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DCM Core Policy Library | PL-2026-06

FX Settlement Risk & PvP Mechanisms in Multi-CBDC Bridges

DCM Core Market Infrastructure Unit
Publication: March 2026 | Format: 6-Page Standard

01 Executive Summary

Foreign exchange (FX) settlement risk, historically known as Herstatt risk, remains a significant vulnerability in global financial markets. This paper analyzes the technical design of Payment-versus-Payment (PvP) settlement mechanisms within multi-CBDC platforms, exploring how distributed ledger technologies can synchronize cross-border, cross-currency legs.

We evaluate current multi-CBDC pilot projects, such as Project mBridge, and model their impact on credit risk, processing latency, and liquidity demands. We conclude that DLT-based PvP mechanisms effectively eliminate settlement risk but increase real-time liquidity requirements for participating commercial banks.

02 Problem Statement

In traditional FX transactions, the two currency legs are often settled in different time zones and across separate national payment systems. This time lag exposes counterparties to settlement risk: one party might pay the designated currency but fail to receive the counter-currency if the partner defaults in the interim.

"DLT-based PvP mechanisms resolve FX settlement risk by executing cross-currency payments as a single, atomic transaction that succeeds or fails as a unified whole."

While existing institutions like CLS Group provide PvP services for major currency pairs, many emerging market currencies remain unsupported. Expanding PvP settlement to these corridors requires alternative, decentralized infrastructure models.

03 Policy Context

The G20 roadmap for enhancing cross-border payments designates the expansion of PvP settlement as a priority action. The Committee on Payments and Market Infrastructures (CPMI) encourages the development of new technologies, including wCBDC and shared ledgers, to facilitate PvP access for broader markets.

Regulators and central banks are collaborating on multi-CBDC platforms (such as Project mBridge) that allow commercial banks to conduct direct cross-border payments on a single, shared network. Establishing appropriate governance and legal frameworks for these bridges is a key regulatory challenge.

04 Analysis & Operational Impact

The operational impact of DLT-based PvP settlement lies in the synchronization of ledger states. Using smart contracts and Hashed Timelock Contracts (HTLCs), the multi-CBDC bridge guarantees that the transfer of Currency A is cryptographically locked until the transfer of Currency B is completed. This atomic swap architecture removes credit risk entirely.

However, our liquidity modeling reveals a significant trade-off. Because payments settle instantly and individually, banks can no longer benefit from the end-of-day netting offered by traditional clearing houses. This real-time settlement increases the demand for intraday liquidity.

Additionally, participating banks must manage access to central bank money across multiple jurisdictions, requiring real-time treasury systems and interoperable connections between the multi-CBDC platform and various domestic RTGS systems.

05 Policy Recommendations

To optimize the implementation of PvP mechanisms in multi-CBDC environments and balance the trade-offs of real-time settlement, we recommend that infrastructures and banks adopt the following measures:

PvP Integration Recommendations:

  • Integrate automated liquidity-saving mechanisms (LSMs), such as bilateral and multilateral queue netting, directly into multi-CBDC platform code.
  • Establish standardized legal frameworks that recognize on-chain settlement finality across all participating jurisdictions.
  • Connect multi-CBDC bridges to domestic RTGS systems via high-speed, secure API channels to facilitate instant liquidity recycling and rebalancing.

06 References & Citations