Major banks’ CBDC trial reveals key efficiency gains for wholesale loans process

Project Atom

Adoption of a central bank digital currency (CBDC) and asset tokenisation could markedly improve efficiency, risk management, and innovation in wholesale financial market transactions, a recent Reserve Bank of Australia-led proof-of-concept project has found.

The RBA, which was joined in the trial by big four banks CBA and NAB alongside Perpetual and ConsenSys, announced the results following the successful conclusion of its year-long ‘Project Atom’, which tested the use of CBDCs in the syndicated loans market.

The Project looked at the potential use and implications of a wholesale form of CBDC on an Ethereum-based distributed ledger technology (DLT) platform.

This involved the issuance of a tokenised form of CBDC that could be used by wholesale market participants for the funding, settlement and repayment of tokenised syndicated loans.

‘Tokenisation’ simply refers to a digital proxy of a physical asset or existing asset class on a blockchain platform.

The team concluded that digitisation of syndicated loans on a DLT (otherwise known as blockchain) platform could fast-track what is still an overwhelmingly manual and paper-based loans issuance process, delivering efficiency gains and reducing operational risk.

Typically used for high-value loans (such as for large-scale infrastructure projects) sourced from multiple lenders, a syndicated loan is a unique arrangement between a group of lenders (normally banks) and a borrower, which is entered into through a syndicated facility agreement (SFA).

The RBA identifies these SFAs as mostly “bespoke, high-value, and low-volume corporate financing instruments”.

For instance, in 2020, the Star Entertainment Group completed a 4.5-year, $1.59 billion, three-tranche syndicated loan, sourced from ANZ, NAB and Westpac as well as a number of foreign banks.

The Project Atom team found that “by integrating a wholesale CBDC on the same DLT platform, [they could enable] ‘atomic’ delivery-versus-payment [DvP] settlement of the drawdown, novation and repayment of the tokenised syndicated loan”.

‘Atomic’ DvP refers to a settlement process in which a transaction is executed and settled in an integrated and instantaneous fashion.

The platform could also allow for “other forms of programmability” to improve efficiency and reduce risk in transactions.

It also includes the possibility of ‘fractionalising’ loans to make them available to a broader investor base, which the RBA believes would enhance liquidity in these markets.

“The POC also demonstrated that an enterprise-grade DLT platform with appropriate controls on access and security could address many of the potential requirements for a wholesale CBDC system and tokenised assets platform,” according to the report.

Being markedly different to the RBA’s existing Information and Transfer System (RITS), currently used for high-value settlements, the Reserve noted that a DLT-based CBDC system may be less susceptible to an outage or cyber-attack that could affect the RITS.

“In addition, because it is distributed rather than centralised, the system can continue to operate even if one or more of the participant nodes (including the RBA) are offline.”

The blockchain-backed Tokenised Syndicated Loan Platform (TSL Platform) – based on Hyperledger Besu, an enterprise-grade Ethereum client – manages loan document management, digitised servicing processes, digital loan template management, and digital lifecycle management.

A key point of difference between Project Atom and other wholesale CBDC projects, the trial participants noted, was that the model used in the POC “preserves several key aspects of the current role of commercial banks in the financial system, including their role in onboarding and providing services to their customers”.

RBA Assistant Governor (Financial System), Michele Bullock, said the trial “demonstrated the potential for a wholesale CBDC and asset tokenisation to improve efficiency, risk management and innovation in wholesale financial market transactions.”

“The project also demonstrated the benefits of collaboration in advancing our knowledge in this area.”

She added that the RBA will continue to research CBDCs “as part of its strategic focus area on supporting the evolution of payments”.

CBA’s group executive for institutional banking & markets, Andrew Hinchliff, said the use of DLT “will continue to grow and see it playing a significant role in Australia’s payments system in the years ahead”.

“As Australia’s biggest bank we have an important part to play in its evolution and we look forward to an ongoing partnership with the RBA and broader industry on this important program of work.”