SDX Fintech Conversation Series – Interview with Mathias Studach

Project Helvetia looks toward a future in which more financial assets are tokenized and financial infrastructures run on DLT. It explored the settlement of interbank, monetary policy and cross-border transactions on the test systems of SIX Digital Exchange (SDX), the Swiss real-time gross settlement system – SIX Interbank Clearing (SIC) – and core banking systems.

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Project Helvetia’s second phase, completed in Q4 2021, sought to demonstrate the feasibility of integrating a wholesale central bank digital currency (CBDC) into existing core banking systems through a joint experiment by the Bank for International Settlements (BIS), the Swiss National Bank (SNB) and SIX (Switzerland’s main provider of financial infrastructure services), which also included five commercial banks: Citi, Credit Suisse, Goldman Sachs, Hypothekarbank Lenzburg and UBS. We sat down with Mathias Studach, Head of Finance & Risk for SDX and one of the company’s founders, to find out more about Project Helvetia, its conclusions, what it means for SDX and for digital asset markets going forward.

Hello Mathias, could you start by telling us a little more about Project Helvetia? What was it, and what was the difference between Phases I and II?

Phase I of Project Helvetia, which was conducted in 2020, focused on integrating wholesale CBDC into the SDX digital asset platform to settle tokenized assets. Following its successful conclusion, we continued with Phase II in 2021, which enlarged the scope of Phase I to encompass an end-to-end integration of wholesale CBDC. There were three core differentiators between Phase I and Phase II. First of all, we added five commercial banks to the experiment. Secondly, we then integrated wholesale CBDC not only into the core banking systems of the central bank, but also of these five commercial banks. Finally, we ran the transactions end-to-end, meaning that they were triggered from the core banking system but then settled on the SDX environment and replicated on the ledgers of the core banking system.

What innovations did Project Helvetia demonstrate, and why did it involve the use of a CBDC?

One of the key innovations that we demonstrated was the idea of atomic trading and settlement, combining trading and settlement into one logical step, which is executed atomically and instantaneously. This means that trade execution and settlement finality are synonymous, which is significant given that a trade is only legally binding once the settlement has been successfully completed. In this set-up, the settlement cycle is reduced from what we have today, which is T+2 settlement, to T-instant settlement. The atomic trading and settlement eliminates the market risk and therefore increases efficiency and reduces costs.

In order to achieve this atomic execution and settlement, we need to have both legs of the transaction – the asset leg and the cash leg –on-ledger, and that’s why a tokenized settlement medium is very important. Project Helvetia demonstrated that our platform can equally support wholesale CBDC to settle transactions in digital assets.

What differentiates Project Helvetia from other CBDC projects around the world? And what was the significance of Phase II being “end-to-end”?

We wanted to differentiate Project Helvetia from other CBDC projects around the world, and we did this through the high degree of realism as well as the end-to-end integration. The experiment was built on a test environment of our productive system, which has been authorized and regulated in Switzerland by FINMA and went live in 2021. The tested wholesale CBDC is built on the technical solution design, which SDX uses today in our productive system to settle digital assets in commercial bank money. Through the involvement of 5 commercial banks, we could test the end-to-end integration of CBDC with their current processes and core banking systems. Finally, the CBDC was also integrated into the SNB’s core system and the traditional RTGS system, operated by SIX.

In this experiment, we focused on issuance, settlement and end-to-end booking, and reconciliation of CBDC. We showed that a bank could request an allocation of wholesale CBDC through their core banking platform, via the traditional RTGS system, and that on receipt of funds from the bank, the SNB would issue the equivalent value in CBDC, which would be credited to the bank on the SDX platform and could then be used for settlement of trades. All transactions have been booked onto the ledgers of the core banking systems and reconciled across all systems at day end.

What did the experiment ultimately prove, and why was it so significant, from the perspective of the Swiss legal and regulatory system in particular?

Firstly, and most importantly, we proved that it is technically and operationally feasible to settle digital asset transactions using wholesale CBDC, in a production-grade environment and with end-to-end participation from the central bank and commercial banks, and the SNB’s existing RTGS system. It is also very significant that we showed this can be achieved within the existing Swiss legal and regulatory framework. The instruction and transfer of a wholesale CBDC is legally feasible, and we can demonstrate that there is payment and settlement finality.

Taken all together, this was as close to a production environment as we can get – it is not far off production-ready.

What more needs to be done before we can see the capabilities demonstrated through Project Helvetia – in terms of atomic and instantaneous execution and settlement of digital asset transactions, using wholesale CBDC – in the real world?

In order to turn this into production and make it scalable, we will need to analyze and test potential negative cases and increase the level of automation to ensure full STP end-to-end. Plus, a great deal of documentation remains to be done around operational procedures and legal frameworks across the parties. And last but not least, this is ultimately a policy decision, one which is fully at the discretion of the SNB, around whether and how to issue a wholesale CBDC.

What do experiments like this mean for the future of digital asset markets in general, and SDX in particular? Any final thoughts?

Token-based ecosystems are emerging around the world. More and more of these use cases have reached the production stage and have gone live. SDX is a leading example of one of these new digital market infrastructure providers. We expect that over time, there will be a transition from the current, traditional financial industry to a token-based financial ecosystem. And with that transition, there comes an increased demand for tokenized settlement assets that can enable settlement on-chain, to leverage the full benefits of the DLT that underpins tokenized assets. Until now, stablecoins have addressed this need; indeed, SDX has issued a tokenized Swiss Franc to settle digital assets on our digital exchange. Our Swiss Franc is a tokenized form of commercial bank money, which is one-to-one backed by SNB reserves.

Wholesale CBDC can help to foster the growth of token-based ecosystems. They can create a level playing field for new infrastructures and entrants to the market. And they can also help to ensure stability, enabling the smooth and steady transition of the financial system from today’s world into the new token-based ecosystem.

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