It’s been more than 18 months since the European Investment Bank (EIB) issued its €100 million digital bond on the permissioned Goldman Sachs DLT infrastructure, GS DAP. Hence, it seems pretty late to publish a report on Project Venus. On the other hand, it’s timely because Project Venus used the Banque de France’s DL3S network for a wholesale central bank digital currency (CBDC) for settlement. The same solution is currently being used in the European Central Bank wholesale DLT settlement trials. Earlier this week, the ECB released a list of 48 private firms participating in the second wave.
Project Venus involved delivery versus payment between two different DLT networks, the GS DAP and DL3S, which use different technologies. The settlement was instantaneous and atomic compared to the average two to five-day settlement for issuances. Even if instant settlement is not always desirable, with DLT it can be performed at a pre-defined time allowing for liquidity planning. Plus, atomic settlement eliminates counterparty risk.
GS DAP is based on Digital Asset’s Canton and is underpinned by Hyperledger Besu. DL3S uses Hyperledger Fabric. Hashed time lock contracts (HTLC) were used to synchronize the two ledgers to enable atomic settlement across the two networks.
Project Venus participants
Both the central banks of France and Luxembourg operated the DL3S network during the issuance, with each central bank only seeing the transactions of its local participants. The EIB is headquartered in Luxembourg, which was the jurisdiction of the bond issuance.
Apart from the central banks, there were only two paying banks operating nodes on the DL3S network, Goldman Sachs and Societe Generale. In addition to the two banks, Santander was also an underwriter but participated indirectly on the DL3S network via Goldman, meaning it had read only permissions. The EIB was a direct participant but didn’t operate a node, so it sent instructions via the Banque Centrale du Luxembourg.
The issuance, settlement, and distribution to investors happened within the same day. Because the wholesale CBDC is not legal tender, it was not held overnight. Payment finality took place in the TARGET 2 environment.
Issuance and distribution
The process had two main steps: the digital bond issuance to the lead bank and distribution to investors. Before the issuance, Goldman had to pre-fund via the TARGET 2 payment system and have CBDC minted into its wallet. On issuance, the CBDC was transferred from Goldman’s wallet to the EIB’s wallet. That was the money side of things.
On the GS DAP securities blockchain, the bond token was transferred from the issuer’s (EIB) account to the lead bank (Goldman) account. The payment and the bond token transfer were simultaneous using HTLC.
Subsequently, the EIB requested the burning of the CBDC, which resulted in funds being transferred via TARGET 2.
For the distribution step, the investors had to transfer money ahead of time to the paying banks, and the paying banks requested the minting of CBDC on the morning of the transaction. The paying banks operated sub-wallets for each investor on the DL3S CBDC DLT. For the distribution, the cash was transferred from the investor sub-wallets to the lead bank’s (Goldman) wallet.
Likewise, the bond tokens were transferred from the lead bank’s account to the investor’s custodian account. The CBDC was subsequently burned with settlement via TARGET 2.
DLT, custodians and investor reach
Regarding the custodian aspect, the model used meant that Goldman’s European subsidiary acted as custodian for the digital bonds. That meant Goldman had to be appointed as sub-custodian for any investors.
However, setting up sub-custodian contracts between custodians takes time so this limited the number of investors that could access the bond.
The suggested solutions included onboarding more participants on the DLT platforms or participating in the DLT Pilot Regime, or becoming a central securities depository. All of these are challenging paths.
The paper concluded with six takeaways (abbreviated):
- Wholesale CBDC is a safe and efficient solution for the settlement of tokenized assets
- Wholesale CBDC speeds up the issuance process
- The HTLC mechanism enables atomic settlement
- Solutions exist to support entities that don’t have access to central bank money
- Wholesale CBDC can interoperate with various DLTs
- Further exploratory work is needed at the Eurosystem level
Of course, the last point is happening now with the ECB’s wholesale DLT settlement trials.
