England successfully concludes peer-to-peer foreign exchange trials utilizing Distributed Ledger Technology (DLT) with three central banks from the European Union

England successfully concludes peer-to-peer foreign exchange trials utilizing Distributed Ledger Technology (DLT) with three central banks from the European Union

Project Meridian FX: Paving the Way for Safer Cross-Border Payments

In a groundbreaking initiative, the BIS Innovation Hubs in London and Europe have completed a joint project called Project Meridian FX. The aim of this project is to revolutionize cross-border foreign exchange (FX) payments using Distributed Ledger Technology (DLT) and the Payment versus Payment (PvP) mechanism.

The project showcases practical paths toward reducing settlement risk in foreign exchange markets. By leveraging DLT, Meridian FX removes traditional delays and counterparty risks in foreign exchange settlements. The PvP system provides atomic settlement, which means payments happen simultaneously on the platform, substantially mitigating principal risk that typically exists in cross-currency payments.

One of the key advancements of Meridian FX is the ability to synchronize payment instructions between counterparties, enabling near real-time, simultaneous settlement of currency trades across borders. This synchronization directly addresses the traditional risks in FX markets, particularly settlement risk—the risk that one party pays without receiving the countervalue—by ensuring payments are settled only if both sides of the trade are complete simultaneously.

The project also trialed a netting approach in addition to the PvP settlement. Over a particular time period, the synchronization operator might prioritize payments of banks that only have transactions in one direction. An interesting additional feature was supporting multiple linked PvP transactions, referred to as (PvP)+(PvP).

The European central banks used the same three platforms that were part of the Eurosystem DLT settlement trials in central bank money. The synchronization system in Project Meridian FX explored liquidity optimizations for each node on the Ethereum-compatible DLT platform.

Perhaps one of the most significant aspects of the project is its potential to transform the foreign exchange settlement landscape. By offering a more resilient infrastructure that reduces liquidity needs and settlement delays, this innovation can enhance market stability and lower operational risks for financial institutions involved in international payments.

The project aligns with broader BIS efforts and other central banks' initiatives in exploring blockchain-based wholesale payment solutions and Central Bank Digital Currency (CBDC) cross-border integration, including tokenization and harmonization of regulatory frameworks.

In summary, Project Meridian FX is advancing the application of DLT and PvP to enable faster, safer cross-border FX settlements, effectively reducing settlement risk in the foreign exchange markets and setting groundwork for future scalable wholesale payment systems.

1. The Project Meridian FX trial also included testing a netting approach alongside the PvP settlement, which could potentially be beneficial for banks with transactions in one direction only.
2. In addition to revolutionalizing cross-border foreign exchange payments, Project Meridian FX aligns with broader BIS efforts and central banks' initiatives, focusing on integrating blockchain-based wholesale payment solutions and Central Bank Digital Currency (CBDC) cross-border integration.
3. The exploration of liquidity optimizations for each node on the Ethereum-compatible DLT platform within Project Meridian FX demonstrates the potential for improved asset management and enhanced technology utilization within the finance industry.

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