Asian Development Bank: Project Tridecagon — Connecting Payment and Settlement Systems of 13 Asian Countries with DLT/Blockchain

Introduction

In June this year, the Asian Development Bank (ADB) published the report Connecting Market Infrastructures in ASEAN+3: The Project Tridecagon Proof of Concept. The report explained the result of the proof of concept (POC), which aimed to connect key market infrastructures of the central banks’ real-time gross settlement systems (RTGS) and central securities depositories’ (CSD) book-entry systems in a group of the 10 member states of the Association of Southeast Asian Nations (ASEAN) and the People’s Republic of China (PRC), Japan, and the Republic of Korea, known as ASEAN+3.

It examined the usability of distributed ledger technology (DLT) and blockchain (BC) for cross-border securities transactions known as cross-border delivery-versus-payment (DVP). In the POC, we appointed ConsenSys, Fujitsu Limited, R3, and Soramitsu as our partners to develop a solution. In this article, I would like to explain 1) the role of ADB in regional financial cooperation, 2) the objectives of Project Tridecagon, 3) key features of the Project, and 4) the lessons from the Project.

ADB and Asian Regional Financial Cooperation

ASEAN+3 and ADB have been working closely in financial market development. The financial cooperation of ASEAN+3 was established in the aftermath of the Asian financial crisis in the late 1990s, which led some of the ASEAN+3 economies into widespread corporate bankruptcies and retrenchment, financial sector difficulties, high unemployment, and severe economic recessions. One of the root causes of the crisis was the heavy reliance on short-term foreign debts to finance long-term local investments, which is known as the double mismatch. With weak economic fundamentals, the double mismatch exacerbated the situation and trapped the economies into the crisis.

As a policy response, in 2002, ASEAN+3 launched the Asian Bond Markets Initiative (ABMI) to mitigate the double mismatch problem by promoting local currency bond markets in the region. Thus, the developments of the markets would change financing from short-term to long-term and from foreign currency to local currency. Since its early stages, ADB has been acting as a secretariat to support the ABMI.

One important initiative under the ABMI has been to consider establishing a regional settlement intermediary to promote intraregional bond transactions through a sound and more efficient market infrastructure. Thus, the Cross-Border Settlement Infrastructure Forum (CSIF) was established in 2013.

The CSIF 1) proposed the Basic Principles on Establishing a Regional Settlement Intermediary and Next Steps Forward (May 2014); 2) published a Progress Report on Establishing a Regional Settlement Intermediary and Next Steps: Implementing Central Securities Depository–Real-Time Gross Settlement Linkages in ASEAN+3 (May 2015); and 3) defined the Common Understanding on Cross-Border Business Continuity Planning and Cybersecurity (May 2018) and 4) the Common Understanding on International Standards and Gateways for Central Securities Depository and Real-Time Gross Settlement Linkages (May 2019). Based on such discussions, the Bank of Japan and the Hong Kong Monetary Authority created a cross-border DVP link to facilitate stable Hong Kong dollar funding for financial institutions through the ability to pledge Japanese government bonds.[1]

The Objectives of Project Tridecagon

CSIF discussed the CSD-RTGS linkages model to directly connect central banks and CSDs in ASEAN+3. However, due to recent technological advancements, ADB, as the secretariat of the ABMI, considered it to be worth exploring possible new technologies for future application.

Project Tridecagon was launched to explore the overall usability of DLT/BC for the settlement of such cross-border bond transactions and assessed the suitability, cost-effectiveness, and security of DLT/BC as well as governance. Besides, Project Tridecagon aimed to ...

Note: I would like to thank Matthias Schmidt, Co-Author of the report and ADB consultant, for valuable comments.

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