Since the beginning of 2024, the Institute of International Finance (IIF) and the Bank for International Settlements (BIS) have been coordinating a project that seeks to guide the efforts of seven Central Banks, highlighting the participation of the Bank of Mexico as the only Central Bank in Latin America, and a group with more than 40 private financial institutions, whose primary objective is to achieve a more efficient, faster, safer and cheaper operation to make cross-border payments, through a “tokenization” process.
The project in question is called “Agorá” which means “meeting place” in Greek, which refers to the idea of bringing together the experiences and knowledge of different financial organizations in order to find the best operating alternative in the process of cross-border money transfers. The participating Central Banks convened by the BIS are: Bank of Mexico, Bank of Korea, Bank of France -which represents the Euro Banking System-, Bank of England, Bank of Japan, Swiss National Bank and the Federal Reserve of New York. At the same time, the BIS and the IIF convened a group of private financial institutions (as of the September 2024 report, 43 institutions were registered), including: Visa, Mastercard, Swift, J.P. Morgan Chase Bank, HSBC, Banorte, Deutsche Bank, Citi, Banco Santander, BBVA and BNP Paribas, among others.
Tokenization is a process that consists of replacing sensitive data or physical asset titles with randomly generated character strings that function as unique means of identification, which are called tokens. The tokenization process has the advantage of being able to be applied to different types of assets, whether they are company shares, real estate titles or any type of financial transaction, among other applications.
Tokenization is a secure means of transmitting information. Through this process, the sensitive data elements of an asset are replaced by a non-sensitive equivalent value called a token, thus becoming an identifier, which has no meaning or exploitable value unless there is a reverse tokenization system, whose function is to “return sensitive data”. For a tokenization system to be used as a reliable means of transmitting sensitive information, it must be validated through the best security practices applicable to the protection of confidential data, as well as secure storage tests, be auditable, and have secure authentication and transaction authorization processes. Once the aforementioned security tests have been validated, a tokenization system must also include data processing applications for the authorized authority (user), as well as interfaces to request tokens and detokenize sensitive data.
The functionality of the Agorá project is based on the concept of a unified ledger proposed by the BIS, which is the best technological alternative available, since it is a distributed ledger (Distributed Ledger Technology or DTL).
The DTL is made up of a technological infrastructure and protocols that allow simultaneous access to data records, their validation and their updating, with the very valuable property that these are unalterable. This property is achieved through the use of a distributed network between a large number of entities with different locations.
In such a way that it is guaranteed that a distributed ledger is a very secure and efficient digital system, as it does not depend on a single central data warehouse, unlike traditional databases. This technology is mainly known as blockchain technology, which operates through a protocol that guarantees the security of the operation of the decentralized database.
The great advantage of distributed networks (which is not entirely to the liking of central banks) is that they eliminate the need for a central authority to oversee the operation and thus the manipulation of data; however, this issue should be settled by keeping in mind that all transactions that are executed are recorded simultaneously in all locations of the decentralized network, and all blocks of information operated are verified by all network participants before new blocks can be created. Access to the DTL is given through cryptographic digital signatures that authenticate users and guarantee the integrity of the data. When the information is stored, it becomes an unalterable database, which guarantees that this information cannot be deleted, and if there is any update it is permanently recorded.
The use of a decentralized ledger guarantees resistance to cybercrime attacks, since in order to affect it, all copies stored in the network would have to be attacked simultaneously. Furthermore, if any agent tries to alter the information stored in the blockchain, the key is immediately revoked, as it is easy to track it through the digital signature used to access the blockchain.
That said, we can return to the Agorá project, which aims to identify the way in which “tokenized commercial bank deposits can be seamlessly integrated with wholesale central bank tokenized money in a public-private programmable central financial platform. This could improve the functioning of the monetary system and provide new solutions using smart contracts and programmability, while maintaining its two-tier structure,” taken from https://www.bis.org/press/p240403.htm
Also, thanks to tokenization, it is possible to develop smart contracts, which allow for new forms of settlement and different types of transactions that are currently not viable due to security or cost. In this way, the financial system will be able to offer its clients new opportunities that benefit them in terms of execution time, cost, and security. The greatest benefit foreseen so far impacts cross-border operations, for which processes must be developed to comply with legal, regulatory and technical requirements, such as financial integrity controls focused on customer verification and preventing money laundering, among others; these processes are normally repeated for the same transaction, due to the number of intermediaries involved. In addition, the problem of operating hours in different time zones is resolved.
Without a doubt, the fact that the Bank of Mexico is participating in this great technological avant-garde project shows its commitment to all users of the financial sector in Mexico and the world, by seeking to reduce the costs and time of cross-border financial operations and increasing their security. Without a doubt, when this project comes into operation, all users of the financial sector (private and public, companies or individuals), especially those who make cross-border money transfers, for example, think of remittances whose transfer will be reflected in a few minutes, with greater security and at a lower cost.
Congratulations to the Bank of Mexico for its participation in such an innovative project!
Curriculum Vitae
Francisco Ortiz Arango, Universidad Panamericana
Francisco Ortiz Arango. Research professor at the Faculty of Economic and Business Sciences of the Universidad Panamericana. Degree in Physics and Mathematics, and Master of Science from the IPN. Master of Operations Research from UNAM. PhD in Financial Sciences from ITESM. Postdoctoral degree in Financial Economics from IPN.
Member of the National System of Researchers. Founding Director of the Center for Energy Regulation and Development Economics, Academic Director of the Master’s and Doctorate programs in Energy Economics and Regulation, Director of Industrial Engineering, Founding Director of Engineering in Innovation and Design, Director of the Pan-American Center for Research and Innovation of the UP-IPADE System, Research Secretary, Professor-Researcher.
Author of more than 40 research articles published in national and foreign journals, more than 20 peer-reviewed book chapters, editor of 6 research books. Director of more than 40 Bachelor’s, Master’s and Doctorate theses. Lecturer and speaker at various national and international conferences.
Topics of expertise: Mathematical modeling in Economics and Finance, Energy Economics, Asset Valuation and Risk Management.
Source: infobae
