The future of CBDCs: why we invested in Adhara

Published in

Force Over Mass

6 min readOct 5, 2021

Earlier in the year, we invested in Adhara, a financial software company that uses blockchain technology to bring efficiency to wholesale international payments including the issuance of Central Bank Digital Currencies (CBDCs) and other forms of tokenized money. It’s an extremely exciting space, but one that is still not well understood. So, we thought we’d take some time to explain what drew us to Adhara in the first place.

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International payments are messy and expensive

We live in a global world with global money flows. Financial institutions constantly send considerable sums back and forth through different countries, jurisdictions, and subsidiaries, both internally and externally. Unfortunately, processes are not standardized and differ from bank to bank and country to country, with different payment cut off times, settlement times, processes, and reconciliation procedures.

The result is a hugely complex and costly global payment system. Many cross-border payments require manual intervention, and transactions take hours or days to settle. This results in substantial liquidity management costs, which can easily exceed $100 million per year for a large bank.

Blockchain to the rescue

Blockchain is an obvious first step in reducing the cost of international payments. Moving from a central ledger to a decentralized blockchain network creates transparent records which can be fully trusted and require potentially simplified regulatory oversight. This allows for increased processing speed, fewer errors, less fraud, and the elimination of middlemen and manual reconciliation.

In a decentralised blockchain, every participant on the chain keeps a copy of the ledger. You would need to hack the systems of every participant, at the same time, to write false data on a decentralised ledger. What’s more, historical information can never be changed due to the timestamps and the cryptographical link of inputs to preceding transactions.

The fact that blockchains are very secure and fully transparent to all involved, results in records that can be trusted 100% without the reliance on a single trusted operator. Governance is created in advance through the blockchain protocol, which sets out the rules of how data is recorded, exchanged and checked.

Central Bank Digital Currencies (CBDCs)

CBDCs have been receiving a lot of coverage in recent months, with articles in publications from Coindesk, to the Economist, to Bloomberg, but there is still a lot of confusion about what the term actually means.

To maximize the efficiency of blockchain technology in a payment context, you need to work with digital currencies. These are synthetic digital representations of an underlying currency, which exist as a single digital object that can be placed on a blockchain.

Today’s global payment system works by sending ‘messages’ which require facilitation by third parties (such as SWIFT). By replacing messages with digital currencies, capital can be transferred directly between users on the blockchain without the need for reconciliation. In other words, payments settle instantly and automatically.

Central Bank Digital Currencies (CBDCs) — synthetic digital representations of fiat currency — lend themselves especially well to this solution.

CBDCs come in two forms, retail and wholesale. Retail CBDCs are a digital version of cash intended for the general public, bringing the technological benefits of the blockchain to fiat currency. Wholesale CBDCs are available only to permitted institutions that hold reserve deposits in a central bank. They are used to improve payment and securities settlement while reducing counterparty credit and liquidity risks. Adhara facilitates wholesale CBDCs, not retail.

CBDCs are starting to go mainstream, with China launching its retail CBDC in April, the European Central Bank outlining its plans for a CBDC, and the Bank of England setting up a regulatory sandbox dedicated to digital currencies.

With more and more digital currencies being created outside of government control, from Bitcoin to Facebook Libra/Diem, Central Banks seemingly want to step in and take back some control. What’s more, there are great benefits to retail CBDCs over paper fiat currency.

As an example, if a Central Bank was looking to stimulate the economy for a certain reason, it could theoretically issue digital currency to every citizen. Because it is digital, the currency can be programmed; for instance, the currency could expire if it has not been spent within 6 months, and the usage can be restricted to consumption only. That seems an additional mechanism for Central Banks to steer the fiscal policy in addition to the current banking system.

However, there are also concerns about the potential threats of retail CBDCs. In potentially bypassing the banks, some fear Central Banks risk undermining the banking system itself. In theory, the availability of retail CBDCs might, for instance, increase the chance of a run-on-a-bank. At the first sign of trouble, people could deem it safer to have their capital with the Central Bank, rather than with a commercial bank. The Financial Crisis of 2008 illustrated that governments will go to lengths to avoid putting the financial system at risk.

So even though most Central Banks around the world are working on digital currencies, and newspapers like to write about a utopia where we consume digital Euros, we think it will take some time before Central Banks use retail CBDCs for fiscal policy and consumers are able to spend them.

Instead, CBDC’s first use cases will be in wholesale, targeting ways to strengthen and improve the banking system, such as improving liquidity management and international payments.

Adhara

In short, Adhara provides the software to facilitate blockchain-based international payments. This includes real-time, multi-currency liquidity management, FX and international payment to commercial banks (and their corporate clients), as well as to central banks, exchanges and payment network operators.

Its solution allows clients to drastically reduce the amount of liquidity capital set aside on their balance sheet or in the foreign accounts of subsidiaries and correspondent banks, thus freeing up large pools of resources and saving significant costs.

It is a pure SaaS company (Software-as-a-Service). Adhara charges fees for the use of its software rather than taking a payment per transaction.

Traction

Adhara is uniquely positioned to capitalize on this market opportunity. It is already a partner for leading international digital payment initiatives including Fnality International.

Fnality was created by a consortium of global banks and financial institutions to facilitate international payments between these banks using a synthetic Utility Settlement Coin. Fnality runs entirely on the Adhara infrastructure.

Fnality boasts 16 major financial institutions as shareholders, including Barclays, Credit Suisse, UBS, Banco Santander, ING, KBC, Bank of New York Mellon, State Street, Nasdaq, MUFG and Sumitomo Mitsui Banking Corp.

By being a partner of the largest initiatives, Adhara’s solutions are driving a de facto standard in this space. While it is early days in the usage of blockchain-based international payments through digital currencies, Adhara has real commercial traction.

Team

The team behind Adhara is high-calibre and has been involved in many of the most credible CBDC projects around the world.

CEO Julio Faura was previously the Head of R&D and Head of Blockchain at Banco Santander. Before that, he worked in the Financial Services team at McKinsey. He holds a PhD in computer science and was named one of the top 25 blockchain CEOs globally by Technology Innovators Magazine.
CPO Ed Budd was Chief Digital Officer at Deutsche Bank.
COO Peter Munnings has 25 years of experience building complex software for financial services and led 2 of the most advanced CBDC projects worldwide.

Round

FOMCAP invested in Adhara alongside Yabeo, the German Fintech VC, and ConsenSys, the accelerator and investment vehicle of Ethereum co-founder Joe Lubin.

The capital will be used to expand the team and develop additional liquidity management and payment solutions for central banks, commercial banks, payment networks, exchanges, and ultimately the corporate clients of banks.

Find out more about Adhara here.

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