(Kitco News) - The Bank for International Settlements (BIS) has announced the completion of “Project Icebreaker,” a pilot study conducted in conjunction with the central banks of Israel, Norway and Sweden that explored the potential benefits and challenges of using retail central bank digital currencies (CBDC) in international payments.
Project Icebreaker launched in September with the goal of exploring how CBDCs can be used for international retail and remittance payments and evaluating the technical feasibility of interlinking different domestic CBDC systems. The project included the development of a “hub” where participating central banks connected their domestic proof-of-concept CBDC systems.
“Project Icebreaker is unique in its proposition, said Cecilia Skingsley, Head of the BIS Innovation Hub. “It first allows central banks to have almost full autonomy in designing a domestic retail CBDC. Then it provides a model for that same CBDC to be used for international payments.”
A detailed report released by the BIS regarding the results of the project shows that the collaboration set out to explore a so-called “hub-and-spoke solution” to interlink domestic payment systems.
The system functioned by breaking down cross-border transactions into two domestic payments, a process that is “facilitated by a foreign exchange provider active in both domestic systems,” the BIS said. “Therefore, retail CBDCs never need to leave their own systems.”
“In most existing cross-border payment systems, the payer has no choice regarding the exchange rate, as it has no control on who the provider of foreign exchange conversion is,” the BIS wrote. “In the model developed by the Icebreaker project, many foreign exchange providers can submit quotes to the system's hub, which automatically selects the cheaper one for the end user.”
The BIS indicated that this type of setup helps to mitigate 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 favorable, promoting competition among foreign exchange providers.”
The hub-and-spoke model also successfully reduced settlement and counterparty risk through the use of coordinated payments in central bank money and was able to complete cross-border transactions within seconds, the report said. “For countries considering the development of a domestic CBDC, the project provides a model for extending them and innovative services into cross-border transactions.”
“If Israel is to issue a digital shekel, it would be very important that we do it according to the evolving global standards so that Israelis could use it also for efficient and accessible cross border payments,” said Andrew Abir, Deputy Governor, Bank of Israel. “While there is still much work ahead of us for the Icebreaker model to become a global standard, the learnings from this successful project have been very important for us and for the central banking community.”
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Project Icebreaker helps provide central banks exploring the implementation of retail CBDCs with a deeper understanding of the technologies that can be used and the technical and policy choices available to them.
The pilot also found that minimum technical requirements were required to enable the integration of domestic systems running on different technologies, and the benefits of doing so include increased scalability, interoperability and simplicity.
“Project Icebreaker shows how different CBDC solutions in different countries could enable instant cross-currency transactions in a way that would greatly benefit the end users,” said Aino Bunge, Deputy Governor, Sveriges Riksbank. “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.”
