The Bank for International Settlements (BIS), the organization that unites the world's central banks, said the cross-border payment model for central bank digital currency (CBDC) it explored in Project Icebreaker offers benefits for both the banks and retail customers, according to a report on Monday.
The project, conducted with the help of the central banks of Israel, Norway and Sweden, used a so-called hub-and-spoke method to connect between the country's different national CBDC systems. A retail CBDC is a digital currency issued by a central bank that can be used for payments by consumers.
In the hub and spoke process, a cross-border transaction is broken down into two domestic payments facilitated by a foreign exchange provider active in both countries. That gives central banks almost complete control over their CBDC, while allowing competitive quotes for the exchange rate to be submitted to the hub so that end users can benefit from the best one.
"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 BIS said. "The project also demonstrated that the hub-and-spoke model can reduce settlement and counterparty risk by using coordinated payments in central bank money; and complete cross-border transactions within seconds."
Many central banks are looking to issue a CBDC within 10 years. Nigeria, Bahamas, Eastern Caribbean and Jamaica have already issued one and China is further ahead than most countries with its CBDC trials. The Group of 20 industrialized nations has made exploring cross border payment solutions a priority, and this experiment was a response to its call to action, the report said. The BIS has conducted other CBDC cross border experiments before which have been successful, such as Project Dunbar, which focused on wholesale use.
For the model to work, every CBDC system involved needs to operate 24/7 and have a hash time-locked contract, which is a form of smart contract, a program that automatically execute transactions when triggered.
“Implementing the Icebreaker model in the real world would require a range of technology, policy and legal considerations to be addressed,” the report said. “Policy considerations could include the governance arrangement, the viability of the business model, liquidity provision, privacy, AML/CFT ( anti-money laundering/ combating the financing of terrorism) compliance and monitoring, and payment initiation-related standards.”
