## Bullet Train

## Source details

**Canonical URL:** [Bullet Train](https://www.imf.org/en/publications/fandd/issues/2022/09/bullet-train-adrian-mancini-griffoli)

## Other formats

- [Markdown version](/en/publications/fandd/issues/2022/09/bullet-train-adrian-mancini-griffoli/index.md)
- [Structured JSON version](/en/publications/fandd/issues/2022/09/bullet-train-adrian-mancini-griffoli/index.json)
- [Bundle manifest](/en/publications/fandd/issues/2022/09/bullet-train-adrian-mancini-griffoli/bundle-manifest.json)

## Bibliographic details
- Authors: Tobias Adrian, TOMMASO MANCINI-GRIFFOLI
- Published: September 1, 2022

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### Overview
- Title: Bullet Train
- Authors: TOBIAS ADRIAN, TOMMASO MANCINI-GRIFFOLI
- Publication: F&D Magazine
- Date: September 2022
- Read time indicator: Less than a minute(0 words) Read
- Key premise: New tokens and platforms may transform cross-border payments—and potentially much more

### Money, trust, and the role of central banks
- 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 frictions and correspondent banking
- 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

### Tokenization: how it can transform correspondent banking
- 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

### Digital platforms: clearing and settlement roles
- 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

### Programmability and expanded financial services
- 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

### Policy and governance considerations
- 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."

### Next steps and further work
- 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."

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## Content in this bundle

- **Adrian**
  - [Adrian (Markdown version)](/-/media/files/publications/fandd/article/2022/september/adrian.pdf.md){rel="alternate" type="text/markdown"}
  - [Adrian (PDF)](/-/media/files/publications/fandd/article/2022/september/adrian.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/fandd/issues/2022/09/bullet-train-adrian-mancini-griffoli_