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The Bank for International Settlements (BIS) has announced the conclusion of its central bank digital currency (CBDC) experiment with the central banks of Israel, Sweden, and Norway.
The experiment, dubbed “Project Icebreaker,” delved into the benefits and risks of launching retail CBDCs with cross-border functionalities. According to the BIS report, the participating central banks settled for a “hub-and-spoke solution” as a way around the challenge of high remittance fees during cross-border payments.
Under the solution, a simple international transaction is divided into two distinct domestic payments, with a foreign exchange provider playing the role of an intermediary. Multiple foreign exchange providers submit quotes to the CBDC system regarding exchange rates, and the system automatically selects the cheapest rates.
The BIS notes that this method ensures that the local CBDCs stay in their local financial systems while solving the debacle of counterparty and settlement risks. Participating entities hailed the study for reducing settlement to a matter of seconds, saying that it could open the floodgates to a wave of similar experiments.
“This competitive set-up mitigates the risk of insufficient liquidity in the desired currency pair, which can drive fees up and even delay the transaction. The Icebreaker system implements the use of bridge currencies if transactions between two specific end currencies are unavailable, or not favourable, promoting competition among foreign exchange providers,” the BIS said.
The study’s outcome further suggests that pulling off the “spoke-and-hub” solution requires little technical infrastructure while offering a window for scalability and interoperability among domestic systems. Only a handful of retail CBDCs have been launched globally, with some experts remaining skeptical over how real-world application of cross-border functionality will be carried out.
“Although there are a lot of questions that need to be investigated further, Project Icebreaker is a valuable initiative and contribution to the discussion on how we can improve cross-currency payments,” Aino Bunge, Sveriges Riksbank’s Deputy Governor, stated.
Cross-border functionality tops the chart
With several central banks working on CBDCs, there appears to be a brewing rush to include cross-border functionalities as part of their features. The Bank of Russia has confirmed that it will explore the feature with the People’s Bank of China to circumvent its economic sanctions.
The Reserve Bank of India (RBI) has also stated that it will be delving into the prospects of using CBDCs for international transactions. Other functionalities being explored by central banks include offline payments, contactless payments, and deployment in security trading.
To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.
Watch: CBDCs and BSV
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