## g20-report-2024-financial-platforms-macrofinancial-implications-imf-oct2024-final-board-publish

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---

### Definitions and platform models
- Financial platforms: infrastructure supporting the interoperability of assets, between money and securities, and across borders.
- Ledgers: assets are claims recorded on ledgers and transfers update ledgers.
- Three basic platform models:
  - Single ledger platform model: owners have access to the ledger on which the assets being transferred are recorded.
  - Compatible platform model: assets recorded on different ledgers, but owners can access both; an “orchestrating entity” coordinates clearing and initiates concurrent settlement.
  - Common ledger platform model: assets recorded on different ledgers and owners only have access to their respective ledgers; a third ledger (connector/bridge) creates corresponding assets or liabilities to enable settlement.
- Examples cited:
  - Single ledger: imperfect example — some CSDs.
  - Compatible ledger: ECB’s T2S; BIS Innovation Hub’s “project Nexus”.
  - Common ledger: central banks’ RTGS; CLS (tracks, nets, then settles exposures on its common ledger among more than 70 member banks covering well over half the world’s foreign exchange transactions).
- New technologies: smart contracts, common data structure and execution environment, DLT, tokenization — enable programmability and broader accessibility but do not change the three basic models.

### Smart contracts, operators, functionality
- Smart contracts can include immutable logic that can be automatically enforced every time an asset is transferred; logic can enforce regulatory rules (e.g., only allowing qualified investors to transact riskier assets).
- Ledger operators’ roles may shift: functions now performed by operators (participant selection, application hosting, escrow, ledger updates) can be transferred to asset-attached logic or protocols; responsibility could shift to the entity deploying the asset or protocol depending on legal arrangements.
- Technical properties:
  - Composability: protocols could be combined and re-used in an internally consistent fashion.
  - Atomicity: multiple transaction steps can be executed in a single inseparable transaction, removing counterparty and settlement risk.
- Platform layers: data and execution environment, assets, applications (protocols). Neutral execution environments and verifiable smart contract execution could attract more users.

### Current experiments and platform implementations
- Single ledger experiments:
  - BIS’ project Agora (transact commercial and central bank money on ledger).
  - MAS’s Global Layer One (GL1) (securities collaboration with global banks).
  - Large banks leveraging Ethereum to develop private enclaves or closed permissioned sub-ledgers.
- Compatible ledger notes:
  - Shared execution environments allow same smart contracts across ledgers but cannot be perfectly synchronous (atomic) or fully composable because of lags or compromise risks.
- Common ledger notes:
  - Escrowing and creation of corresponding settlement assets can be automated and transparent.

### Potential macro-financial implications — overview
- Four impact areas analyzed:
  - Structure of the IMS.
  - Financial inclusion.
  - Market efficiency (after considering impacts on intermediate variables such as transaction costs).
  - Financial stability.
- Today's platforms (RTGS, CSDs, CLS) already lower settlement and counterparty risks and spur market activity.

### Implications for the Structure of the IMS
- The IMS guides who should have access to international payments and capital markets, what assets should be available, and how transactions should occur.
- A stable, efficient, integrity-compliant IMS implies broad inclusion, few restrictions on international payments, exchange rate stability, transparent data for monitoring, compliance with standards including AML/CFT, fair dispute treatment, and availability of backstops such as IMF lending.
- Widely used cross-border platforms could shape coverage, interoperability (or fragmentation), access, permitted assets and applications, applicable laws, and change-processes for rules.

### Implications for Financial Inclusion
- The compatible ledger model (interlinking countries’ fast-payment systems) appears the most feasible near-term solution to improve cross-border retail payments.
- Characteristics that improve inclusion: transparency of costs, message harmonization, pre-transaction compliance checks, and front-end convenience.
- Empirical examples and estimates:
  - Bilateral link between Singapore and Thailand lowered costs of sending SGD 200 from 13 percent to 3 percent, and time from 3 days to seconds (ASEAN+3 Macroeconomic Research Office, 2023).
  - Costs above 10 percent are common in sub-Saharan countries (FSB, 2023).
  - Cerutti, Firat, and Perez-Saiz (forthcoming) shows that a 60 percent reduction in transaction costs can increase remittance flows in countries with high initial costs (up to 20 percent) by nearly 23 percent or about 5 percent of GDP (a    likely lower bound).
- More efficient cross-border payments would alleviate poverty and spur trade of SMEs.

### Implications for Market Efficiency
- Single ledger platforms offering composability and atomicity among a large set of assets could lower transaction costs and settlement risk relative to today’s security settlement systems.
- Market liquidity and competition:
  - Single ledger platforms unifying more assets could improve liquidity.
  - Compatible ledgers could use smart contracts to compare prices and move assets where liquidity is greatest.
  - Leung and others (2023) find 25.8 percent lower fees on new technology platforms.
- Correspondent banking:
  - Single ledger platforms (or a dedicated common ledger) could create a market for correspondent banking services, standardize claims, and make credit exposure transfer easier.
- Quantitative effects on cross-border payments:
  - Cerutti and others (2024) assumes unchanged elasticities and finds that if transaction costs decrease by 60 percent, volumes rise only by about $5.8 trillion—a 3 percent increase, or about 6.1 percent of world GDP.
- Foreign exchange markets:
  - More than half of total cost for cross-border payments stems from foreign exchange trading (FSB report, 2023).
  - Platforms could enable payment-versus-payment trading across more currencies, lowering transaction costs.
  - Project Mariana uncovered feasibility of new FX links; liquidity remains to be explored.

### Implications for Capital Flows and Currency Substitution
- Lower transaction and access costs may increase countries’ gross foreign asset positions.
- Fu (2023) suggests countries with more foreign asset exposure may face larger and faster capital outflows as foreign investors respond more strongly to domestic shocks.
- Valuation effects would be larger in countries’ balance of payments (Obstfeld, 2010).
- Reuter and others (forthcoming) suggest effects depend on whether shocks are real or financial.
- Lower barriers to holding foreign assets could increase currency substitution, reducing monetary policy effectiveness, lowering seigniorage revenue, and increasing banking instability risks.
- Smart contracts could code and automate capital flow management measures (except if there are leakages).

### Implications for Financial Stability — existing, remaining, and new risks (paragraphs 49–52)
- 49. Platforms may lower some existing risks: counterparty and settlement risks may decrease for a larger set of assets and transactions (notably on the very large foreign exchange markets) to the extent that single ledger models are widely adopted.
- 50. Many current risks would remain:
  - platforms are not void of operational risks, including cyber risks;
  - resilience could improve in compatible ledger models where assets can be moved among ledgers;
  - a single ledger model could undermine resilience if it grew large while relying on a few dominant operators;
  - existing national legal risks could be exacerbated in cross-border platforms;
  - liquidity and credit risks related to on-ledger assets, and risks to financial integrity would remain.
- 51. New risks could arise, especially in countries with weaker capacity:
  - contract contingencies (composability) could introduce contagion effects if one contract fails;
  - layers of contingent/bundled contracts could be difficult for regulators to track;
  - faulty code snippets could affect multiple contracts before discovery;
  - greater competition among intermediaries and higher FX exposures could undermine stability in transition;
  - new legal risks due to novelty of platforms and on-ledger assets.
- 52. Platforms (especially single ledger models) could increase interconnectedness between assets, countries, and owners, with ambiguous effects:
  - greater interconnectedness could increase shock absorption;
  - incomplete information about exposures might induce greater run risks;
  - effects depend on aggregate transparency regarding prices, exposures, and balance sheets.

### Policy considerations and recommended public sector actions (paragraphs 53–77)
- Five public sector actions recommended:
  1. Further evaluate macro-financial implications of basic platform models, and develop views on a preferred model or constellation of models depending on assets, markets, and users.
  2. Consider who should set the rules of such platforms, and which rules may best preserve the stability, efficiency, and integrity of the IMS.
  3. Decide whether to build platforms, guide technology, or fill gaps left by initial developments; and decide how to oversee platforms.
  4. Decide on which platform model to issue central bank money as a safe settlement asset and potentially to improve foreign exchange liquidity.
  5. Swiftly establish clear and comprehensive legal foundations for platforms and the assets liable to be recorded and transferred on them.
- Market imperfections that may warrant public intervention:
  - coordination failures: hesitation to be first mover; coordination mechanisms lacking;
  - network effects: convergence on first/dominant entrant can lock users into standards;
  - externalities: private interests may leave out unprofitable countries, firms, assets, or users and not internalize systemic risks or social costs.
- Options for setting platform rules (paragraphs 59–63):
  - Option 1 — public entities set platform rules: advantage—legitimacy, oversight; disadvantage—feasibility and need for treaties or new laws.
  - Option 2 — private entities build and set rules: advantage—efficiency and speed; disadvantage—fairness, exclusion, rent-extraction risks.
  - Option 3 — open base layer with few restrictions: advantage—inclusion and flexible links; disadvantage—commons/free-rider problems, potential dominance by entities, privacy-vs-throughput tradeoffs.
- Actions beyond rule-setting (paragraphs 64–68):
  - Public sector may build platforms to overcome coordination failures, facilitate convergence on common technologies, fill bridging gaps, and regulate/oversee platforms.
  - Key regulatory question: whether platforms (or parts) undertake functions of systemic FMIs and should be regulated under CPMI-IOSCO Principles for Financial Market Infrastructure (PFMI, 2012).
- Offering central bank money on platforms (paragraphs 69–72):
  - 69. Central bank money on platforms could reduce counterparty risk and spur development; central banks could favor one model or many; providing safe settlement aligns with PFMI.
  - 70. Single ledger wCBDC: central banks could operate a single ledger platform (wholesale CBDC).
  - 71. Compatible ledger path has been most explored (project Ubin, BISIH’s project Icebreaker; Bundesbank’s “trigger solution”; Banca d’Italia’s “TIPS Hash-Links”).
  - 72. Common ledgers: SNB made its wCBDC available on third party ledgers while retaining control; Bank of England model uses a common ledger operator holding an omnibus account at the central bank; legal requirement: assets held by common ledger operators should be bankruptcy remote.
- Building sound legal foundations (paragraphs 73–77):
  - 73–74. Need clear, comprehensive, enforceable legal foundations; issuers, operators, and owners must be allowed under governing laws; use appropriate legal instruments (bilateral/multilateral agreements or international treaties).
  - 75. Legal robustness across: legal nature/ownership/registration; dispute resolution; clarity of powers of operating/governing entities; decision-making and governance structure with transparent voting rules.
  - 76. Legal certainty for assets recorded on platforms (smart contracts, on-chain applications, commercial bank deposits, CBDC, regulated crypto assets) is prerequisite for regulatory treatment and secure operation.
  - 77. Consistency across countries needed for enforceability; inconsistencies could arise across financial regulation, AML/CFT, tax, data privacy, capital flow management, dispute resolution, settlement finality, and access to payment systems; international standards can provide a harmonized basis.

### AML/CFT risks and integrity (CONCLUSION)
- “Moreoever, safeguarding the integrity of transactions on platforms is essential.”
- Transactions are vulnerable to misuse for illicit finance (ML/TF); mitigation requires effective AML/CFT measures.
- AML/CFT measures depend on ML/TF risk level, which depends on platform model:
  - Compatible ledger platforms providing messaging/supporting infrastructure to participating financial institutions might face low indirect ML/TF risks — “limited AML/CFT measures may be required.”
  - Common and single ledger platforms that allow settlement and transfer of a wider array of assets including peer-to-peer “face greater ML/TF risks. In these instances, a range of AML/CFT measures would need to be implemented effectively to ensure that the risks are mitigated.”
- Early design actions for AML/CFT:
  - (i) determine the purpose and policy mandate of the platform;
  - (ii) assess the level of ML/TF risks of the model under consideration;
  - (iii) identify necessary mitigating measures and allocate implementation responsibilities;
  - (iv) clearly define criteria for access to the platform, asset, and protocol for jurisdictions and potential owners, reflecting ML/TF risk.

### IMF role and concluding remarks
- “This paper is a start. It offers simple platform models and a review of macro-financial implications. Significant space remains to better understand platforms and converge on a coherent vision for future development. Given the complexity and potential implications, that journey should begin swiftly.”
- The IMF stands ready to:
  - collaborate with organizations and members to explore policy implications;
  - propose guidance on macro-financial cross-border payments policy for platform rules to support stability and efficiency of the IMS;
  - offer convening power; build capacity; and eventually assess policies or standards once they emerge.

*International Monetary Fund — extracted content from "g20-report-2024-financial-platforms-macrofinancial-implications-imf-oct2024-final-board-publish"*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Definitions and platform models
- Financial platforms: infrastructure supporting the interoperability of assets, between money and securities, and across borders.
- Ledgers: central to platforms; assets are claims recorded on ledgers and transfers update ledgers.
- Three basic platform models (rooted in the relation between owners, assets, and ledgers):
  - Single ledger platform model: owners have access to the ledger on which the assets being transferred are recorded.
  - Compatible platform model: assets are recorded on different ledgers, but owners can access both; an “orchestrating entity” coordinates clearing and initiates concurrent settlement.
  - Common ledger platform model: assets are recorded on different ledgers and owners only have access to their respective ledgers; a third ledger (connector/bridge) creates corresponding assets or liabilities to enable settlement.
- Examples cited:
  - Single ledger: imperfect example — some CSDs.
  - Compatible ledger: ECB’s T2S; BIS Innovation Hub’s “project Nexus” (orchestrating entity clearing among correspondent banks linked to domestic fast payment system ledgers).
  - Common ledger: central banks’ RTGS; CLS (tracks, nets, then settles exposures on its common ledger among more than 70 member banks covering well over half the world’s foreign exchange transactions).
- New technologies affecting platforms: smart contracts, common data structure and execution environment, DLT, tokenization. These enable programmability and broader accessibility but do not change the three basic models.

### Potential macro-financial implications (findings)
- Adoption uncertainty: adoption remains uncertain, but could be significant and global.
- Benefits if widely adopted:
  - Lower transaction costs.
  - Boost market liquidity and competition.
  - Favor market access, integration, and efficiency including for payments and foreign exchange.
  - Potentially improve cross-border payments, integrate markets, and enhance competition.
- Ambiguous or mixed outcomes:
  - Effects on capital flow volatility and currency substitution are more ambiguous.
- Risks and adverse consequences:
  - Platforms could challenge financial stability and fuel contagion.
  - Platforms could undermine the international monetary system (IMS) by fostering and cementing fragmentation, limiting access to assets and markets, and undermining integrity.
  - Market imperfections may prevent platforms from delivering potential benefits without public sector action.

### Policy considerations and recommended public sector actions (enumerated)
- The public sector (central banks, ministries of finance, and others) may consider at least five actions:
  1. Further evaluate macro-financial implications of basic platform models, and develop views on a preferred model or constellation of models depending on assets, markets, and users.
  2. Consider who should set the rules of such platforms, and which rules may best preserve the stability, efficiency, and integrity of the international monetary system.
  3. Decide whether to build platforms, guide technology, or fill gaps left by initial developments; and decide how to oversee platforms.
  4. Decide on which platform model to issue central bank money as a safe settlement asset and potentially to improve foreign exchange liquidity.
  5. Swiftly establish clear and comprehensive legal foundations for platforms and the assets liable to be recorded and transferred on them.
- Additional policy themes discussed:
  - Market imperfections that could undermine platform benefits and amplify risks.
  - Options and trade-offs for setting platform rules (summary table in source).
  - Considerations for offering central bank money across platform models.
  - Need to build sound legal foundations for platform operations and asset definitions.

### Operational and technical notes
- Platforms facilitate coordinated transfer of two or more assets between two or more owners independently of initial relationships.
- Transactions recorded on a ledger involve three key players: operators (safekeeping and updating ledgers), issuers (create assets), and owners (send instructions, receive confirmations, validate balances).
- Smart contracts: code-based instructions stored on a ledger used to create assets or financial applications; smart-contract based assets are called tokens and smart contract–based financial applications are called protocols.
- Public permissionless blockchains introduced additional features (e.g., self-custody, new consensus mechanisms) but the paper focuses on technologies and platform models rather than any single popular term.

### IMF role and next steps
- The IMF stands ready to:
  - Collaborate with other organizations and member countries to further explore policy implications of platforms.
  - Propose guidance on macro-financial cross-border payments policy to support the stability and efficiency of the IMS.
  - Offer its convening power to spur dialogue.
  - Build capacity in the field.
  - Eventually assess policies or standards once these emerge.

*International Monetary Fund — EXECUTIVE SUMMARY of "g20-report-2024-financial-platforms-macrofinancial-implications-imf-oct2024-final-board-publish"*

### 27.      Importantly, smart contracts can include immutable logic that can be automatically

### g20-report-2024-financial-platforms-macrofinancial-implications-imf-oct2024-final-board-publish - 27.      Importantly, smart contracts can include immutable logic that can be automatically

### Smart contracts and ledger operator roles
- Smart contracts can include immutable logic that can be automatically enforced every time an asset is transferred.
- Logic can be used to strictly enforce certain rules, such as to comply with regulation like only allowing qualified investors to transact riskier assets.
- As a result, ledger operators need not be vertically integrated and can focus on data management and execution.
- Currently, operators of ledgers perform multiple functions: specialize in certain assets, select participants, build and run applications (such as to transfer or escrow assets), then separately update the ledger.
- With new technology, some functions undertaken today by the ledger operator can be transferred to the logic attached to assets or protocols.
- Depending on legal arrangements (still in flux), responsibility could shift to the entity deploying the asset or protocol, away from the ledger operator.

### Platform functionality, composability, and atomicity
- Layers of functionality range from the data and execution environment to the assets and applications (protocol) deployed on the ledger.
- Platform operators offering a common execution environment and data structure could host a variety of assets and protocols deployed by separate financial entities.
- Key technical properties:
  - Composability: protocols could be combined and re-used in an internally consistent fashion.
  - Atomicity: multiple steps to a transaction (e.g., receiving one payment before initiating another) can be executed in a single inseparable transaction, thereby removing counterparty and settlement risk.
- Atomicity is much more valuable among a greater set of assets where any number of steps can be bundled, beyond simple delivery-versus-payment arrangements.
- More users may join platforms if smart contract execution is easily verifiable and the execution environment is neutral.

### Current experiments and models
- Public and private sectors are actively experimenting with single ledger platforms:
  - BIS’ project Agora aims to transact commercial and central bank money on ledger.
  - Monetary Authority of Singapore’s (MAS) Global Layer One (GL1) project considers securities in collaboration with various global banks.
  - Several large banks (Goldman Sachs, HSBC, Société Générale, BNP Paribas, UBS) leverage public open ledgers such as Ethereum to develop private enclaves or build closed and permissioned sub-ledgers.
- Compatible ledger model: if two ledgers share the same execution environment they can run the same smart contracts so transactions can be triggered across ledgers, though they cannot be perfectly synchronous (atomic) or logically connected (composable) because of lags or compromise risks.
- Common ledgers: escrowing of assets and creation of corresponding settlement assets can be automated and made more transparent.

### Macro-financial implications — Overview
- This section considers implications in four areas:
  - Structure of the IMS.
  - Financial inclusion.
  - Market efficiency (after considering impacts on intermediate variables such as transaction costs).
  - Financial stability.
- Today’s platforms (e.g., RTGS systems, CSDs, CLS) already produce macro-financial effects by lowering settlement and counterparty risks and spurring market activity.

### A. Implications for the Structure of the IMS
- The IMS provides guidance on:
  - Who (or which countries) should have access to international payments and capital markets.
  - What assets (including foreign exchange) should be available for transaction.
  - How transactions should occur.
- A stable, efficient, and integrity-compliant IMS stands for broad inclusion, few restrictions on international payments, exchange rate stability, transparent and readily available data for monitoring, compliance with standards including AMF/CFT, systematic and fair dispute treatment, and availability of backstops such as IMF lending.
- Platforms, if used widely to transfer money and securities across borders, could impact the IMS by shaping coverage, interoperability (or fragmentation), and rules—effectively determining who can connect, which firms and households can participate, which assets can be transacted and how much, which applications can be deployed, which laws apply, and how rules change.

### B. Implications for Financial Inclusion
- The compatible ledger model of interlinking countries’ fast-payment systems appears the most feasible near-term solution to improve cross-border retail payments.
- Key characteristics: transparency of costs, message harmonization, compliance checks prior to transactions, and front-end convenience from fast-payment systems.
- Empirical examples and estimates:
  - Bilateral link between Singapore and Thailand lowered costs of sending SGD 200 from 13 percent to 3 percent, and time from 3 days to seconds (ASEAN+3 Macroeconomic Research Office, 2023).
  - Costs above 10 percent are common in sub-Saharan countries (FSB, 2023).
  - Cerutti, Firat, and Perez-Saiz (forthcoming) shows that a 60 percent reduction in transaction costs can increase remittance flows in countries with high initial costs (up to 20 percent) by nearly 23 percent or about 5 percent of GDP (a    likely lower bound).
- More efficient cross-border payments would alleviate poverty and spur trade of SMEs.

### C. Implications for Market Efficiency
- Single ledger platforms offering composability and atomicity among a large set of assets could lower transaction costs and settlement risk relative to today’s security settlement systems.
- Predictable settlement can help investors improve capital allocation.
- Commercial banks are exploring these technologies to save on automated portfolio redeployment of cash and asset servicing costs.
- Market liquidity improvements:
  - Single ledger platforms that unify a greater set of assets could improve liquidity.
  - Compatible ledgers could use smart contracts to compare prices and move assets to where liquidity is greatest.
  - Liquidity is less likely to be contained to a specific ledger and search frictions should shrink if assets are recorded on widely available platforms rather than OTC.
- Competition effects:
  - Escrow functionality is likely to migrate to ledgers.
  - Brokers may continue to provide access but portability of assets should strengthen competition among brokers.
  - Example findings: Leung and others (2023) find 25.8 percent lower fees on new technology platforms.
  - Custodians remain necessary to bridge ledgers and keep track of proofs of asset ownership (private keys), but standardization and self-custody options should heighten competition.
- Correspondent banking:
  - Single ledger platforms (or a dedicated common ledger) could create a market for correspondent banking services, standardizing claims and making credit exposure transfer easier.
  - Correspondent banks could bid for business on platform models, enhancing competition.
  - Platforms could offer greater transparency on prices (mark-ups) for correspondent banking services.
  - Competition could also come from central banks if they make CBDC more widely available on platforms.
- Quantitative effects on cross-border payments and capital flows:
  - Cerutti and others (2024) assumes unchanged elasticities of payments and finds that if transaction costs decrease by 60 percent, volumes rise only by about $5.8 trillion—a 3 percent increase, or about 6.1 percent of world GDP.
  - This is likely a lower bound because elasticities could increase over time and be higher for certain countries or corridors.
  - Preliminary study suggests lower foreign exchange costs (from accessing CLS) stimulate entry and competition to the point of overturning benefits to incumbents from lower trade costs (Qiu and Mancini-Griffoli, forthcoming).
- Market integration and investor behavior:
  - Platforms enlarge the potential set of owners with access to assets, but market access will continue to be conditioned by legal frameworks.
  - Lower transaction and access costs and lower search frictions should facilitate market integration, especially on single ledger platforms.
  - Further work needed to study potential changes in aggregate investor behavior (e.g., more herd behavior, rapid reallocations).
- Foreign exchange markets:
  - Lower costs and volatility, higher liquidity, and potential stabilizing effects on inflation and trade are possible if trading moves onto platforms.
  - More than half of total cost for cross-border payments stems from foreign exchange trading (FSB report, 2023).
  - Platforms could enable payment-versus-payment trading across more currencies, lowering transaction costs.
  - Project Mariana uncovered feasibility of new foreign exchange links, but liquidity remains to be explored.
  - If more currencies are actively traded, macro effects could be notable: Gopinath and others (2020) documents pricing in a dominant currency increases exchange rate pass-through to prices and trade globally.
- Capital flow volatility:
  - Lower transaction and access costs may increase countries’ gross foreign asset positions.
  - Fu (2023) suggests countries with more foreign asset exposure may face larger and faster capital outflows as foreign investors respond more strongly to domestic shocks.
  - Valuation effects would be larger in countries’ balance of payments (Obstfeld, 2010).
  - New model results (Reuter and others, forthcoming) suggest effects depend on whether shocks are real or financial.
- Currency substitution and capital flow management:
  - Lower barriers to holding and transacting foreign assets could increase currency substitution, which can reduce monetary policy effectiveness, lower seigniorage revenue, and increase banking instability risks.
  - Capital flow management measures can be implemented more efficiently on platforms (except if there are leakages); smart contracts can code and automate limits on foreign currency holdings and transactions.

### D. Implications for Financial Stability
- The report reviews salient risks with emphasis on new risks introduced by platforms and technologies.
- A more detailed and comprehensive assessment is available in related G20 papers on tokenization from BIS, CPMI, and FSB, and in Agur and others (2024) which emphasizes market frictions.
- The report notes that unforeseeable risks could materialize with new arrangements and technologies.

*Source: https://www.imf.org/-/media/files/research/imf-and-g20/2024/g20-report-2024-financial-platforms-macrofinancial-implications-imf-oct2024-final-board-publish.pdf*

### 49.      Platforms may well lower some existing risks. As discussed, counterparty and settlement

### g20-report-2024-financial-platforms-macrofinancial-implications-imf-oct2024-final-board-publish - 49.      Platforms may well lower some existing risks. As discussed, counterparty and settlement

### Risks: existing, remaining, and new (paragraphs 49–52)
- 49. Platforms may lower some existing risks: counterparty and settlement risks may decrease for a larger set of assets and transactions (notably on the very large foreign exchange markets) to the extent that single ledger models are widely adopted.
- 50. Many current risks would remain:
  - platforms are not void of operational risks, including cyber risks, that might increase especially if development is rapid and broad-based;
  - resilience could improve, especially in a compatible ledger model where assets can be moved among ledgers;
  - a single ledger model could undermine resilience if it grew sufficiently large while relying on a few dominant operators;
  - existing national legal risks could be exacerbated in cross-border platforms;
  - liquidity and credit risks related to any of the on-ledger assets, as well as risks to financial integrity would remain.
- 51. New risks could arise, especially to financial stability in countries with weaker capacity:
  - contract contingencies (composability), especially on single ledger platforms, could introduce contagion effects — if one contract fails, others could follow suit; greater settlement speeds and automated trading behavior would exacerbate this risk;
  - layers of contingent or bundled contracts could become difficult for regulators to track, introducing hidden risks in the financial system;
  - a faulty code snippet could affect multiple contracts before the fault is discovered;
  - greater competition among intermediaries, and possibly higher foreign exchange exposures, could undermine financial stability in the transition;
  - new legal risks might arise given the novelty of platforms and assets recorded on them.
- 52. Platforms (especially single ledger models) could lead to much higher interconnectedness between assets, countries, and owners, with ambiguous effects on risks:
  - more interconnected systems could be more stable as more parties can absorb shocks;
  - incomplete information about exposures might induce greater risks of runs when systems are highly interconnected;
  - the effects depend in part on how transparent information will be at the aggregate level regarding prices, exposures, and balance sheets.

### Policy considerations — overview (paragraphs 53–58)
- 53. Section divided in five parts: (A) market imperfections that could interfere with platform development and warrant public sector involvement; (B) setting platform rules; (C) taking direct action; (D) offering central bank money; (E) building sound legal foundations.
- 54–58. Market imperfections that could impede beneficial platform development:
  - coordination failures: parties hesitate to move first or invest resources because returns depend on others joining; the option requiring least coordination may become dominant; coordination mechanisms may be lacking;
  - network effects: convergence around the first or dominant entrant can lock users into one technology standard or platform, making backtracking or parallel solutions difficult; network effects can create social value but can also undermine it if a platform model is developed hastily;
  - externalities: private interests may overshadow public or global interests — rapid private development may leave out unprofitable countries, firms, assets, or users; regional platforms could exclude smaller countries; systemic risks (lack of a safe settlement asset, contagion and spillover effects, fragmentation, opacity, glitches, or outages) and social costs might not be fully internalized by private firms or individual countries.
- 58. Conclusion from market imperfections: some public sector intervention seems warranted to avoid sluggish or hasty development, exclusion of lower-income countries or unprofitable use-cases, and harm to the stability, efficiency, and integrity of the IMS.

### Setting platform rules (paragraphs 59–63)
- 59. Platform rules are important for any model; rules have farther reaching implications and are likely harder to establish for single ledgers with more participants and assets.
- 60. Option 1 — public entities set platform rules:
  - advantage: legitimacy, alignment with policy objectives, strong oversight and buy-in;
  - disadvantage: feasibility — difficulty of agreeing on rules, decision-making powers, and which assets/applications to include; possible need for international treaties or new laws; risk of fragmented regional ledgers with limited interoperability;
  - international organizations could facilitate dialogue among countries and ensure IMS implications are considered.
- 61. Option 2 — private entities build and establish rules for single ledger platforms:
  - advantage: efficiency — ledgers designed to meet financial firms' interests and use-cases and could be built quickly;
  - disadvantage: fairness — lack of representation may leave smaller firms and countries out; risk of undercutting competition, rent-extraction, and hold-up problems in settlement;
  - public oversight could guide private sector to integrate features supporting stability, efficiency, and integrity; examples of cooperation include Swift and CLS.
- 62. Option 3 — open base layer with very few restrictions:
  - advantage: inclusion — ability to create financial links between any country, firm, individual, asset, or application as conditions evolve; restrictions could be imposed on assets or applications by jurisdictions with authority;
  - disadvantage: “commons or free-rider problems” — innovation and security require developer goodwill; dominant entities could still steer development;
  - identity of transacting parties can remain private or disclosed selectively; privacy-enhancing protocols (zero knowledge proofs) exist but may reduce throughput; closed/permissioned sub-ledgers (layer 2s) or regulated enclaves are options; an open base layer should not be equated with today’s Decentralized Finance (DeFi).
- 63. Policy recommendation: begin early and proceed swiftly to compare approaches, identify principles for rules conducive to a stable, fair, and efficient IMS, and weigh tradeoffs between platform rules and preferred designs.

### Taking action (paragraphs 64–68)
- 64. Public sector actions extend beyond setting rules; “public sector” broadly includes country or regional authorities, central banks, ministries of finance, standard setters, and international organizations.
- 65. Public sector may build platforms to overcome coordination failures and act as a catalyst; building a platform supports one model over another and may require setting platform rules.
- 66. Public sector could facilitate convergence on common technologies or features to overcome coordination failures (for example, adoption of an execution environment such as the Ethereum Virtual-Machine or EVM); require platforms to provide features like sufficient transparency to monitor capital flows and ability to tailor capital flow management measures.
- 67. Public sector could build platforms to fill gaps left by initial developments, such as bridging regional single ledger platforms or blocks of platforms led by different consortia; alternatively, leave bridging role to the financial sector.
- 68. Public sector should regulate, oversee, and supervise platforms to limit risks; key question: whether platforms (or parts of them) undertake functions of systemic financial market infrastructures (FMIs) and should be regulated as such; could be the underlying data ledger/operator or the protocols/applications; more work needed in line with the CPMI-IOSCO Principles for Financial Market Infrastructure (PFMI, 2012); public sector may participate in platform pilots and observe private and open platform experiments.

### Offering central bank money on platforms (paragraphs 69–72)
- 69. Public sector could make central bank money available on platforms to reduce counterparty risk and spur development; central banks could favor one platform model or make their liability available on more than one model; making safe central bank money available for settlement would be in line with the PFMI.
- 70. Central banks could make money available on a single ledger platform which they operate (wholesale central bank digital currency, wCBDC); they could build platform infrastructure to settle their own money and induce issuers and financial firms to record and transact assets on the same ledger; the Brazilian DREX experiment seems to go in this direction.
- 71. Alternatively, central banks could leverage the compatible ledger model; this path has been most explored to date because setting platform rules is easier — each operator can set rules freely; central banks have established orchestrating entities and common execution environments to transact concurrently over two or more ledgers:
  - examples: project Ubin and the BISIH’s project Icebreaker (exchanged CBDCs across borders); Bundesbank’s “trigger solution”; Banca d’Italia’s “TIPS Hash-Links” tested compatibility between CBDCs and securities recorded on CSDs using “hash-time-lock contracts.”
- 72. Finally, central banks can opt for common ledgers on which they make their money available directly and indirectly:
  - example: SNB made its wCBDC available on third party ledgers while retaining control over participants and transactions;
  - question: whether central banks could agree on constraints for data structure, execution environment, consensus mechanisms, ledger operators, and potential owners so several could issue liabilities on the same common ledger and create a liquid market to exchange currencies;
  - Bank of England model: common ledger operator holds an omnibus account at the central bank to receive reserves from transacting parties; operator can hold reserves in escrow and issue fully backed private liability for settlement on its ledger;
  - key legal requirement: assets held by common ledger operators should be bankruptcy remote.

### Building sound legal foundations (paragraphs 73–77)
- 73. Platforms must be established on clear, comprehensive, and enforceable legal foundations; operators, providers of assets, and owners must be liable to follow established rules.
- 74. General legal challenges to platform establishment:
  - issuers, operators, and owners must be allowed within their governing laws and regulation to undertake these roles, including central bank laws and mandates where applicable;
  - platform establishment should use appropriate legal instruments (bilateral or multilateral agreements or international treaties).
- 75. Platform structure, accountability, and regulatory and transparency framework should be legally robust across four areas:
  - legal nature, ownership, and registration of the platform and operating/governing entities;
  - efficient dispute resolution mechanism able to produce enforceable agreements and decisions;
  - clarity of powers (contractual, regulatory, or disciplinary) of operating and governing entities over participants and transactions;
  - decision-making and governance structure among entities on the platform, including clear, fair, and transparent voting rules among stakeholders.
- 76. Clear legal framework needed for assets recorded and transacted on platforms, including smart contracts, on-chain applications, commercial bank deposits, CBDC, and possibly regulated crypto assets; legal certainty on the nature and treatment of assets is a prerequisite to determine regulatory treatment and secure operation of the platform.
- 77. Applicable rules, laws, and enforcement should be consistent across countries:
  - if operating rules and legal arrangements cannot be enforced in a participant’s jurisdiction due to conflicts with national laws, this creates legal risk of unenforceability and invalidation of platform transactions;
  - inconsistencies could exist among national laws across financial regulation, AML/CFT, tax, data privacy and protection, capital flow management, dispute resolution, settlement finality, and access to payment systems;
  - international standards can provide a basis for harmonized regulations.

*International Monetary Fund — extracted content (paragraphs 49–77) from the provided chapter/section.*

### 78.      Moreoever, safeguarding the integrity of transactions on platforms is essential.

### CONCLUSION

### AML/CFT risks and transaction integrity on platforms
- "Moreoever, safeguarding the integrity of transactions on platforms is essential."
- Transactions are vulnerable to being misused for criminal purposes such as to facilitate illicit finance including money laundering and terrorist financing (ML/TF).
- "To mitigate this risk, effective AML/CFT measures need to be implemented."
- The nature and intensity of the required AML/CFT measures depend on the level of ML/TF risks, which in turn depends on several elements, including the platform model.
- Platform-model risk distinctions:
  - Compatible ledger platforms that only provide their participating financial institutions with messaging services and other supporting infrastructure to coordinate transfers in different ledgers might face low levels of indirect ML/TF risks. "In these instances, limited AML/CFT measures may be required."
  - Common and single ledger platforms that allow for settlement and for the transfer of a wider array of assets including peer-to-peer "face greater ML/TF risks. In these instances, a range of AML/CFT measures would need to be implemented effectively to ensure that the risks are mitigated."

### AML/CFT integration in early platform design
- "In light of the above, AML/CFT considerations should be an integral part of early platform design deliberations."
- Specific design-deliberation actions to take:
  - (i) "a clear determination should be made as to the purpose and policy mandate of the platform;"
  - (ii) "the level of ML/TF risks of the model under consideration should be appropriately assessed;"
  - (iii) "the assessment should identify necessary mitigating measures, and the allocation of responsibilities for their implementation;"
  - (iv) "the criteria for access to the platform, asset, and protocol should be clearly defined, both for jurisdictions and for potential owners (individual participating entities), and should reflect the degree of ML/TF risk."

### Overall conclusions and IMF role
- "This paper is a start. It offers simple platform models and a review of macro-financial implications. Significant space remains to better understand platforms and converge on a coherent vision for future development. Given the complexity and potential implications, that journey should begin swiftly."
- "The IMF stands ready to serve its role and mandate. It will actively collaborate with other organizations and members to further explore policy implications, propose guidance on macro-financial cross-border payments policy for platform rules to support the stability and efficiency of the IMS, offer its convening power to spur dialogue, build capacity in the field, and eventually assess policies or standards once these emerge."

*https://www.imf.org/-/media/files/research/imf-and-g20/2024/g20-report-2024-financial-platforms-macrofinancial-implications-imf-oct2024-final-board-publish.pdf*

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_Source: https://www.imf.org/-/media/files/research/imf-and-g20/2024/g20-report-2024-financial-platforms-macrofinancial-implications-imf-oct2024-final-board-publish.pdf_