Technical Showcase: Evolution of Programmable Policy Wrappers for Cross-Border Payments
Members of Project Mandala took to the Singapore FinTech Festival's Regulation Stage for a technical showcase of the project and the concept of programmable compliance. The project involves taking regulatory compliance checks and embedding them into smart contract-based policy wrappers. These policy wrappers can then be wrapped around any digital asset like a CBDC or a tokenized deposit, and can travel all along the payments chain.
1. Project Orchid: The inception of purpose-bound money
Project Orchid, developed by the Monetary Authority of Singapore (MAS), pioneers the concept of purpose-bound money (PBM), aiming to program compliance checks into money without directly programming the money itself. This model ensures money flows with a set program, maintaining compliance through the payment process.
- Three models explored:
- Programmable Payments: Similar to scheduled payments, where instructions are given to a bank for future execution.
- Programmable Money: Embedding programs directly into money, which creates complexity with multiple versions of money.
- Purpose-Bound Money (PBM): Wraps money in a program that dictates conditions (e.g., a voucher that can only be spent at certain merchants or within a timeframe).
- Use of PBM in compliance: The program checks conditions, ensuring that the money is spent as intended and meets regulatory requirements.
- Broader applications: PBM could go beyond vouchers to include ensuring compliance checks before money transfers, forming the foundation for Project Mandala's work on compliant financial flows.
2. Project Mandala and cross-border payments
Project Mandala builds on the concept of programmable compliance, focusing on cross-border payments, where compliance is traditionally left out due to complex regulatory frameworks. By integrating compliance checks into the transaction process, Mandala innovates with a peer-to-peer system and cryptographic proofs.
- Peer-to-peer system for cross-border payments: Financial institutions run nodes, allowing direct communication without intermediaries. Each node contains a rules engine that conducts pre-validation compliance checks before transactions.
- Cryptographic proofs of compliance: Rules are applied, and a verifiable proof of compliance is generated and cryptographically verified. This proof ensures that the transaction is compliant and is tamper-proof.
- Two types of compliance checks:
- Public sanctions list check: Non-interactive check where banks generate a cryptographic proof without external interaction.
- Private sanctions list check: A multi-party computation approach that allows for compliance checks without sharing private data between the originating and beneficiary banks.
- Integration with traditional and digital finance systems:
- Mandala integrates with both SWIFT and digital asset systems, allowing flexibility across payment types.
3. Demonstration of policy wrapper
Speakers then provided a live demo of the policy wrapper developed for Project Mandala for use with wholesale CBDCs. The policy wrapper incorporates compliance checks and wraps digital assets to ensure regulatory compliance across payment corridors.
The session concluded with speakers addressing audience questions, touching on the challenges that come with building the proofs of concept and encouraging wider adoption of smart contracts.
Speakers:
- Friedrich Klinger, Advisor, BIS Innovation Hub - Singapore Centre
- Khai Uy Pham, Advisor, Banque de France
- Vincent Pek, Deputy Director, Monetary Authority of Singapore
- Sonja Davidovic, Advisor, BIS Innovation Hub - Singapore Centre