BIS and big banks introduce Project Mandala for improved cross-border transactions

Project Mandala is a significant new initiative launched by the Bank for International Settlements (BIS) alongside central banks from Australia, South Korea, Malaysia, and Singapore. The project’s goal is to streamline cross-border payments while ensuring regulatory compliance is embedded directly into the transaction process. This addresses one of the biggest challenges in international finance — the complexity of differing regulations that often result in high transaction costs and slower speeds.

Key Features and Objectives of Project Mandala:

1. Compliance-by-Design Approach:
   • Project Mandala uses a compliance-by-design framework that integrates regulatory checks into the transaction process before payments are executed. This enables regulatory compliance to be a built-in feature of cross-border transactions, rather than an afterthought or separate step, improving efficiency and reducing friction.
2. Integration with Existing and Emerging Systems:
   • The system is designed to work with both traditional financial systems, such as SWIFT, and modern digital asset systems, including Central Bank Digital Currencies (CBDCs). This flexibility makes it suitable for a wide range of financial institutions, whether traditional or emerging.
3. Proof-of-Concept Success:
   • The project has already reached the proof-of-concept stage, which means it has demonstrated its potential functionality in a controlled environment. This is a crucial step towards real-world implementation. The system’s capabilities align with the G20‘s broader goal of making cross-border payments faster, cheaper, and more transparent.
4. Decentralized Architecture:
   • The architecture of the system includes three main components:
     • Peer-to-peer messaging: Facilitates communication between financial institutions.
     • Rules engine: Ensures that regulatory requirements are met.
     • Proof engine: Generates a “proof of compliance” to confirm that a transaction meets all the necessary regulations.
   • These components work together to ensure that regulatory checks are completed before payments are processed.
5. Privacy Protection:
   • One of the key features of Project Mandala is its privacy-first design. The compliance proof system ensures that sensitive customer data is not exposed during the verification process. This allows for the validation of transactions while maintaining privacy and protecting personal information.
6. Real-World Use Cases:
   • Cross-Border Lending: Project Mandala was tested in a use case involving cross-border lending between Singapore and Malaysia, where it automated compliance checks related to capital flow management and sanctions screening.
   • Unlisted Securities Transactions: Another use case involved South Korea and Australia, improving the compliance processes for transactions involving unlisted securities in cross-border financing.

Future Implications:

The success of Project Mandala could have far-reaching implications for global finance. By embedding compliance directly into the payment process, the system could significantly reduce costs and improve speed for international transactions. Furthermore, it could encourage greater transparency and privacy protection — a balance that has been difficult to achieve in cross-border payments.

For traditional financial institutions, this could represent a way to modernize and streamline operations, particularly as digital currencies and blockchain technology gain more mainstream adoption. Similarly, central bank digital currencies (CBDCs) could become a core part of the system, integrating seamlessly with the regulatory framework established by Project Mandala.

In essence, Project Mandala represents a cutting-edge approach to modernizing cross-border payments, with the potential to revolutionize the way global transactions are conducted.