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BIS Shares How Project Agorá Aims to Tokenize Correspondent Banking – Ledger Insights
The Bank for International Settlements (BIS) Innovation Hub was unveiled last month. Agora Project, its ambitious project with seven central banks to transform cross-border payments with tokenization. It is proposed to use a Unified registry involving wholesale central bank digital currencies (wCBDCs) and tokenized deposits on a shared infrastructure to execute payments. Today the BIS published a short document on “New generation correspondent banks“, which outlines the vision of Agorá. Much of this has to do with how compliance is handled.
Active correspondent banks have declined over the years, particularly in emerging markets. This is often the result of increasingly stringent compliance requirements, resulting in additional expenses. Therefore, withdrawals often occur from regions where the trade-off between costs and benefits does not make sense for banks.
If the compliance process could be reviewed and simplified, perhaps this could arrest the decline in the number of correspondent banks.
The BIS has previously explained that Agorá does not aim to upset the status quo in terms of participants. The objective is therefore to maintain the structure of the corresponding banking system. Instead, it wants to explore the possibility of changing the infrastructure by replacing messaging with tokenization and a unified ledger.
Today, payments are driven by messages that instruct banks on how to credit certain customers. This separates payment communication from the movement of money, while tokenization would unite these aspects. Messaging causes the various banks involved in a payment to update their records at different times. With tokenization there would be atomic settlement, so a payment would be reflected in each bank’s balances simultaneously. Finally, know-your-customer (KYC) and anti-money laundering (AML) compliance processes would be streamlined.
Proposed changes to KYC and AML
Currently, each bank in the payment chain must perform its own AML and compliance procedures, which often cause delays. The Agorá project aims to pre-select payments so that they are made once.
The BIS Mandala Project is piloting a shared protocol that verifies compliance with jurisdiction-specific requirements, such as restrictions on capital movements as well as sanctions and anti-money laundering. The protocol then provides a “proof of compliance” for the payment.
Separately, the BIS proposes using artificial intelligence (AI) to build models for anti-money laundering and transaction monitoring. To train AI, this involves sharing data between institutions while respecting privacy. Potentially this could be done centrally or, alternatively, in a federated learning manner. The latter usually involves an algorithm working on a single bank’s data and communicating a summary result without sharing the underlying data.
The paper concludes: “The next generation correspondent banking system should be inclusive, accessible and capture beneficial network effects.”