Tripartite Success: BIS, World Bank, and SNB Complete Proof of Concept for Tokenized Promissory Note
The World Bank and the Swiss National Bank have teamed up to explore the use of digital bonds, marking a significant stride in the modernization of financial infrastructure. This collaboration, however, is distinct from Project Promissa, a proof of concept that focuses on tokenizing promissory notes issued by government ministries of finance to multilateral development banks.
In traditional financial methods, promissory notes are paper-based, signed with wet signatures, and physically couriered between countries, stored in vaults at central banks. This process, while robust, can be time-consuming and costly. The tokenization of these notes, as demonstrated by Project Promissa, aims to streamline this process, offering several potential benefits.
One of the key advantages of tokenizing promissory notes is increased liquidity. By breaking down these debt instruments into smaller digital units, they become easier to buy, sell, and trade on secondary markets. This democratizes access to traditionally illiquid or institutional financial instruments, allowing a wider range of investors to participate.
Another significant benefit is improved transparency and security. Utilizing blockchain technology provides a tamper-resistant ledger that records ownership and transaction history clearly, reducing fraud and enhancing trust among parties. This transparency is maintained, as each party in the trial had full control over their own activities regarding the promissory notes.
The trial for Project Promissa, conducted on Digital Asset's Canton blockchain, also aimed to eliminate the need for separate records between the ministry and the development bank by using a blockchain as a single source of truth. This eliminates the need to reconcile separate records, as the blockchain serves as a unified and consistent record.
Faster settlement and reduced costs are additional benefits of tokenization. Digital token transfers can be processed more quickly than traditional paper-based processes, lowering administrative and operational costs associated with promissory notes.
Enhanced programmability is another advantage of tokenized notes. Smart contracts associated with these notes can automate interest payments, maturities, and compliance requirements, increasing efficiency.
The potential of Project Promissa, through the collaboration of these major institutions, serves as a proof of concept showing how tokenization can modernize the way promissory notes are issued, managed, and traded. By leveraging blockchain’s benefits, it aims to improve financial infrastructure on a global scale.
Notably, the World Bank and the Swiss National Bank have previously collaborated to test the use of the Swiss National Bank's pilot wholesale CBDC. The BIS Innovation Hub, in collaboration with the Swiss National Bank (SNB) and the World Bank, also conducted Project Promissa to explore tokenizing promissory notes. The International Monetary Fund (IMF) observed the Project Promissa trial.
While the digital bond issued by the World Bank and the Swiss National Bank was not tokenized, it does represent a step towards digitalizing financial instruments. Replacing wet signatures with multiparty signatures significantly sped up events such as encashing the note, reducing the timescale from weeks to seconds.
In conclusion, the collaboration between the World Bank and the Swiss National Bank marks a significant step towards digitalizing financial instruments and modernizing financial infrastructure. Project Promissa, as a proof of concept, demonstrates the potential benefits of tokenizing promissory notes, including increased liquidity, improved transparency and security, faster settlement and reduced costs, greater accessibility, and enhanced programmability.
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