BIS’s Project Mandala successfully tests cross-border payments with self-enforcing specifications, a further step forward for the implementation of P2P payments using DLT technology.
The Bank for International Settlements (BIS), together with its central bank partners, has hinted at a new breakthrough in cross-border transactions. Through its original project, called “Mandala Project”, BIS and its partners may have confirmed It is quite possible to incorporate compliance protocols directly into cross-border transaction protocols. This means that international financial transfers can still be easily carried out without having to bypass the requirements set by regulators around the world.
What is the Mandala Project?
But what is the Mandala Project? Project Mandala is an innovative initiative that seeks to address the significant challenges in maintaining compliance with the various regulatory and policy frameworks in different jurisdictions. This pilot project is a collaboration between the BIS Innovation Centre in Singapore, the Reserve Bank of Australia, the Bank of Korea, Bank Negara Malaysia and the Monetary Authority of Singapore.
The project, which has reached the Proof of Concept (PoC) stage, aligns with the G20’s priority actions to improve cross-border payments, as it has the potential to reduce costs and increase transaction speeds, while preserving regulatory compliance.
Automating compliance in cross-border transactions
Thanks to that, Project Mandala has successfully demonstrated the automation of compliance procedures for cross-border financial transactions. This achievement is crucial because regulatory frameworks governing cross-border transactions are essential for the safe and efficient functioning of the global financial system.
However, complying with these regulatory frameworks across different jurisdictions presents challenges that have contributed to increased costs and impacted transaction speed. Mandala aims to increase the speed and efficiency of cross-border transactions by automating compliance procedures, improving transparency of country-specific policies, and providing real-time reporting and monitoring for regulators and supervisors.
Key innovations and technical achievements
Project Mandala developed a decentralized compliance-by-design system that could help streamline cross-border payments by embedding regulatory compliance within a network of financial institutions and central banks. This decentralized architecture integrates three main components: a peer-to-peer (P2P) messaging system, a rules engine, and a proofing engine.
This system ensures that all necessary compliance checks have been completed before the payment instruction is initiated. Once all checks are complete, the Mandala system automatically generates a proof of compliance, which can accompany any digital settlement asset or cross-border payment instruction.
To preserve privacy, proof of compliance can be verified without revealing underlying customer data. The project demonstrated its technical feasibility through two main use cases:
- Cross-border loan between Singapore and Malaysia: Mandala streamlined compliance processes for capital flow management (CFM) measures and sanctions screening for financial institutions and facilitated real-time compliance monitoring for central banks.
- Cross-border financing for equity investments between South Korea and Australia: Mandala automated sanctions screening and CFM reporting requirements for an unlisted securities transaction.
Integration with traditional and digital asset systems
Mandala successfully integrates with both emerging digital asset settlement systems, such as a wholesale central bank digital currency, and traditional payment messaging systems such as Swift. This dual integration ensures the versatility and modularity of the Mandala system to support both future digital asset ecosystems and existing financial infrastructures. For digital assets, Mandala deployed programmable compliance that can be embedded in smart contracts.
Using Zero-Knowledge Proofs (ZK-proofs)
One of the most important aspects of Project Mandala is how it uses zero-knowledge proofs (ZK-proofs) to privately verify compliance. This system can verify these compliance claims without exposing sensitive transaction details. Not only does this ensure privacy, but it does so in a way that still maintains regulatory standards.
According to Maha El Dimachki, head of the BIS Innovation Centre in Singapore, there is little doubt that positive results will be seen even in the early stages of the project. If successful, the BIS could have initiated a shift towards more advanced cross-border payment systems that are not only secure and private, but also compliant with international standards.
Impact on the global financial system
Project Mandala has the potential to transform the global financial system by addressing compliance challenges in cross-border transactions. By automating compliance procedures, the project can significantly reduce costs and increase transaction speed.
This not only benefits financial institutions, but also regulators and supervisors, who can obtain real-time reporting and monitoring. Furthermore, integration with digital and legacy asset systems ensures that the Mandala system can adapt to the changing needs of the financial market.
Project Mandala is the result of a collaboration between several key entities in the financial sector. The BIS Innovation Hub Singapore Centre, the Reserve Bank of Australia, the Bank of Korea, Bank Negara Malaysia and the Monetary Authority of Singapore have worked together to develop and test this innovative system. The collaboration between these entities has not only demonstrated the viability of the project, but has also laid the groundwork for future innovations in the field of cross-border transactions.
