Enable Payment versus Payment (PvP)

Use Cases

About

Use Case Category	Use Case Scope
wCBDC	This use case involves banks from different countries conducting cross-border payments settled via payment versus payment (PvP) on blockchain infrastructure. Blockchain-based payment systems of different countries or institutions can seamlessly execute FX transactions, ensuring that the conditions of PvP (simultaneous settlement) are met.

Description

Key Stakeholders:

Banks

Story:

1. Bank A and Bank B agree to make payments in different currencies to each other.

2. The PvP settlement occurs via either a centralised model on one ledger, or a decentralised model across ledgers (e.g. trading one currency, say USD, on a Ethereum network A, for another currency, say GBP, on another Ethereum network B, without the need for a trusted intermediary)

3. Settlement rules ensure atomicity - if one leg fails, the entire transaction is rolled back.

4. Final settlement of each leg is conditional on the other to achieve PvP.

5. Settlement finality is legally defined and confirmed across jurisdictions.

6. Banks receive real-time confirmation of settled payments.

Postconditions: Cross-border payments are settled between banks with reduced risk via synchronised PvP settlement on blockchain infrastructure.

Example Solution Provider

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Payment versus Payment (PvP) crosschain interoperability involves payments taking place across two or more blockchains.

The Bank of Canada (BoC), Bank of England (BoE) and the MAS jointly published a report on 15 November 2018 which assesses alternative models that could enhance cross-border payments and settlements. The report examines existing challenges and considers alternative models that could in time result in improvements in speed, cost and transparency for users. The report, Cross-border interbank payments and settlements: Emerging opportunities for digital transformation (4.4 MB), provides an initial framework for the global financial community to assess cross-border payments and settlements in greater depth. Specifically, it discusses how a variety of payment models could be implemented, from both a technical and non-technical perspective.

MAS and BoC subsequently linked up their respective experimental domestic payment networks, namely Project Jasper and Project Ubin, and announced on 2 May 2019 a successful experiment on cross-border and cross-currency payments using central bank digital currencies. MAS and BoC jointly published a report, Jasper-Ubin Design Paper: Enabling Cross-Border High Value Transfer using DLT (2.45 MB), which proposes different design options for cross-border settlement systems.

1. As part of BB 9, the CPMI Cross-border Payments Foreign Exchange Workstream (FX WS) has focused on facilitating the increased adoption of payment versus payment (PvP). PvP is a settlement mechanism that ensures that the final transfer of a payment in one currency occurs if and only if the final transfer of a payment in another currency takes place. PvP arrangements are designed primarily to reduce settlement risk in foreign exchange (FX) transactions and, depending on the design, can substantially reduce funding costs by offering functionalities such as netting to reduce participants’ liquidity obligations.

Source: BIS

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The concrete solutions aim to achieve PvP settlement through two types of settlement models: (i) a centralised model in which settlement of both currency legs occurs on the ledger of a single settlement institution (Graph 3, left-hand panel), and (ii) a decentralised model in which settlement of each currency leg occurs on the ledgers of two separate settlement institutions and is synchronised either by a settlement agent or by the counterparties themselves (Graph 3, right-hand panel). PvP settlement is achieved through a clear legal basis governing settlement finality and through settlement rules and procedures that clearly define the point at which settlement is final. This ensures that final settlement of one currency leg occurs if and only if final settlement of the other currency leg (or legs) also takes place. In decentralised models, settlement rules and procedures across the two settlement institutions should ensure that final settlement of one currency leg is conditional on final settlement of the other currency leg. Reasonable steps should be taken to confirm the effectiveness of cross-border recognition and the protection of cross-system settlement finality in order to clearly establish the point at which finality takes place and ensure that this is not subject to different interpretations.