Central Banks Advance Compliance-Embedded Cross-Border Transactions

In a landmark development for international finance, the Bank for International Settlements (BIS), working alongside central banks from Australia, South Korea, Malaysia, and Singapore, has successfully showcased the potential for embedding regulatory compliance within cross-border financial transactions. This breakthrough aims to resolve one of the most persistent challenges in global payments—navigating the complex web of regulatory frameworks that differ from one jurisdiction to another.

Cross-border payments often face delays, heightened operational costs, and uncertainties caused by the need to comply with varied regulatory standards. To address this, the BIS-led initiative, known as Project Mandala, introduced an innovative Proof-of-Concept (PoC) aimed at reducing the compliance burden while enhancing transaction efficiency.

At the heart of Project Mandala is a compliance-by-design approach. This method automates regulatory procedures, enabling real-time transaction monitoring and providing transparency around country-specific policy requirements. It builds on lessons learned from Project Dunbar, a prior BIS-led initiative that explored the development of a multi-central bank digital currency (mCBDC) platform.

The Mandala system operates using a decentralised architecture that incorporates three key components: a peer-to-peer messaging system, a rules engine, and a proof engine. Together, these components ensure that compliance checks are completed before a payment is executed. Once all checks are successfully validated, the system automatically generates a compliance proof. This proof can accompany digital settlement assets and payment instructions as they cross borders, assuring that regulatory obligations have been met.

The initiative successfully demonstrated its technical capabilities in live cross-border lending transactions between Singapore and Malaysia, as well as cross-border financing for capital investments between South Korea and Australia. It showcased the ability to automate compliance tasks, such as sanctions screening and cash flow management (CFM) reporting, which are essential for financial security and oversight.

Crucially, the Mandala concept is future-ready. It integrates with both emerging digital asset settlement systems, like wholesale central bank digital currencies (CBDCs), and traditional financial messaging systems such as SWIFT. For digital assets, it introduces programmable compliance, which can be embedded directly into smart contracts, enabling automated enforcement of regulatory rules.

By embedding compliance into the transaction process itself, Mandala has the potential to revolutionise global payments. The automation of compliance checks could significantly reduce delays, enhance trust, and create a more transparent financial environment, ultimately benefiting stakeholders across the financial ecosystem.