A new solution to facilitate interoperability between central bank digital currencies (CBDCs) and regulated stablecoins was unveiled at last week’s World Economic Forum at Davos.
What is UDPN and what does it aim to do?
Universal Digital Payments Network (UDPN) aims to allow commercial enterprises to transact and settle in different currencies and connects users to CBDC and stablecoin systems. The UDPN has been in development for the past two years by a consortium of companies including Red Date Technology, (a blockchain tech company with its HQ in Hong Kong) and DLA Piper’s TOKO.
In July 2022, a sandbox version of the network was unveiled and multiple banks began utilizing it to trial stablecoin transfers and FX transactions.
According to its press release, a group of leading global banks will take part in a series of proof-of-concept tests this month to demonstrate how UDPN can address current and future challenges of integrating digital currency into daily business, banking, and payment scenarios.
In particular, two of the world’s top banks will take part in testing UDPN’s capabilities for digital currency cross-border transfers and swaps. They will also examine the ease of implementing the crucial “Travel Rule” on the network for anonymous stablecoin transfers between financial institutions.
What are the potential use cases for UDPN?
The UDPN has listed 10 potential use cases on its website, including:
- Digital Currency Transfer and Swap
- Implementing the “Travel Rule”
- Digital Currency Payment Gateway for E-Commerce
- Cross-Institution KYC Verification
- Central Bank Digital Currency Issuing and Circulation
- Facilitating Foreign Exchange on Digital Currencies
- Digital Asset Tokenization
You can learn more about UDPN and download their whitepaper here.
Could UDPN make Ripple’s XRP obsolete?
We previously wrote about the potential of XRP to be used as a “global bridge currency” facilitating cross-border transactions and interoperability between CBDCs/stablecoins. While UDPN is not the first platform that aims to be a solution for digital currency, CBDC, and stablecoin interoperability, it has garnered a significant amount of attention since it was unveiled at the WEF last week (potentially because of the perceived influence of the WEF when it comes to influencing policy).
Taking a look at some of the potential use cases UDPN will be tested for, one could certainly question whether this platform will become a direct competitor for XRP, or in time make XRP’s cross-border use case obsolete altogether.
UDPN’s impact on Ripple’s XRP
It’s possible that UDPN could have an impact on the adoption and usage of Ripple and XRP for cross-border transactions. The UDPN is designed to facilitate interoperability between CBDCs and stablecoins and aims to provide a common standard for messaging across different digital currency systems. This could potentially make it easier for financial institutions to conduct cross-border transactions using CBDCs and stablecoins, rather than using XRP as a bridge currency.
However, it is important to note that the UDPN and Ripple’s XRP serve different purposes. The UDPN is focused on providing infrastructure for cross-border transactions between different digital currencies, whereas Ripple’s focus is on providing a global settlement network and a suite of software solutions that enable faster, cheaper, and more efficient cross-border transactions using XRP as a bridge currency.
Ripple’s technology is already being used by financial institutions, who are using XRP and Ripple’s On Demand Liquidity (ODL) to make cross-border transactions cheaper and faster. The UDPN is still undergoing testing and development and it’s unclear whether the technology will be adopted en-masse by institutions. That being said, it appears that two of the world’s top financial institutions will be testing UDPN’s capabilities.
UDPN and Ripple’s XRP could co-exist and complement each other
It’s also possible that the UDPN and Ripple could complement each other, as the UDPN could potentially provide a regulated infrastructure for cross-border transactions, while Ripple’s XRP could be used as a way to facilitate these transactions in a faster, cheaper, and more efficient manner.
Ultimately, it will depend on the adoption of each network and how they will interact with each other and with other financial institutions and payment providers.
As we mentioned UDPN and Ripple are not the only ones trying to find solutions for the interoperability of various digital currencies and tokenized assets. Learn more about interoperability solutions below: