Stablecoins and a potential digital pound could be used together to speed up cross-border trade finance.
The Bank of England has selected NOBO Finance, Dun & Bradstreet and Polygon Labs for the second phase of its Digital Pound Lab, as it tests whether different forms of digital money can work together for cross-border payments.
The Digital Pound Lab, which doesn’t involve real customers or money, completed Phase One earlier this year. NOBO Finance participated in the phase, testing a system that holds B2B payments until agreed conditions are met.
Phase Two sees the introduction of Dun & Bradstreet and Polygon Labs, with the three companies working on settlement and business identity solutions.
Participants will test two areas, including an SME Bankable Profile, which uses transaction data, open finance and business information to create a reusable credit profile for smaller businesses.
The second is an electronic bill of lading (eBL)-backed invoice factoring flow, which will test settlement across different payment rails.
Removing friction from trade finance
Ayo Ojerinola, Founder and CEO of NOBO Finance, said that the project is about finding a way to improve how trade finance works across different parties, rather than speeding up payments.
Trade finance involves multiple parties, he explained, but “the workflows, data, and settlement paths still don’t connect cleanly”.
Phase Two work will therefore see how these different parts can work together more effectively, particularly for smaller businesses that can face delays between sending goods and receiving payment.
The eBL-backed invoice factoring work will allow an exporter to receive an advance through a stablecoin payment rail, while the importer completes the final settlement in digital pounds.
Additionally, the consortium will also look at whether smaller businesses can prove their creditworthiness quickly enough to access financing.
An SME Bankable Profile will give lenders better visibility of a business by using its transaction history, open finance data and business information to create a reusable credit profile.
Dun & Bradstreet will provide business intelligence and risk data and Polygon Labs will provide the infrastructure used to manage the digital identity and transaction process.
Ojerinola said the Digital Pound Lab gives the group a controlled environment to test whether these different elements can work together without introducing unnecessary friction.
“The Digital Pound Lab gives us a safe environment to test our innovations, improving coordination across participants, and transforming how cross-border trade actually works today,” he said.
Where do stablecoins and digital pounds fit?
Stablecoins and central bank digital currency (CBDC) are usually presented as competing forms of digital money, with debates around which will lead the future of payments. This experiment, however, is looking at how the two could work side by side.
Stablecoins are privately issued digital tokens designed to keep a digital currency’s value stable, backed 1:1 by assets such as fiat currency. They have become popular for payments and settlement, particularly in B2B cross-border transactions.
A digital pound, meanwhile, would be a CBDC issued by the Bank of England. Unlike a stablecoin, which is privately issued, it would be digital money issued by the central bank. The digital pound is still in development and has not yet been launched.
In the proposed transaction, the exporter receives payment in a stablecoin, while the importer settles the transaction using a potential digital pound.
Marc Boiron, CEO of Polygon Labs, said this interoperability will be important if digital money is to become more useful for international trade.
“For digital money to actually move the world’s trade, its different forms have to work together, public and private, central bank money and stablecoins,” he said.
The project will use Polygon’s Open Money Stack to support the stablecoin settlement side of the transaction, as well as embedded wallets and smart contract infrastructure.
The Bank of England’s Digital Pound Lab aims to find out how a potential digital pound could work with other forms of digital money, rather than replacing them.
“Interoperability is what gets value moving, and it is what Polygon’s Open Money Stack is built to enable,” Boiron added.
