## Introduction (ftnea2023005)

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---

### Money, payments, and technological evolution
- Money underpins the financial system: contracts denominated in money; exchange conducted in monetary units; central banks, regulators, and finance ministries manage and backstop money via monetary policy, payment oversight, infrastructure, and banking supervision.
- Historical evolution noted: metal coins → fiat currencies; paper letters of credit → account-based systems; cash use decreasing in many countries while digital innovation rises.
- Current technological enablers being explored globally: cryptography, tokenization, programmability.
- Market participants experimenting: banks exploring deposit tokenization; central banks experimenting with digital currencies; fintechs innovating across money and payments.

### Purpose and scope of the Note
- Objective: explore the design and governance of platforms to enhance cross-border payments aligned with public policy goals.
- Mandate context: IMF governed by the central banks and finance ministries of 190 member countries.
- Relationship to other work: draws from experiments including project Ubin 3, mCBDC Bridge, Dunbar, and prior IMF working papers and blogs.
- Blueprint aim: propose a novel class of cross-border payment and contracting (XC) platforms; flexible design applicable from low-value retail payments (remittances) to broader payment flows; gains increase with participating countries and transaction volume.
- Implementation needs highlighted: evaluate technology and features, consider legal requirements and reforms, and discuss governance arrangements.

### XC platforms — concept, advantages, and limits

### Core concept and high-level advantages
- Core concept: a trusted single ledger (a document representing property rights) where standardized digital representations of central bank reserves in any currency can be exchanged and programmed to replicate basic financial contracts in a privacy-preserving fashion among selected public and private participants subject to strong governance, standards, and rules.
- Key advantages:
  - Scalability and potentially wide participation.
  - Safety by settling with central bank reserves.
  - Interoperability among national currencies and legacy systems.
  - Greater competition and liquidity in certain payment corridors.
  - Efficiency and lower risks in devising and trading financial contracts.
  - Innovation via private-sector customization through programming.
  - Modularity and compliance in information management.
  - Resilience and stability.
  - Transparent, rule-based governance supporting international monetary system stability.

### Macroeconomic and market benefits
- Potential beneficiaries and effects:
  - Small and medium businesses: lower transaction costs.
  - Poorer households: lower-cost remittances.
  - Certain exchange rate corridors: increased liquidity and market integration.
  - Policymakers: easier monitoring of capital flows, aiding capital flow management measures and foreign exchange interventions.
  - Broader integration: facilitates integration of financial and commercial flows; counters fragmentation pressures.

### Limits of alternative approaches
- Crypto projects (e.g., Bitcoin) drawbacks:
  - Environmental/onerous settlement processes.
  - Volatility undermines trust in money.
  - Lack of AML/CFT compliance.
- Supranational common-asset platforms currently implausible due to the need for elastic creation of safe settlement asset and associated institutions, mandates, oversight, and accountability.
- Escrow model more plausible: common ledger that leverages existing monies (commercial bank money or central bank reserves) instead of creating a new supranational currency.

### Interoperability and the anatomy of payments

### Ledger-based view and trust conditions
- Cash is central bank liability and bearer instrument; other money forms recorded on ledgers.
- Ledgers represent a consensus on ownership; payments are ledger updates.
- Three essential trust conditions for payments:
  - Trust in the settlement process (technology and governance for updating ledgers).
  - Trust in the sender’s money (stability of nominal value).
  - Issuer’s trust in recipient’s compliance with AML/CFT requirements.

### Two basic interoperability models
- Intermediated model: recipient’s issuer holds or accesses sender’s ledger (bilateral trust relationships).
- Platform model: a common ledger or platform interoperable with participants’ ledgers, with two variants (platform holds escrowed money as claims; platform issues its own money).
- Domestic solutions historically evolved to central bank platforms holding central bank reserves as common asset (solved interoperability domestically).
- Cross-border reality: remains largely intermediated via correspondent banking and Nostro accounts; concentration and high fixed costs make services expensive.

### XC platform architecture — three layers

### 1. Settlement layer — transferring tokenized central bank reserves
- XC platform settles token representations of central bank reserves held in escrow in central banks; platform does not issue its own safe settlement asset.
- Tokenization defined: writing property rights to a digital ledger widely accessible, easily verifiable, immutable, and optimized for cheap, immediate, safe, and final transactions among participants.
- Operational flow (simplest case): participating banks deposit reserves in escrow and receive a digital certificate of escrow (tokenized reserve) that can be transferred on the ledger; recipient’s bank may sell tokenized reserves to other participants for domestic reserves.
- Advantages:
  - Settlement that is safe, final, and efficient via a permissioned system.
  - Single, unique information set shared by participants; excludes double spending.
  - Standardized tokenized reserves improve interoperability and market liquidity.
  - Compatibility with legacy central bank systems; central banks not required to issue CBDC.
  - Tokenization yields a platform-specific CBDC available only to participants (platform-specific representation).
- Access and liquidity:
  - Foreign entities can trade tokenized domestic central bank reserves on-platform but do not directly redeem tokens at central banks; central banks retain reserve access policies.
  - Banks with reserve access would provide liquidity to the platform, borrowing reserves from their central banks as needed.
- Operational stewardship:
  - Strong argument for public-sector operation or close involvement due to public-good characteristics and trust considerations.
  - Alternative operators (bank consortia, public blockchains) exist but have drawbacks (exclusivity, coordination costs, rent extraction, security, scalability, privacy, energy use).

### 2. Programming layer — complementary services and automation
- Payments include complementary services: PvP (payment-versus-payment), conditional payments, FX auctions, risk management, CFMs enforcement.
- Platform provides object libraries (off-the-shelf templates) that programs can call and bundle to offer functionality while constraining programmability to vetted building blocks.
- Advantages of programmability:
  - Reduces reliance on third parties and information leakage; easier to monitor computerized behavior.
  - Lowers counterparty risk and settlement failures by escrow and automated execution.
  - Encourages controlled innovation and customization through vetted object libraries; platform operator must vet libraries and evolve them over time.
  - Ensures internal consistency across programs running on the same ledger (e.g., pledging future payments as collateral).
  - Facilitates public policy objectives (e.g., FX auctions to improve liquidity; automatic deployment of CFMs).
- Risks and constraints:
  - Not all transactions should be automated—contracts that are incomplete may still need human intervention.
  - Complexity of contracts written on other contracts necessitates careful study of cascading risks and cyber-security implications.
  - Platform operator’s investment in vetting and maintaining object libraries is non-trivial.

### 3. Information management layer — privacy and compliance
- Payments transfer value and information: amounts, sender/recipient identities (for AML/CFT or CFMs), and service-related data.
- XC platforms enable unbundling of settlement and non-settlement services, allowing countries to retain jurisdictional control over compliance checks.
- Platform roles and participant responsibilities:
  - Central banks influence participation eligibility; participant firms remain responsible for KYC/AML monitoring.
  - Platform could impose minimal compliance standards as a “top-up” to national regulation.
- Privacy-preserving design benefits:
  - Agents can bid truthfully in FX auctions without revealing identities or reservation prices.
  - Platforms can publish anonymized, binding bids and order-book information to reduce market-maker rents while preserving identities.
- Law enforcement and AML/CFT access:
  - While transactions can be anonymized for market purposes, platform operator could make identity/transaction information available to designated authorities (financial intelligence unit, law enforcement, AML/CFT supervisors) in cases of suspicious activity.
- Monitoring and verification costs remain material; platform contributions to AML/CFT monitoring require further study.

### Governance: legal, operational, and transparency considerations
- Governance must be solid, transparent, effective, and accepted as fair and representative.
- Key governance issues:
  - Legal framework: incorporation law, conflicts of law, licensing, legal arrangements with participating central banks, legal status of tokenization.
  - Operating and oversight bodies: roles and responsibilities of participating countries, firms, institutions; decision-making and dispute-resolution mechanisms; transparency of procedures and codes.
  - Access criteria and participation requirements: onboarding/offboarding rules.
  - Financing: investment and running-cost coverage.
  - Operating rules: platform AML/CFT minimums, FX auction designs, object library stability assessments, cyber-security requirements.
- Suggested approach: agree on high-level principles (e.g., adoption of relevant international standards; countries’ ability to manage transactions of their citizens and domestic firms subject to predefined support thresholds).
- Examples for governance models: Continuous Linked Settlement (CLS); private payment schemes (card operators); international organizations with governance experience (IMF) as potential partners to help establish governance and consensus mechanisms.

### Extension to domestic CBDC platforms and tokenized domestic markets
- Domestic application: XC platform concepts applied domestically as an evolution of wholesale CBDC (a platform offering interoperability among tokenized forms of money and assets, safe settlement asset, and programmable information management).
- Tokenization trend: banks and brokerages issuing tokenized assets (stocks, bonds, commodities); banks considering deposit tokenization; stablecoins still being experimented with under evolving regulation.
- Potential domestic benefits:
  - Atomic settlement, wider participation, lower trading costs, automation, fractionalization of assets, improved monitoring.
- Domestic limitations and risks:
  - Interoperability challenges from incompatible ledgers (“walled gardens”).
  - Safety concerns using tokenized commercial bank money or private stablecoins.
  - Efficiency losses where contracts on different ledgers are incompatible.
- Platform approach for domestic markets:
  - Escrow and common-asset architectures can enable delivery-versus-payments and synchronized asset-exchange across ledgers.
  - Two asset-transfer options: temporary escrow with burn/mint on respective ledgers; durable escrow with on-platform tokenized versions traded among participants.
  - Programming layer enables swapping, lending, and other operations via vetted object libraries; standards on the platform could catalyze broader private-ledger standardization via APIs.
  - Information management: ensure participant compliance standards and privacy-preserving interaction.
- Governance domestically: easier to negotiate than international platforms, but requires inter-agency and private-sector engagement (central bank, central securities depository, government) and possibly multiple collaborating institutions.
- Ongoing experiments: central banks and authorities in Brazil, France, Italy, Singapore, UK, and others exploring related concepts; referenced initiatives include project Orchid (Monetary Authority of Singapore) and Banco Central do Brasil publications.

### Conclusion and next steps

### Renewing public-sector payments infrastructure
- New technologies, new entrants, and new needs have opened a window of opportunity to think ambitiously and improve domestic and cross-border payment systems, while continuing to pursue public policy objectives, such as financial and monetary stability.

### Blueprint elements for a new class of platforms
- Core infrastructure elements identified:
  - a single ledger for settlement
  - a safe settlement asset
  - programming standards
  - information management capabilities leveraging encryption
- The proposal expands the vision for public goods in payments from mere settlement to include programming and information management.

### Further work required
- More work is needed to test:
  - architecture
  - technology
  - features
- Additional development is required for:
  - legal underpinnings
  - governance arrangements

### Role of the IMF
- The IMF seems like a strong partner in this endeavor.
- Functions the IMF can perform:
  - leverage its convening power to build momentum around these suggestions and evolve them in a direction consistent with the interests of member countries
  - draw on its wide membership and experience to help establish governance arrangements
  - build on its policy expertise to suggest platform designs that would support the stability of the international monetary system
  - help bolster trust in the governance, oversight, and functionality of cross-border platforms, to the extent it is involved

*Source: ftnea2023005 - Introduction (FINTECH NOTES — The Rise of Payment and Contracting Platforms)*

### Introduction ...........................................................................................................

### Introduction

### Table of contents and structure
- Introduction ................................................................................................................................................. 3
- I. Interoperability and the Anatomy of Payments, from Domestic to Cross-Border ......................... 6
- II. XC Platforms .......................................................................................................................................... 10
- III. Domestic CBDC Platforms .................................................................................................................. 17
- Conclusion ................................................................................................................................................. 19
- References ................................................................................................................................................. 20

### Figures listed
- Figure 1: Cross-Border Payments Via Correspondent Banking
- Figure 2: A Simple Cross-Border Payment Via the XC Platform

### Glossary entries included in this content unit
- AML/CFT ... anti–money laundering/combatting the financing of terrorism
- CBDC ........ central bank digital currency
- CFMs ......... capital flow management measures
- PvP ............ payment versus payments
- XC ............. exchange and contracting

*International Monetary Fund — FINTECH NOTES: The Rise of Payment and Contracting Platforms (ftnea2023005 - Introduction)*

### Introduction

### Introduction

### Money, payments, and the evolution of technology
- Money underpins the financial system: contracts denominated in money; exchange conducted in monetary units; central banks, regulators, and finance ministries manage and backstop money via monetary policy, payment oversight, infrastructure, and banking supervision.
- Historical evolution: metal coins → fiat currencies; paper letters of credit → account-based systems; cash use decreasing in many countries while digital innovation rises.
- Current technological enablers being explored globally: cryptography, tokenization, programmability.
- Market participants experimenting: banks exploring deposit tokenization; central banks experimenting with digital currencies; fintechs innovating across money and payments.

### Purpose and scope of this Note
- Objective: explore the design and governance of platforms to enhance cross-border payments aligned with public policy goals.
- Mandate context: IMF governed by the central banks and finance ministries of 190 member countries.
- Relationship to other work: draws from experiments including project Ubin 3, mCBDC Bridge, Dunbar, and prior IMF working papers and blogs.
- Blueprint aim: propose a novel class of cross-border payment and contracting (XC) platforms; flexible design applicable from low-value retail payments (remittances) to broader payment flows; gains increase with participating countries and transaction volume.
- Implementation needs highlighted: evaluate technology and features, consider legal requirements and reforms, and discuss governance arrangements.

### XC platforms — concept and high-level advantages
- Core concept: a trusted single ledger (a document representing property rights) where standardized digital representations of central bank reserves in any currency can be exchanged and programmed to replicate basic financial contracts in a privacy-preserving fashion among selected public and private participants subject to strong governance, standards, and rules.
- Key advantages listed:
  - Scalability and potentially wide participation.
  - Safety by settling with central bank reserves.
  - Interoperability among national currencies and legacy systems.
  - Greater competition and liquidity in certain payment corridors.
  - Efficiency and lower risks in devising and trading financial contracts.
  - Innovation via private-sector customization through programming.
  - Modularity and compliance in information management.
  - Resilience and stability.
  - Transparent, rule-based governance supporting international monetary system stability.

### Macroeconomic and market benefits
- Potential beneficiaries and effects:
  - Small and medium businesses: lower transaction costs.
  - Poorer households: lower-cost remittances.
  - Certain exchange rate corridors: increased liquidity and market integration.
  - Policymakers: easier monitoring of capital flows, aiding capital flow management measures and foreign exchange interventions.
  - Broader integration: facilitates integration of financial and commercial flows; counters fragmentation pressures.

### Design principles and participation constraints
- Platforms leverage novel technologies (single ledger, programmability, encryption) but do not require countries to adopt them; compatibility with existing payment systems and central bank–bank arrangements is emphasized.
- Work with banking system while seeking to inject competition into correspondent banking.
- Multicurrency system preserved: no imposition of a single or new settlement asset; currency choice remains with participants within central bank reserves.
- XC platforms do not require adoption of a CBDC, but anchor their architecture and functionality in insights and technologies developed around some CBDCs.
- Applicability to domestic systems: XC design general enough to apply to domestic financial systems (evolution of wholesale CBDC), allowing settlement of tokenized assets with safe central bank money and interoperability among tokenized assets and money.

### Interoperability and the anatomy of payments
- Money as debt and ledger-based recordkeeping:
  - Cash is central bank liability and bearer instrument; other money forms recorded on ledgers.
  - Ledgers represent a consensus on ownership; payments are ledger updates.
- Three essential trust conditions for payments:
  - Trust in the settlement process (technology and governance for updating ledgers).
  - Trust in the sender’s money (stability of nominal value).
  - Issuer’s trust in recipient’s compliance with AML/CFT requirements.
- Two basic models of interoperability:
  - Intermediated model: recipient’s issuer holds or accesses sender’s ledger (bilateral trust relationships).
  - Platform model: a common ledger or platform interoperable with participants’ ledgers, with two variants (platform holds escrowed money as claims; platform issues its own money).
- Domestic solutions historically evolved to central bank platforms holding central bank reserves as common asset (solved interoperability domestically).
- Cross-border reality: remains largely intermediated via correspondent banking and Nostro accounts; concentration and high fixed costs make services expensive.

### Limitations of alternative approaches
- Crypto projects (e.g., Bitcoin) offer a common asset but have drawbacks:
  - Environmental/onerous settlement processes.
  - Volatility undermines trust in money.
  - Lack of AML/CFT compliance.
- Supranational common-asset platforms currently implausible due to the need for elastic creation of safe settlement asset and associated institutions, mandates, oversight, and accountability.
- Escrow model more plausible: common ledger that leverages existing monies (commercial bank money or central bank reserves) instead of creating a new supranational currency.

### XC platform architecture — three layers
1. Settlement layer — transferring tokenized central bank reserves
   - XC platform settles token representations of central bank reserves held in escrow in central banks; platform does not issue its own safe settlement asset.
   - Tokenization defined here: writing property rights to a digital ledger widely accessible, easily verifiable, immutable, and optimized for cheap, immediate, safe, and final transactions among participants.
   - Operational flow (simplest case): participating banks deposit reserves in escrow and receive a digital certificate of escrow (tokenized reserve) that can be transferred on the ledger; recipient’s bank may sell tokenized reserves to other participants for domestic reserves.
   - Advantages:
     - Settlement that is safe, final, and efficient via a permissioned system.
     - Single, unique information set shared by participants; excludes double spending.
     - Standardized tokenized reserves improve interoperability and market liquidity.
     - Compatibility with legacy central bank systems; central banks not required to issue CBDC.
     - Tokenization yields a platform-specific CBDC available only to participants (platform-specific representation).
   - Access and liquidity:
     - Foreign entities can trade tokenized domestic central bank reserves on-platform but do not directly redeem tokens at central banks; central banks retain reserve access policies.
     - Banks with reserve access would provide liquidity to the platform, borrowing reserves from their central banks as needed.
   - Operational stewardship:
     - Strong argument for public-sector operation or close involvement due to public-good characteristics and trust considerations.
     - Alternative operators (bank consortia, public blockchains) exist but have drawbacks (exclusivity, coordination costs, rent extraction, security, scalability, privacy, energy use).

2. Programming layer — complementary services and automation
   - Payments include complementary services: PvP (payment-versus-payment), conditional payments, FX auctions, risk management, CFMs enforcement.
   - Platform provides object libraries (off-the-shelf templates) that programs can call and bundle to offer functionality while constraining programmability to vetted building blocks.
   - Advantages of programmability:
     - Reduces reliance on third parties and information leakage; easier to monitor computerized behavior.
     - Lowers counterparty risk and settlement failures by escrow and automated execution.
     - Encourages controlled innovation and customization through vetted object libraries; platform operator must vet libraries and evolve them over time.
     - Ensures internal consistency across programs running on the same ledger (e.g., pledging future payments as collateral).
     - Facilitates public policy objectives (e.g., FX auctions to improve liquidity; automatic deployment of CFMs).
   - Risks and constraints:
     - Not all transactions should be automated—contracts that are incomplete may still need human intervention.
     - Complexity of contracts written on other contracts necessitates careful study of cascading risks and cyber-security implications.
     - Platform operator’s investment in vetting and maintaining object libraries is non-trivial.

3. Information management layer — privacy and compliance
   - Payments transfer value and information: amounts, sender/recipient identities (for AML/CFT or CFMs), and service-related data.
   - XC platforms enable unbundling of settlement and non-settlement services, allowing countries to retain jurisdictional control over compliance checks.
   - Platform roles and participant responsibilities:
     - Central banks influence participation eligibility; participant firms remain responsible for KYC/AML monitoring.
     - Platform could impose minimal compliance standards as a “top-up” to national regulation.
   - Privacy-preserving design benefits:
     - Agents can bid truthfully in FX auctions without revealing identities or reservation prices.
     - Platforms can publish anonymized, binding bids and order-book information to reduce market-maker rents while preserving identities.
   - Law enforcement and AML/CFT access:
     - While transactions can be anonymized for market purposes, platform operator could make identity/transaction information available to designated authorities (financial intelligence unit, law enforcement, AML/CFT supervisors) in cases of suspicious activity.
   - Monitoring and verification costs remain material; platform contributions to AML/CFT monitoring require further study.

### Governance: legal, operational, and transparency considerations
- Governance must be solid, transparent, effective, and accepted as fair and representative.
- Key governance issues enumerated:
  - Legal framework: incorporation law, conflicts of law, licensing, legal arrangements with participating central banks, legal status of tokenization.
  - Operating and oversight bodies: roles and responsibilities of participating countries, firms, institutions; decision-making and dispute-resolution mechanisms; transparency of procedures and codes.
  - Access criteria and participation requirements: onboarding/offboarding rules.
  - Financing: investment and running-cost coverage.
  - Operating rules: platform AML/CFT minimums, FX auction designs, object library stability assessments, cyber-security requirements.
- Suggested approach: agree on high-level principles (e.g., adoption of relevant international standards; countries’ ability to manage transactions of their citizens and domestic firms subject to predefined support thresholds).
- Examples for governance models: Continuous Linked Settlement (CLS); private payment schemes (card operators); international organizations with governance experience (IMF) as potential partners to help establish governance and consensus mechanisms.

### Extension to domestic CBDC platforms and tokenized domestic markets
- Domestic application: XC platform concepts applied domestically as an evolution of wholesale CBDC (a platform offering interoperability among tokenized forms of money and assets, safe settlement asset, and programmable information management).
- Tokenization trend: banks and brokerages issuing tokenized assets (stocks, bonds, commodities); banks considering deposit tokenization; stablecoins still being experimented with under evolving regulation.
- Potential domestic benefits: atomic settlement, wider participation, lower trading costs, automation, fractionalization of assets, improved monitoring.
- Domestic limitations and risks:
  - Interoperability challenges from incompatible ledgers (“walled gardens”).
  - Safety concerns using tokenized commercial bank money or private stablecoins.
  - Efficiency losses where contracts on different ledgers are incompatible.
- Platform approach for domestic markets:
  - Escrow and common-asset architectures can enable delivery-versus-payments and synchronized asset-exchange across ledgers.
  - Two asset-transfer options: temporary escrow with burn/mint on respective ledgers; durable escrow with on-platform tokenized versions traded among participants.
  - Programming layer enables swapping, lending, and other operations via vetted object libraries; standards on the platform could catalyze broader private-ledger standardization via APIs.
  - Information management: ensure participant compliance standards and privacy-preserving interaction.
- Governance domestically: easier to negotiate than international platforms, but requires inter-agency and private-sector engagement (central bank, central securities depository, government) and possibly multiple collaborating institutions.
- Ongoing experiments: central banks and authorities in Brazil, France, Italy, Singapore, UK, and others exploring related concepts; referenced initiatives include project Orchid (Monetary Authority of Singapore) and Banco Central do Brasil publications.

*Source: ftnea2023005 - Introduction (FTNEA2023005)*

### Conclusion

### Conclusion

### Renewing public-sector payments infrastructure
- As innovation tugs ahead, and payments evolve, the public sector too should consider renewing its infrastructure.
- New technologies, new entrants, and new needs have opened a window of opportunity to think ambitiously and improve domestic and cross-border payment systems, while continuing to pursue public policy objectives, such as financial and monetary stability.

### Blueprint for a new class of platforms
- The Note sketches a blueprint for a new class of platforms to bring interoperability, efficiency, and safety to cross-border payments, as well as to domestic financial markets.
- Core infrastructure elements identified:
  - a single ledger for settlement
  - a safe settlement asset
  - programming standards
  - information management capabilities leveraging encryption
- The proposal expands the vision for public goods in payments from mere settlement to include programming and information management.

### Further work required
- More work is needed to test:
  - architecture
  - technology
  - features
- Additional development is required for:
  - legal underpinnings
  - governance arrangements

### Role of the IMF
- The IMF seems like a strong partner in this endeavor.
- Functions the IMF can perform:
  - leverage its convening power to build momentum around these suggestions and evolve them in a direction consistent with the interests of member countries
  - draw on its wide membership and experience to help establish governance arrangements
  - build on its policy expertise to suggest platform designs that would support the stability of the international monetary system
  - help bolster trust in the governance, oversight, and functionality of cross-border platforms, to the extent it is involved

*FINTECH NOTES The Rise of Payment and Contracting Platforms — INTERNATIONAL MONETARY FUND 20*

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_Source: https://www.imf.org/-/media/files/publications/ftn063/2023/english/ftnea2023005.pdf_