is costly and only a handful of institutions can profitably maintain many bilateral relationships.

### Tokenization and its effects
- Tokenized money (examples: stablecoins, such as USD Coin, and central bank digital currency (CBDC)) can be held by anyone with the right private key and transferred across compatible wallets.
- Key effects of tokenization on correspondent banking:
  - Risks are lower because a bank receiving tokenized deposits obtains a concrete form of money that can be sold or redeemed for hard assets, reducing the need to extend unsecured bilateral credit.
  - Banks hold a liquid asset that can be sold, traded, or hedged more easily than an unsecured IOU.
  - Correspondent banking can become more competitive as any bank or financial institution with a compatible wallet can engage, improving speed and reducing fees.
- Examples of CBDC adoption noted: The Bahamas and Nigeria have launched CBDC; an increasing number of countries are actively evaluating CBDC.

### Digital platforms and settlement services
- Platforms can coordinate payments by broadcasting payment orders, collecting bids for correspondent services, and ensuring timely execution.
- Assets that could be traded on a platform include tokenized bank deposits, CBDC, and well-regulated stablecoins; the essential requirement is that a wide body of counterparties trust the asset to be stable.
- Platforms could move beyond clearing to provide settlement by:
  - Taking in monies such as CBDC into escrow, issuing tokens against them on a single ledger, and exchanging those tokens among participants.
  - Bringing different monies onto a single ledger (a recognized “basket”) and enabling seamless cross-border exchange.
- Platform capabilities enabled by a common ledger include programmable smart contracts to:
  - Execute conditional payments (payment made only when another is received).
  - Automatically hedge foreign exchange risks of transactions.
  - Pledge future incoming payments in financial contracts.
  - Design auctions to encourage exchange of typically shunned (and expensive) currencies in cross-border payments.
- The private sector could extend platform uses by writing smart contracts, leveraging two public goods: a common settlement platform and a common programming language for compatible smart contracts.
- Resulting arrangement would be a tight public-private partnership; success depends on governance and mobilizing a sufficient number of central banks.

### Policy considerations and next steps
- Important policy and governance challenges:
  - Establishing the right governance arrangements for a common platform.
  - Mobilizing a sufficient number of central banks to participate.
- Institutional role:
  - The IMF, with near universal membership, is positioned as a starting place to explore these prospects.
- Research and outreach:
  - The authors note forthcoming papers with coauthors Dong He and Federico Grinberg of the IMF; Rod Garratt of the University of California, Santa Barbara; and Robert Townsend and Nicolas Xuan-Yi Zhang of the Massachusetts Institute of Technology, intended to lay out an initial blueprint for such platforms and stimulate further discussion.

*TOBIAS ADRIAN is director of the IMF’s Monetary and Capital Markets Department, where TOMMASO MANCINI-GRIFFOLI is division chief.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/september/adrian.pdf_