Revolutionizing Cross-Border Payments: Project Agorá's Vision

Last month, the Bank for International Settlements (BIS) Innovation Hub launched Project Agorá, a significant initiative with seven central banks aimed at revolutionizing cross-border payments through tokenization, reports Ledger Insights. The project proposes utilizing a Unified Ledger, incorporating wholesale central bank digital currencies (wCBDC) and tokenized deposits on a shared infrastructure to facilitate payments. Few weeks ago, the BIS published a brief paper titled “Next Generation Correspondent Banking,” detailing Agorá’s vision, with a strong focus on compliance management.

The number of active correspondent banks has been declining over the years, particularly in emerging markets, largely due to increasingly stringent compliance requirements that add to operational costs. As a result, banks often withdraw from regions where the cost-benefit analysis is unfavorable.

Revisiting and streamlining the compliance process could potentially halt the decline in the number of correspondent banks. The BIS has previously clarified that Agorá does not intend to disrupt the existing participant structure in the correspondent banking system. Instead, it seeks to transform the infrastructure by replacing traditional messaging with tokenization and a Unified Ledger.

Currently, payments are driven by messages instructing banks on how to credit specific clients, which separates payment communication from the actual money transfer. Tokenization would integrate these aspects. Messaging also leads to banks updating their ledgers at different times, whereas tokenization would enable atomic settlement, reflecting the payment simultaneously across all banks involved. Additionally, the know-your-customer (KYC) and anti-money laundering (AML) compliance processes would be streamlined.

Proposed Changes to KYC and AML At present, each bank in a payment chain conducts its own AML and compliance checks, often causing delays. Project Agorá aims to pre-screen payments, consolidating the compliance process. The BIS Project Mandala is exploring a shared protocol to verify compliance with jurisdiction-specific requirements, including capital movement restrictions, sanctions, and AML. This protocol would provide a 'proof of compliance' for each payment.

Moreover, the BIS suggests employing artificial intelligence (AI) to develop models for AML and transaction monitoring. This involves sharing data across institutions in a privacy-preserving manner, either centrally or through federated learning. The latter method allows an algorithm to analyze data within a single bank and communicate summarized results without sharing underlying data.

The paper concludes, "Next generation correspondent banking should be inclusive, accessible, and leverage beneficial network effects."