Learning from AMM, the BIS Innovation Hub's Project Mariana aims to support cross-border foreign exchange transactions of multiple countries' CBDCs.

The Bank for International Settlements (BIS), in collaboration with the central banks of France, Switzerland, and the Monetary Authority of Singapore, is working together on the Mariana project to explore the use of DeFi protocols for cross-border CBDC transactions and settlements. The project utilizes smart contracts based on Automated Market Makers (AMM) to achieve the vision of atomic transactions. Launched in September last year, the project aims to provide a proof of concept by mid this year. Source

Mariana Project to Adopt DeFi AMM Model

DeFi protocols built on blockchain today facilitate automation in the cryptocurrency and digital asset markets through smart contract protocols. Automated Market Maker (AMM) protocols combine pooled liquidity with innovative algorithms to determine the price between two or more tokenized assets. In the future, similar AMM protocols may become the foundation for a new generation of financial infrastructure that facilitates CBDC cross-border transactions.

The Mariana project aims to utilize this DeFi protocol to achieve automation in the foreign exchange market and settlement, improving cross-border payment purposes, and will prioritize supporting various currencies of the G20 group in the future.

Architecture of Mariana Project

As shown in the diagram below, the fiat currencies originally existing within each country are transformed into wholesale Central Bank Digital Currencies (wCBDC) within the project through Bridges to the global network system, and standardized technical specifications. These wCBDCs can act as liquidity providers and forex traders to financial institutions. wCBDCs are based on unified technical standards, allowing them to be used in the same protocol, but central banks of different countries can specify governance functions for their currencies, such as access permissions in the international network and qualifications for transfers in and out of domestic platforms.

Liquidity providers deposit/withdraw wCBDCs to support the liquidity pool of AMM, while forex traders exchange different types of wCBDCs through AMM and pay transaction fees to liquidity providers. This is achieved through DeFi smart contracts, which provide real-time, cheaper, and more transparent cross-border payments compared to the traditional process of matching buyers and sellers.

AMM vs. Traditional Forex Trading

Traditional forex trading is mostly over-the-counter (OTC). For example, if I want to buy Singapore dollars (SGD), I need to find a forex dealer offering SGD and ask for a quote. The dealer sets the price, and if unsatisfied, I must look for other counterparties. Market prices are referenced from Reuters and Bloomberg, which provide real-time best quotes from price providers worldwide. The so-called 24-hour trading in the forex market involves price providers from different countries taking turns. For example, in Taiwan time, mornings may involve Australia and Japan, afternoons the UK, and evenings the US. Additionally, forex market quotes are mostly based on the US dollar. Using the example in the diagram, if I want to exchange Euros for New Taiwan Dollars, I need to convert Euros to USD first and then use USD to buy New Taiwan Dollars for better liquidity and pricing. Traditional forex trading also requires signing contracts with counterparties to avoid delivery risks, with settlement taking 2 working days.

Automated Market Maker (AMM) is a DeFi protocol that prices assets using mathematical formulas, or algorithms. In this case, counterparties are no longer needed as trades occur between users and smart contracts. Liquidity for smart contracts relies on liquidity providers (LPs). Using the example in the diagram, liquidity providers recognized by central banks of various countries provide liquidity for their currencies through wCBDC. Forex traders only need to refer to the price quotes provided by algorithms in the pool for trading. In the example of Euro to New Taiwan Dollar exchange, there is no longer a need for USD conversion, saving costs and time for an extra conversion, and blockchain transactions are no longer limited to 2 working days, and should proceed in instant settlement through atomic settlement, completing the transaction immediately.