European Central Bank and Bank of Japan Finalize Third Phase of Project Stella
The Bank of Japan and European Central Bank have successfully completed the third phase of Project Stella. Stella Project was initiated back in 2016 in order to improve cross-border payment and remittance for banks around the world. It is currently in its third phase and the main area of concern is the various risks involved in cross-border payments which are mainly credit risk.
Initially, the centralized financial institutions like banks were not in favor of cryptocurrencies and called them a bubble waiting to burst. However, as the cryptocurrency market started to climb the ladders of popularity, these banks realized that the digital assets are here to stay. Now, the same banks are lining up to use the underlying technology of Blockchain and distributed ledgers to help them get as efficient as these crypto tokens.
A traditional bank can take 3-5 days for making cross border payments, and also costs a bomb in transaction fee. However, with the help of distributed ledger based banking solutions, these banks can process the same transaction in a matter of a couple of minutes.
Ripple and Stellar Lumens the Most Preferred Choice of Banks
The cryptocurrency market is overcrowded with thousands of crypto tokens and blockchain, each serving a different purpose. However, Ripple blockchain has taken up the initiative to build banking and payment solution software which can be incorporated by banks in their operation to achieve the same high transaction speed and lower transaction costs.
Ripple has been quite successful in its endeavor and boats of more than 200 bank partners comprising of both central banks as well as commercial banks. The current Stella project is looking to fix the problem of credit risk involved in cross-border payment by locking the funds in an escrow, till the commencement of the transaction. The summary of the phase report read,
“This risk can be mitigated if the payments are synchronized and funds are locked, but in today’s world such synchronization rarely happens”
Stella has created a Hashed Time Locked Contracts (HTLC) for the settlement of payments across ledgers. and help synchronize payments. The report explains how the system of HTLC functions,
“The report concludes that only payment methods with an enforcement mechanism, either through the ledger itself or through a third party, can ensure that the transacting parties who completely satisfy their responsibilities in the transaction process are not exposed to the risk of incurring a loss on the principal amount being transferred.”
The Stella report further states that the use of HTLC can help in synchronizing payments across both centralized as well as decentralized ledgers. It also ensures the safety of the fund by locking them in an escrow until the transaction completes.
In the Full summary of the report, the article reads,
“The analysis and experimental results presented in this report are not geared towards replacing or complementing existing arrangements, which include central bank-operated payment systems. Moreover, legal and regulatory aspects are outside the scope of the project. Project Stella offers a contribution to a wider debate on the possible usage of DLT in the field of payments and financial market infrastructure services”