Bullet Train

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Title: Bullet Train
Authors: TOBIAS ADRIAN, TOMMASO MANCINI-GRIFFOLI
Publication: F&D Magazine
Date: September 2022
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Key premise: New tokens and platforms may transform cross-border payments—and potentially much more

Fundamental definition: Money is essentially an IOU—a promise to pay—made by one party to another; "Modern money is credit."
Trust is central: "As money is credit, its value lies in trust."
Central banks provide two essential public goods:
- Reserves: "special central bank money called 'reserves'—accounts that banks hold at the central bank"
- The settlement network over which reserves are traded
Central banks act as bridges between distinct trust networks, enabling exchanges when parties trust different issuers

Cross-border challenges:
- Lack of a commonly trusted asset or network to settle transactions
- Scarcer information and harder legal recourse across borders
- Higher costs of establishing trust
Current mechanism: correspondent banks exchange IOUs and rely on bilateral trust ("handshake") to process cross-border payments
Market structure effects:
- High costs of establishing and monitoring trust limit the number of correspondents
- Result: payments are "costly, slow, and opaque" and dominated by a handful of very large institutions

Tokenized money defined: money accessible with a private key and transferable on a shared network (examples: stablecoins such as USD Coin; CBDC)
Key transformative effects:
- Eliminates need for two-way trusted relationships: "Anyone can hold a token, even without having a direct relationship with the issuer."
- Lowers risks: banks receive tokenized deposits rather than unsecured IOUs
- Improves liquidity: tokenized holdings are "a liquid asset that it can sell, trade, or hedge"
- Enhances competition: "correspondent banking can be made more competitive" leading to better speed and lower fees

Platform functions:
- Broadcast payment orders and collect bids for correspondent services
- Offer clearing services (orchestrate payments)
- Potentially provide settlement services (hold assets in escrow and issue tokens on the platform)
Asset options on platforms:
- Tokenized bank deposits
- CBDC (examples of issuers that have launched CBDC: The Bahamas and Nigeria)
- Well-regulated stablecoins
Settlement in safe assets (e.g., CBDC) can reduce disputes and attract more correspondents

Platform ledger enables smart contracts (programmable transactions), with examples:
- Conditional payments ("a payment could be made only when another is received")
- Automatic hedging of foreign exchange risks
- Pledging future incoming payments in financial contracts
- Auctions to encourage exchange of typically shunned currencies
Private sector can extend platform uses by writing smart contracts, leveraging:
- A common settlement platform
- A common programming language for interoperable smart contracts
Expected governance model: "a tight public-private partnership" requiring coordination and participation of multiple central banks

Main challenges:
- Finding the right governance arrangements for platform operation
- Mobilizing a sufficient number of central banks to participate
Institutional role suggested: "The IMF, with its near universal membership, is a good place to start exploring these prospects."

Authors' plan: publish two papers with coauthors Dong He, Federico Grinberg, Rod Garratt, Robert Townsend, and Nicolas Xuan-Yi Zhang
Purpose of papers: "lay out an initial blueprint for such platforms" and stimulate further discussion on shaping the future of cross-border payments
Closing observation: "Much remains to be explored, debated, and eventually done."